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Important clauses

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Contents

Employment contract

An employment contract may be oral written, or partly oral and partly written. However, it is in your best interests as well as your employee's for the agreed terms and conditions that govern your employment relationship to be confirmed in writing. A contract should expressly set out all of the essential terms and conditions so as to avoid unnecessary disputes arising at a later point in time, which in some circumstances may result in legal action.

Essential clauses

As a bare minimum, a contract should include all the matters that are required to be referred to in an employment statement (see Employment Statement), and will therefore avoid the need to give a separate written statement. Otherwise, however, there is no prescribed form for a written contract.

Some of the most important clauses that should be included in your contract of employment are the following:

Duties and mobility

This type of clause will provide a job description and the place or places where the employee will be required to perform his or her duties. You should ensure that your employee's duties are widely defined so as to cover all duties that you may envisage that your employees will be required to do, and any possible future changes in duties.

Hours of work

Under the provisions of the Working Time Regulations 1998 you cannot force your employees to work for more than 48 hours a week on average. The average weekly working time is usually calculated over 17 weeks but is longer for certain employees (26 weeks) and it can be extended by agreement. Working time includes travelling where it is part of the job, working lunches and job-related training but does not include travelling to work or lunch breaks.

Employees can agree to work longer than the 48-hour limit but must do so in writing and can change their mind at any time upon giving you at least seven days' notice, or longer (up to three months) if this has been agreed.

For more information on the Working Time Regulations 1998 see: Gov.uk

Notice periods

Where you have employed an employee for an indefinite period of time (i.e. where employment is intended to be permanent), the contract should specify the notice period to be given by the employer or employee to terminate the contract. However, in the absence of such notice, statute implies a minimum notice period into every contract. Where contractual notice does apply it must be at least equal in length to statutory notice. A summary of the statutory notice periods is as follows:

Length of continuous employment Employee's notice entitlement

1 month up to two years

1 week

2-11 years

1 week for each year (e.g. 3 weeks for 3 years)

12 years +

12 weeks

An employee who has been continuously employed for one month or more is legally bound to give you at least one week's notice. You are entitled to impose a longer notice period on your employees by mutual consent. In the case of a managerial, professional or other senior employee, it may be advisable and appropriate to make the notice period fairly long, for example six months to be given by either party.

The benefit to you is that you will not be deprived of a key employee on short notice. It may of course be suitable to reduce the notice period in the early stages of employment. This will allow earlier termination if either you or your employee has reason to believe that it is not suitable or convenient to continue with the existing contract.

Pay in lieu of notice

You may reserve the right to terminate an employee's contract without notice by making a payment to an employee in lieu of notice (a 'PILON clause').

A PILON clause may be express or discretionary. An express PILON clause will state that the employer must make payment in lieu of notice and will therefore contain such language as 'will' or 'must'. A clause of this type will immediately terminate an employment contract.

A discretionary PILON clause allows you to use your discretion as to whether or not you wish to make payment in lieu of notice. A clause of this type will contain such language as 'the employer may make a payment in lieu of notice to the employee...'.

Without a PILON clause, however, you have no contractual right to make a payment in lieu of notice.

Garden Leave

Once you have decided to dismiss an employee, you may place him or her on garden leave provided the contract allows you to do so. The aim of garden leave is to get the employee out of the office so that you can either investigate alleged misconduct or so as to protect your business interests.

If an employee is placed on garden leave then he or she will receive full pay but will be asked not to perform any services or special duties for a specified period of time (usually the duration of his or her notice period). Employers commonly put an employee on garden leave so as to protect the business interests of the company as it ensures that the employee refrains from continuing with his or her employment duties and keeps them away from the premises.

If the contract does not contain a clause allowing the employer to place the employee on garden leave, to do so would amount to breach of contract and the employee would not be bound by any other terms of the contract, such as post-termination restrictions.

Pay, benefits and commission

The National Minimum Wage Act 1998 sets out the framework for the National Minimum Wage (NMW) that you must consider when deciding how much to pay your employees. Regulations outlining the detail of the National Minimum Wage have since been published. The Minimum Wage provisions were implemented with effect from April 1999.

See our article 'Pay and The Minimum Wage'.

If your employee is to be remunerated partly by commission, the contract should deal with this. The clause should not only deal with the rate of commission but also when it becomes payable.

Sick pay

If an employee is absent for more than three days then he or she is entitled to claim Statutory Sick Pay from the fourth day of absence (so long as they qualify). The current rate of Statutory Sick Pay is £87.55 per week. However, many employers choose to offer their employees a company sick pay scheme.

The contract should state whether you offer the employee a sick pay scheme (other than statutory sick pay). If a scheme is offered, the contract should state the period for which it is payable, how much is payable and whether statutory sick pay is deducted in calculating it.

You are entitled to include a clause specifying that you require your employee to self-certify illness or provide a medical certificate if absent for more than a certain number of days. GPs are not obliged to provide certificates for illnesses of seven days or less.

For more information on sickness and absence see the Gov.uk website.

Holidays and holiday pay

As at 1 April 2009, all employees have had a statutory right to at least 5.6 weeks' paid annual leave (that's 28 days' paid holiday if you work five days a week).

Employees do not have a statutory right to paid leave on bank and public holidays. If an employer gives an employee paid leave on a bank or public holiday, this can count towards your minimum holiday entitlement. There are eight permanent bank and public holidays in England and Wales, nine in Scotland and ten in Northern Ireland.

If an employee works on a bank or public holiday, there is no automatic right to an enhanced pay rate. What you get paid depends on your contract of employment. It is important that you address such matters in an employee's contract of employment so as to avoid any disputes arising at a later point in time.

