I’m often asked, what makes a good contract of employment?

Well there are many things. A starting point is to ensure that contracts are written in plain English and not full of legal jargon that no-one can understand. A contract of employment is also a communication document!

Here are my top five clauses for contracts. Check to see if you have these in your contracts of employment. If not, you do not have the protection and flexibility that could be achieved and is needed for your business.  

1.         Deductions Clause

You cannot make a deduction from an employee’s earnings unless you have a clear deductions clause (except for statutory deductions).

Why might this be important? Well if an employee deliberately or negligently damages company property, or gets a parking ticket, or loses company property or does not return company property, you would be unable to legally make a deduction from their wages or salary. This can be very frustrating (and costly).

No one is talking about making deductions unfairly, but we all know that it seems to be the same employee(s) where you have problems. A deductions clause can act as a deterrent and can help encourage the behaviour you want.

Examples: We put a deductions clause into a client’s contract of employment and included the right to deduct if an employee had an accident in their company car/vehicle for the insurance excess if this became due. The client saw an immediate decrease in the number of minor accidents and damage to company vehicles.

We had a new client who called us because an employee lost their temper in the office and threw their lap-top against the wall. Now there were lots of issues regarding his conduct and disciplinary matters, but one of the questions was, who pays for the damaged lap-top. Without a deductions clause the employer could not ‘legally’ make a deduction.

2.         Pay in Lieu of Notice

A payment in lieu of notice (PILON) clause allows you to make a payment to an employee rather than them work their notice period. Such a clause can have several benefits. It can mean that the employee can be asked to leave immediately (and not work their notice). The date of termination is then their last working day (not the end of the ‘notice period). You can make sure any company property is returned on their last working day and any benefits stop as of their last working day.

Example: a client had a manager who was not performing and the company had to give notice. They did not want him to work his notice so gave him payment in lieu of notice. He argued that he wanted to keep his car for the period that would have been his notice (one month). His contract had a clear clause that said that they could make a payment in lieu of notice and that in this event any company property must be returned on the last day of work (the termination date).  He was therefore required to return the car immediately and the Company ensured that the car was returned and not retained by an ex-employee.

3.         Short Time Working / Lay-off

This is a very difficult clause, but one I feel is essential in the uncertain times that we live in. This clause allows you to put people on short-time working (e.g. a 3 day week) or to lay them off completely for a period of time. If you have a sudden and significant downturn in business or business interruptions this can be a way to protect the business and reduce costs to allow for recovery.

No one is saying that a decision to implement short-time working or lay off is easy and it should never be taken lightly. But there are cases where this can literally be the difference between a company being able to continue or go under. And then no-one has a job!

Example: We have a client who lost a very big contract that accounted for over 40% of their turnover. They did not want to lose their work force (i.e. make redundancies) as they were confident that they could recover. They implemented many cost savings across the company and also implemented a period of short time working. Yes it was tough, but the outcome was that everyone was soon back to full employment and no-one was made redundant. The business kept its skilled work force and was able to compete in the market place. They actually became more competitive as they had reduced costs in other areas and had become more efficient. 

Without this clause the options would have been limited. They would have had to make redundancies or even closed the business.

4.         Holiday Clauses

Of course, all employees and workers are entitled to paid holiday, but you can put your own rules around this. Here are a few to consider:

  • All holiday should be subject to prior authorisations – you can decline requests
  • You can restrict when holiday is taken e.g. you may not authorise holiday over peak trading period
  • You can allocate holiday e.g. allocate holiday over Christmas/ New Year or have a shut down period
  • You can allocate holiday to someone’s notice period i.e. ask them to take holiday during their notice period.

Examples: An employee resigned giving a months’ notice as due under their contract of employment. They had started to be very uninterested and disruptive just before they resigned, and the Company was concerned that this would continue and cause problems. The employee had 2 weeks outstanding holiday that the company would need to pay in addition to the notice. However, the Company had a clause that said they could allocate holiday to the notice period, so they allocated the first two weeks of his notice to his holiday and then paid the final two weeks in lieu. This minimised their costs and allowed them to exit him without having to physically work his notice.

5.         Restrictive Covenants Post – Termination

Post termination restricted covenants restrict what ex-employees can do once they leave your employment. They are notoriously difficult to enforce – as you cannot stop competition, but you can protect a legitimate interest. They can also be very expensive to enforce.

However, this does not mean that they are not worth including in your contracts of employment for those employees who may pose a genuine risk to the business. But you should not include them as a blanket clause for all employees. 

If nothing else they are a deterrent and, in most cases, all you want is for the ex-employee to stop doing whatever they are doing.

Example: an ex-employee joined a competitor and started contacting old clients in breach of his restrictive covenants. A letter was sent to the employee to confirm that if this continued the company would sue him for breach of contract. The value of the claim would be the monetary losses of the client’s business that he had ‘poached’. The ex-employee’s new employer was also contacted, confirming he was in breach of his post termination restrictions and that they considered the new employer was also in breach of contract and would therefore be held accountable in any proceedings.

The employee ceased contacting old clients until the restrictions expired (they can only be for a limited period), but this gave the company time to speak to clients and secure their business.

These are just five clauses. There are many more that can help you protect your business and provide you with the flexibility your business may need.

Paula Fisher.

You can contact Paula on paula@practical-hr.co.uk

If you feel that you need guidance or advice on this matter, please call Practical HR on 01702 216573 or email Paula on the above.