Five common issues that arise from failing to provide a detailed employment contract

Under Section 1 of the Employment Rights Act 1996 (“ERA”), employees must be provided with written particulars of employment within two months of the commencement of their employment.  However, from experience, limiting contracts to what is required under the ERA does not afford employers with as much protection as having a more comprehensive and bespoke contract would.  

Assuming that the requirements under Section 1 of the ERA have been complied with, here are five common problems that can arise if more detailed contracts are not put in place.

  1. Notice Period

In the absence of any notice provisions, once an employee has been continuously employed by the employer for at least one month, the employer must give the employee the minimum period of notice that is required under the ERA based on their length of service (from one week up to a maximum of 12 weeks).  However, the employee would only be required to give the employer one week’s notice regardless of their length of service.

The failure to specify a contractual notice period could therefore potentially leave the employer exposed to a number of commercial and reputational risks.  For example, an employer may find it very difficult to explain to important clients that an employee with 20 years’ service and thorough knowledge of their affairs is able to leave the business within just one week of serving notice.  Additionally, it is unlikely that, in the space of a week, the departing employee will have sufficient time to complete a proper handover or that their role can be filled by another employee immediately after their departure.

  1. Payment in Lieu of Notice Provisions

It is not essential to have a payment in lieu of notice (“PILON”) clause in the employment contract, however, without such clause, the employer will need to take into account bonuses, commission payments and any other contractual benefits when calculating the PILON. This may lead to significant additional costs for some employers, especially if an employee has a long notice period and/or they would have expected to receive commission and/or bonuses had they worked their notice period.

In contrast, many PILON clauses make it clear that the PILON only covers basic salary. However, employers need to take care that the PILON clause is clearly drafted and that the terms are fully complied with, otherwise there is still a risk that the contract will be terminated unlawfully.  This was an issue in the case of Société Générale, London Branch v Geys [2012] UKSC 63; [2013] IRLR 122 where the Supreme Court found that the employer’s actions fell short of what was contractually required under its PILON clause.

  1. Garden Leave

In the absence of express garden leave provisions, employees could argue that the employer’s obligation to provide them with work continues during their notice period. This can cause particular problems if the employer wishes to exclude a senior employee from the business during their notice period.

This problem arose in the case of William Hill Organisation Ltd v Tucker [1998] EWCA Civ 615. In this case, the Court of Appeal held that the employee had an implied contractual right to work, therefore, by failing to provide work during the employee’s notice period, the employer was in repudiatory breach of contract.  As a consequence of the employer’s breach, the employee’s restrictive covenants no longer applied.

  1. Restrictive Covenants

If the employer fails to include express restrictive covenants in an employment contract, they risk losing senior and/or skilled employees to competitors as soon as their employment ends. Further, without restrictive covenants, former employees can immediately approach customers or clients of the employer with a view to soliciting business from them.  The departing employee can also try and poach other employees.

Many employers do incorporate express restrictive covenants in employment contracts, however, difficulties can still arise when the drafting of the restrictive covenants is ambiguous or where the restrictive covenants go further than necessary to protect the legitimate interests of the business.  In these cases, the restrictive covenants are likely to be interpreted in favour of the employee or held to be unenforceable altogether.

Often, employers also fail to properly update restrictive covenants. This could leave the employer in a vulnerable position in circumstances where an employee progresses to a very senior position and decides to leave some years after his restrictive covenants have been agreed.

  1. Intellectual Property

If there are no express intellectual property provisions in an employment contract, disputes may arise in respect of the ownership of intellectual property rights.

Generally, if the subject of the intellectual property rights was created by the employee during the course of their usual duties, the law favours the employer even in the absence of an employment contract.  However, there are exceptions which could have devastating consequences for the employer.  It is therefore prudent to include comprehensive intellectual property provisions in any employment contract, especially when the subject of the rights is likely to be valuable to the employer.

These are just some examples of the avoidable difficulties that may arise if an employer fails to provide its employees with an adequate, well drafted and up-to-date written employment contract. It is also worth bearing in mind that, even if there is a written contract in place, if the contract does not reflect the reality of the employment relationship (which will inevitably change over time), this will be a significant consideration when a Court or Tribunal construes and determines the enforceability of its terms.

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