NEWS & RESOURCES

Why robust employment contracts are key to business success

Are you aware of the extent to which your employment contracts can affect your organisation? In recent years we have seen a significant shift in the way in which people are employed and a more modern way of operating has materialised.

Initially, this change was as a response to a worldwide emergency, supported by advancements in technology. Now, it is widely recognised that business operations and the employment of people can be more flexible, benefiting not just the individual, but also the business.

As businesses have modernised, so must employment practices, and in particular, the way in which we employ people. Using the right type of contract of employment can not only help employers to attract the best talent, but they can also help with employee retention.

Gone are the days of such rigid and fixed working arrangements, so in this month’s Hot Topic, we will explore how a more modern way of working needs legally compliant contractual paperwork that underpins a more flexible and modern employment relationship.

Why robust employment contracts are key to business success?

  • They protect the rights of both employer and employee.  Having a well-drafted employment contract will set out the terms and conditions of employment concisely. This helps to avoid misunderstandings and disputes between the employer and the employee.
  • They promote good employee relations because it shows that the employer is serious about its employees and their rights. This can help to create a positive work environment and improve employee morale.
  • They reduce the risk of legal dispute because if an employment dispute does arise, a robust employment contract can help to protect the employer from legal liability because it will set out the employer’s rights and obligations in clear terms.
  • They will attract and retain top talent because employees are more likely to want to work for businesses that offer robust employment contracts because they know that their rights will be protected and that they will be treated fairly.

It is also important to recognise the role that remote, and hybrid working plays in employee attraction and retention.  Research shows that these are now big factors when people are looking for new employment.  Not all businesses, or job roles can support it, but where it can, it can be a great tool for attracting candidates to your organisation.  The research carried out in 2022, reported in People Management, but conducted by CIPDHR, found:

  • Employers who could offer remote or hybrid working were more successful at recruitment than those that couldn’t/didn’t.
  • Employers with staff working 100% remotely were three times more likely to report finding it easier than usual to recruit when compared to employers who required staff to work onsite only.

This means, that looking at the way in which you employ people and the contracts used can be massively beneficial to the business.

Types of employment relationships

When an employee leaves the business, it is always a good opportunity to reflect on what the business needs are at that point and are likely to be in the future. Many things could have changed since the business recruited previously, both internally within the business or externally within the industry that the business operates in.

Another valuable key activity is to develop a strategic people plan which aligns to the business plan.  This is vital for ensuring the business can achieve its success through its people, and resourcing is a fundamental aspect of this.

When determining what resource is needed one important consideration is the employment status of the job holder.  Doing so can be invaluable in terms of costs, efficiency, and flexibility.

There are three types of employment status; employee, worker and self-employed (although only the first two are legally defined). In recent years, the dividing line between these has become increasingly blurred and so it is important that you can distinguish between these and manage the relationship in line with the relevant rights and protections that are associated with each.

Employee

The Employment Rights Act 1996 (ERA) defines an employee as “an individual who has entered into, or works under, a contract of employment. A contract of employment is quite different from a contract to provide services, as used for a self-employed contractor or consultant. Common law duties such as confidentiality, good faith and the duty of care are implied in employees’ contracts.”

Worker

The Act then defines a worker as an “individual who has entered into a contract of employment … or any other contract under which they undertake to perform personally any work for another party to the contract whose status is not that of a client or customer“. So based on this wording, the term ‘worker’ includes not only employees, but also an individual who has any other contract, whether express or implied, whereby they undertake to do or perform personally any work or services for your business (but where you are not a client, or customer of any profession or business undertaking carried on by the individual).

Contractor (self-employed)

There is no legal definition of what constitutes a contractor (self-employed), but we know from case rulings key elements of a working relationship that help to identify whether someone is truly self-employed or is in practice, an employee. For example:

  • Whether the person can bring in outside assistance for the completion of the work
  • Can the person accept or turn down the work
  • To what extent are they in control of most aspects of the work
  • Whether they provide their own equipment.

These are just some areas that factor in to deciding if someone is a contractor, there are many others, and we would always seek HR advice if you were unsure of a person’s employment status.

Understanding the nature of the employment relationship is important because it ensures the correct type of contract or agreement is used, that you are compliant with your legal protections and ultimately provides flexibility and options for the business.

