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Protecting your business through employment contracts

Many bosses have faced disputes which have arisen because employment contracts were either not issued, or were poorly drafted. But it is possible to avoid such scenarios by ensuring all employees are handed appropriate and robust contracts in the first place.
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Common mistakes include failing to issue a employment contracts entirely (which can result in tribunal awards of two to four weeks’ pay (capped at the current rate of £489/week) or using generic templates inappropriate for the role in question and make the company vulnerable to staff using confidential information improperly.

Here are some key tips on drafting contracts of employment to protect your business.

Clear and unambiguous terms

A clear and unambiguous contract should be issued in good time. Any ambiguity is likely to be interpreted by a court in the employee’s favour. The contract should include the mandatory information such as pension, place of work, as well as terms which give you flexibility in managing the business and employee, such as garden leave, or pay in lieu of notice.

It’s also important to state clearly which country’s laws will govern the contract, and that this contract supercedes all early versions or discussions.

Use the right contract

There are two aspects to this: firstly, ensure the contract is appropriate for the employee’s role, duties and obligations. A contract for a director, a junior employee and a casual employee are all likely to be different as the duties and employment rights for each individual are different.

Make sure to reflect any regulatory requirements or conditions which apply, such as FCA Approved Person status.

Secondly, the right “label” should be used for the individual depending upon their employment/engagement status, for example are they an “employee”, “worker” or “self-employed”? If you use the wrong contract/label, it could result in individuals gaining additional employment rights they wouldn’t otherwise have and/or tax liabilities if HMRC considers an alleged contractor is actually an employee.

Obligations – during and post termination

Your business’ assets, whether tangible or intangible, should be properly protected. This can be done by including robust provisions regarding confidential information, intellectual property and return of company property (including passwords and log in details) when the employment ends.

The courts are more likely to enforce a reasonably drafted confidentiality clause than a dubious post termination restriction, so it pays to make sure these clauses are well drafted.

Include, where appropriate, reasonable and proportionate post termination restrictions. These should be tailored to the role and reviewed each time the individual is promoted or given a pay rise, to ensure they remain reasonable and proportionate.

If you simply use the same restrictions for every employee, regardless of role or seniority, or include restrictions which are very widely drafted, this is likely to reduce the likelihood of them being legally enforceable.

If the contract contains a power of attorney clause – giving the business legal authority to sign specific documents on the employee’s behalf regarding intellectual property rights, shares and/or office holding – it’s imperative that the contract is executed properly. Failing to do so will make the power of attorney clause invalid and could reduce your ability to protect your trade marks, patents etc in a timely manner.

Distinguish contract and handbook

Don’t incorporate your offer letter and/or staff handbook into any employment contracts. Doing so makes those documents contractual terms too, limiting your flexibility in dealing with future events or changes because the employee’s consent will be required any changes to the policies.

Record all variations

Employment contracts are living things and should be updated (with the necessary employee consent) each time you vary it. This avoids any confusion as to the relevant contract terms. Remember that an employee could argue unilateral changes to contract terms is technically a breach of contract and means their post termination restrictions are not enforceable. This could also give rise to the employee claiming constructive dismissal, providing they have the two years’ qualifying service.

Shareholders and directors

Don’t incorporate other documents unnecessarily. For example, a shareholder’s agreement or articles of association. Doing so could give the individual greater rights than they would otherwise be entitled to. This point is often overlooked, but it’s sensible to specify what will happen if an employee gives up their statutory director post and/or shares in the company.

While it can be tempting to use a generic employment contracts for everyone, use one found online, or provided by a friend, it’s prudent to take the time to draft contracts which give you the greatest flexibility in dealing with employees while also protecting your business fully.

Maria Hoeritzauer is associate at Crossland Employment Solicitors, specialists solely in employment law

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