Pensions

Stakeholder pensions

Since 1 October 2012, employers with five or more employees are not required to choose and provide access to a stakeholder pension plan. However, where an employee is already a member of a stakeholder pension plan (having had one regular contribution to the plan deducted from their salary as of 1 October 2012), the employer is still under a duty to deduct and pay over the employee's pension contributions.

An employer that has selected an existing stakeholder scheme (whether or not it pays contributions to it) can continue with the scheme after 1 October 2012 if it wishes, provided the scheme is registered with HM Revenue & Customs and with the Pensions Regulator.

Auto-enrolment and NEST (National Employment Savings Trust)

Since 1 October 2012, some employers must automatically enrol eligible jobholders into a pension scheme. Employers can use their existing scheme, a new scheme or NEST (which has been set up by the Government).

Auto-enrolment is taking place in stages. The staging dates depend on an employer's size (based on PAYE as at 1 April 2012). Employers with 120,000 or more jobholders became subject to the new law on 1 October; those with 50,000 or more were affected in November 2012. Staging will continue until 2018, ultimately covering all employers.

Mandatory contributions, which will eventually reach 3% for employers, are also being phased in over the same period.

Employees may opt-out of the auto-enrolment scheme.

For more information, see the auto-enrolment guide (opens a PDF) from the Pensions Regulator.

An employer should not advise employees about the financial benefits of a particular pension scheme or provide any financial advice on choosing a scheme. They should simply provide a channel to allow the employee to discuss these matters with the scheme provider. The employer can provide help and guidance, give additional information or interpret the information, but should be careful not to advise employees. The provision of financial advice is strictly controlled by the Financial Conduct Authority (one of the successors to the Financial Services Authority). Employees are not obliged to sign up to the scheme.

Records

The employer must ensure that it keeps a record of the direct payment payroll arrangements showing the rate and dates of contributions. Separate records should be kept for contributions made by the employer and employee. The records must be kept for a minimum period of six tax years.

Occupational pensions schemes

Also known as works pension, company pension, or superannuation, occupational pension schemes are set up by employers for their employees in contrast to stakeholder pensions where employees purchase investment into a stakeholder scheme. The occupational pension scheme is managed by a board of trustees who are responsible for ensuring payment of benefits. There are two types of occupational pension schemes:

  • Contributory: both the employer and the employee contribute to the pension
  • Non contributory: the employer makes all the payments
In either case the employer has to pay for a substantial part of the administration costs of the pension scheme, by law.

This is a complicated area and tax relief may be available to employers who contribute to an occupational pension scheme that is approved by HM Revenue and Customs.

Retirement

In April 2011, the government removed the right for employers to be able to fairly dismiss employees after they turn 65.

It is now only possible to lawfully require an employee to retire at a specified age if the chosen age can be objectively justified as being a 'proportionate means of achieving a legitimate aim'.

What constitutes a 'legitimate aim' will depend on individual circumstances. You should take into consideration such factors as:

  • Whether the role that the employee must perform requires high levels of physical or mental fitness
  • The safety of the general public and other workers
  • Whether other employees performing the same role already have a specified retirement age in their employment contracts
  • What effect, if any, would it have on the workforce if you do not set a retirement age for employees performing the particular role. For example, not having a compulsory retirement age may affect an employer's ability to recruit and retain high-quality personnel (as the scope for promotion could be limited)

The law regarding the use of objectively justified retirement ages is developing. Decisions in the Court of Justice of the European Communities indicate that workforce considerations regarding future opportunities for younger workers and the effect on businesses' retention of staff could prove to be a 'legitimate aim'. So could public health and safety concerns.

If an employee challenges the lawfulness of a clause in their contract allowing you to require them to retire at a specified age, then you will need to provide evidence that it was objectively justified. This can often prove hard to do as the decision may have been made many years before you tried to force the employee to retire. If you are unable to do so, then you may become liable to pay damages for unfair dismissal and/or unlawful age discrimination.

Even if you are able to show that there was a legitimate aim behind requiring an employee to retire, you must still be able to prove that enforcing this was a proportionate means of achieving that aim, i.e. there were no other suitable options available to you which could have avoided dismissing the employee.

Acas advises employers to write down their reasons for requiring an employee to retire at a particular age; consider whether they have good evidence to support their reasons; and then consider if the same result could be achieved using an alternative or non-discriminatory way. It also advises that employers should encourage employees to have more open discussions about their future plans. See the Acas guide on working without the default retirement age, for more information (opens a PDF).

Acas also advises that before enforcing a fixed retirement age in an employment contract, you should give the employee adequate notice of their impending retirement and consider whether you will permit them to apply to stay beyond the compulsory retirement age. You must use a fair procedure when dismissing any employee, including when dismissing employees once they have reached the compulsory retirement age. Note that although Acas guides do not have to be followed, they are often considered by employment tribunals when investigating what may be best practice when dealing with particular employment issues.

The government has stated that people will need to work for longer before they can retire and are implementing new laws increasing the age from which the state pension can be taken. With this in mind, it is likely that any attempt by employers to dismiss employees by making them retire before they reach the state pension age will be regarded as unfair and contrary to public policy.

If you are unsure whether or not you can justify requiring the employee to retire at a particular age, then you should seek legal advice.

Pay secrecy clauses (England Wales and Scotland)

The Equality Act 2010 makes it unlawful to include clauses in an employment contract that prevent employees from discussing their salary and terms of employment with other employees, if the clause is to be used by an employer to prevent employees discovering whether there is a discriminatory difference in pay that may give rise to a claim under equal pay legislation.

Note that it is not unlawful for the employment contract to contain such a clause unless its aim is to prevent discussions between employees from establishing the existence of discrimination.

For example, if a female employee thinks that she is underpaid when compared with a male colleague and upon request he tells her how much he is being paid, then an employer cannot discipline the male employee for breaching the terms of his employment contract.