Legally compliant paperwork that underpins the employment relationship

Regardless of the type of employment relationship it will be vital to set out the terms as clearly as possible to avoid confusion and disputes in the future as to what was agreed or meant.

If the terms are ambiguous, a tribunal will normally construe it in favour of the individual as that person did not draft the document. Another reason for putting terms in writing is because the implied terms of a contract can go right back to the wording of the original job advertisement. Having written terms then ensures that the agreed terms and the rights and obligations which both parties have undertaken towards each other are clearly recorded.

A person’s employment status is based on their employment contract or ‘written statement of employment particulars, what was agreed when they were offered the job and the way in which the business and the individual work together. We are focussing on the written statement of employment particulars for this Hot Topic, but it is a good reminder to mention that what is put down in writing must be applied in practice.

There are several ways in which terms can be set out in writing and it will depend upon the employment status mentioned above.

Those who are classed as an employee and worker are entitled to be given a written statement of employment particulars. Those who are self-employed and contracting, it is necessary to set out the terms of the work in writing in the form of a written agreement.

Written statement of particulars

The relationship of employee to employer is bound by a contract of service and must be given a written statement of employment particulars.  This means there must be certain details communicated in writing to the employee and be given by their first day of employment. This is a legal requirement.

Contract of Employment

A contract of employment is a document (which can be incorporated within the written statement of employment particulars or kept as a standalone document) that both parties enter into which gives rise to obligations on both parties and that are recognised or enforced by law. It sets out the ground rules governing the employment relationship. Whilst it is not a legal requirement, it is good practice, and we always advise to use contracts of employment as it will become the most important employment document that you can give.

It is also important to be mindful that a contract of employment does not have to be in writing to be legally binding. Even if there is no written agreement, once you have offered a job to someone on certain terms and conditions (“consideration”) and they have accepted it, an agreement is reached, and a contract of employment exists.  Furthermore, contractual terms can also exist through custom and practice i.e., what is happening in practice rather than what is written down.

A written agreement

A written agreement is often used when you have a contract of service relationship between an employer and a worker, where there is no obligation to offer work, nor is there any obligation to accept work.  A written agreement will outline the terms and conditions of the arrangement so there is no ambiguity or confusion.

Worker’s do have certain legal protections although not fully, so it is necessary that any written agreement contains details about their rights and entitlements.

A contractor agreement

A contractor agreement is a contract for services, between an employer and a self-employed contractor which outlines the terms and conditions of the relationship.

The different types of contracts of employment and agreements that underpin a flexible and modern employment relationship

With advancements in technology, businesses have been able to modernise and whilst the pandemic led to more modern employment practices, there is still more that could be achieved through the way in which people are employed.

Using the right contract of employment and agreement can boost business performance as well as improve your ability to attract and retain your staff.  Gone are the days of such rigid and fixed working arrangements, adopting a more modern way of working can be achieved through the right type of contract.

Having the resource in the right place, on the right terms and for the right duration can allow an employer to become more flexible and adapt to an ever-challenging external business context.

Below you will find the many different types of contracts of employment and agreements that can be used.

Contract of Service:

 Employee to employer relationship

  • Open ended contract

The ‘open ended contract’ is the most traditional, common type of contract.  It essentially offers “permanent” employment, either on full time hours, or part time hours, which would be specified within the contract.

They can benefit the business for example:

  • They can increase employee engagement and productivity because the individual has job security from a permanent role
  • Reduced staff turnover and therefore reduced recruitment costs because the frequency of recruiting is more infrequent (generally) when compared to other types of contract
  • A more stable and experienced workforce from having a more experienced workforce which in turn leads to better understandings of the business enabling the business to operate more efficiently
  • Enhanced employer reputation because it can be seen as the business is able to provide stable and reliable employment

They can also benefit the individual for example:

  • By providing more opportunities for advancement because permanent employees are generally given priority for promotions and other internal opportunities
  • People on permanent contracts generally have a wider range of benefits that accompany the contract

Fixed term (temporary) contract

These contracts last for a specific time, typically used either for specific projects, or to provide cover for long term absences, such as maternity leave. The employee would have the same employment rights as a permanent member of staff, the only difference being is that their employment is for a specified period, agreed in advance.  The term “temporary contract” is sometimes used to refer to this type of arrangement.

