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Contracts and Incentives


As an employer, it’s essential that you have the right documentation in place from the start, whether it’s for consultants or employees.

What are contracts of employment?

A contract of employment is a written document which contains the details of the agreement between the employer- who is providing the work – and the individual – who is doing the work. The information contained in a contract of employment is broken down into express “terms”. Each term covers discrete areas such as pay, holidays and notice entitlements.


The terms of the employment contract give the parties legal rights which can be enforced in Court or the employment tribunal if they are breached.


Express terms are those that are written down in the contract or, which are specifically agreed orally between the parties. There may be other types of terms called “implied terms” which are not written down in the employment contract but which are assumed to apply to both the parties – either because it is so obvious it doesn’t need saying or, as a result of the circumstances of the employment.


Finally, there are other places where you may find essential information about the details of your employment. These include the staff handbook and your disciplinary and grievance policy documents. Not all terms found in these places may confer legal rights.


Regardless of the sources of the terms, the contract of employment provides clarity about what is expected from each party and provide protection should things go wrong in the employment relationship.

While a written employment contract cannot cover absolutely every single scenario that may occur during employment, it will usually cover the main areas so that everyone understands from reading it where they stand.


Are contracts of employment a legal requirement?

An employer has a legal obligation to provide its employees with written evidence of the main terms of their employment from day 1. This document is sometimes referred to as a “written statement”. However, this doesn’t have to include absolutely all the terms which the parties may want to agree, just the most important ones.


For practicality, most employers would usually satisfy their legal obligation by simply issuing an employment contract which included all the required information.


When should contracts of employment be issued?

Ideally an employment contract should be provided before your employee starts work so they know what they are signing up to.


As a minimum, a written statement of the main terms and conditions must be given from day one of employment (with limited exceptions for some terms which may be provided in instalments). Thereafter, any changes to employment terms must be notified within one month.


When can contracts of employment be changed?

There may be many scenarios where an employer wishes to change employees’ terms: as a result of a takeover or merger, to update information that has become outdated, to accurately record a change such as a promotion, new job title or pay rise or, in the event of financial difficulties to reduce pay or benefits.


However, legally binding terms of an employment contract cannot usually be changed without an employee’s agreement. In other words, an employer cannot just ignore existing terms or impose new terms unless the employee agrees.


For uncontroversial changes (normally those that are beneficial to an employee such as a pay rise), this can easily be done. However, for more negative changes the employer will need to consult with employees first to secure their agreement.


Where this is not forthcoming, an employer may decide to dismiss employees and immediately offer to re-employ them on the new terms (sometimes referred to as “fire and re-hire”). An employer will need to carefully follow the required procedure in such a scenario and may open itself up to unfair dismissal and other claims if it adopts this method.


Types of incentive contracts

An employer may wish to offer certain benefits as part of its employment contract to incentivise its workforce. These may take the form of commission schemes, bonuses, enhanced pensions, share options, LTIPs (long term incentive plans), discounts, benefits in kind, gym membership etc.

Such incentives may be included as terms within the employment contract or details of entitlements may be set out in separate documents. This is normally the case with share-based incentives and pensions which will be governed by a set of rules outside of the employment contract.


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