Put simply, having contracts of employment in place is a very easy way to reduce the risk of future disputes arising, which could, in turn, lead to costly Employment Tribunal claims. The law requires that a statement containing certain key employment particulars is given to all employees within two months of commencing work. A failure to do this can lead to a claim being made to the Tribunal and compensation of two or four weeks pay can be ordered in certain circumstances where no such statement has been provided.
Many small business owners (and indeed larger ones) take the view that they are better off without a contract - don't commit to anything in writing seems to be the mantra often advanced in support of their approach and there is a feeling that having no written contract gives them greater flexibility. In fact the reverse is the case. With no written contract setting out the key terms, disputes frequently arise. In the absence of a clear written document setting out the position it is frequently impossible to resolve that dispute without going to an Employment Tribunal. The very nature of any court or tribunal action is that the outcome is uncertain and very often could go either way depending on the view taken by the court or tribunal on the day. This can have huge ramifications for any business but especially for an SME.
Consider the following all too common example: a business has 3 people who are "self employed". There is nothing in writing. The business owner sees them as self employed contractors with no employment rights (eg holiday pay, right to notice when dismissed etc). The business needs to cut costs and the 3 are let go. They are not happy and all 3 claim unfair dismissal which can only be claimed by employees. The legal test for employment status is a topic on its own and so will not be discussed in this article (although feel free to write to the editor imploring that he commission a further article on that topic). The employer goes to the employment tribunal assuming that they are self-employed because that is what he has always called them. In the absence of anything definitive in writing and depending on how they actually worked in practice it is likely that the Tribunal would view them as employees and in the absence of a fair procedure having been followed before dismissing them would find that they were unfairly dismissed for which compensation can be up to £65,300 for each employee (from 1 February 2010). A well-drafted written contact could have avoided this by making it clear they were self-employed.
Even if it is accepted that someone is an employee there can still be disputes over terms and conditions. A clear contract can avoid such disputes from arising at all. Many small business owners assume that nothing in writing means no contract at all. This is not the case; a contract can be written or verbal (or a combination of the two) and can include express terms, which the parties have agreed upon, and also implied terms. No small business owner would want the uncertainty of a Tribunal assessing the verbal terms of the contract. Terms can be implied into contracts of employment through custom and practice - therefore if you have no written contract but arrangements develop over time they can become contractual. Again this can cause significant problems for a small business owner which can easily be avoided by setting out plainly and in writing the terms of employment and updating these if changes are agreed.
The savings to a business in having proper contracts of employment in place are great: as well as avoiding costly court or Employment Tribunal proceedings an employer can avoid further diverted management time in dealing with disputes and arguments over entitlements. Contracts do not need to be lengthy documents full of legal jargon - in fact we would also seek to avoid this - they should be clear, concise and set out what the agreed terms are. Employers should ensure that they are signed and accepted by staff. Taking these simple and inexpensive steps at an early stage will lead to significant savings later on if the relationship sours over a dispute as to the terms of employment.
Guy Hollebon, director and Head of Employment at Bevans solicitors