Hybrid Contract

A hybrid contract of employment enables an employee to work both remotely and in the workplace. It is important that when using this type of contract, it includes specific terms and conditions relating to this type of work, for example:

  • The number of days per week that the employee is required to work remotely
  • The days and times that the employee is required to be in the workplace
  • The employee’s access to company resources and equipment when working remotely
  • The employee’s communication and collaboration requirements when working remotely

Of course, hybrid working can also be more flexible, and not specify specific days and times of when they are to be in the office, instead, it may be more of a ‘based on business needs’ basis.

Annualised hours contract

Annualised contracts set out the number of working hours to be worked during a year, which means the hours worked are likely to fluctuate week to week, and month to month.

It can be particularly useful where an employer has varying demands for their products or services over the course of the year, and so, the employees can be managed around business need.

This type of contract will need a certain amount of planning in advance based around known predicted peak operating times.  It is usual for a certain amount of the annual hours to be set out in advance, but then allow for a reserve period whereby the employee can be called upon, based on business needs.  The employee will have full employment rights, just as somebody who is on a regular weekly hour open ended contract.

Zero hours contract

There are times when there is the unpredictability of work and the business cannot commit to set working hours but need reliability that when work arises, they have resource.

Employing on a zero-hour contract can either be with the status of employee, or worker.  However, if it was to be a worker, it is more likely known as a ‘casual worker’.

Worker to Employer relationship

Casual worker agreement contract

Casual workers are those who truly provide ad hoc work on an irregular basis; the organisation is not obliged to offer work, and the individual is not obliged to accept.

They can be written so that they are an overarching agreement for various placements when work is available, or it can be issued for a specific requirement where is no ongoing work on completion.

Agency worker

This is to access resource via a 3rd party recruitment agency generally for short term, ad hoc, and sometimes urgent work.  Employment rights of the agency worker are limited, and it will overall be the agency’s responsibility to ensure that their employment rights are protected, however after 12 weeks continuous employment in the same role, the agency worker is entitled to the same rights as permanent employees of the company.

Contract for services: Contractor – individual or via a company

Contractor (self-employed) agreement

This type of agreement enables you to buy in the services or skills of an individual directly, or through a separate company.  They may also be known as freelancers.  Individuals who work in this way are responsible for their own tax and national insurance but for the organisation buying in the services, it is vital they make their own assessment to determine if the engagement is deemed “employment” for the purposes of IR35 off payroll rules.

What employment arrangement is best for the business

Questions you will want to consider when determining which is the best contract to use include:

  • Is there a short or long-term need for the role(s)?
  • Will you have sufficient work for committing to a specified number of hours each week
  • Are there peak periods across the year, conversely are you able to identify quiet periods?
  • Are their activities that can be fulfilled sporadically, short term and could be completed through temp work or for fixed periods of time?
  • Could it be more cost effective to buy in the services/skills for any activities?

Here are some scenario’s for how you may use the different types of contracts:

  1. You need a specialist skill but the work you need doing doesn’t warrant hiring someone to work regularly. You look to hire a contractor on a self-employed basis.  Not only will this avoid having to undergo a lengthy recruitment process and save a direct and indirect impact on recruitment costs, but it will be a more efficient way of bringing the skill into the business because of financing only what is needed.
  2. You are about to enter your busiest period of the year and need to have resource on standby for providing additional resource as cover. You hire someone on a casual worker agreement. This not only provides the back up if needed, but it is on an ‘as and when’ basis and therefore does not tie the business into any long term or permanent relationship.
  3. A new business critical project has been given the go ahead which requires resource for the duration of the project only. You hire someone on a fixed term contract as it enables the business to deliver on the project and provides flexibility once the project ends.

Future Changes

There is an employment Bill going through parliament called the ‘Workers (Rights and Definition) Bill. The Bill, if passed, would amend the definition of work.  However, it originated back in 2022 and has made little progress since.  It is unclear whether this will progress any further.

The Government this month has also published its response to the consultations that took place in regards to the Retained EU Employment (Revocation and Reform) Act 2023.  As part of its response, the Government have committed to defining in legislation, what is meant by irregular hours and part year workers.

 

For support in reviewing and updating your contracts, whether on a one-off basis or through a retained agreement, please feel free to contact us.

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