The Importance of Having an Employment Contract
21 February 2019
When starting a business, you can only get so far by yourself. Before long you’ll be thinking about building a team of people who share your vision and goals. These people will become an important part of your success and may become one of your most cherished assets.
Despite this, it is a harsh fact that 1 in 5 people don’t pass the probationary period. Therefore, it is vitally important that you set out the terms of employment of your employees so you can ensure that you build a team that is the right fit for you and your business. This blog will outline 5 key reasons why you need to put employment contracts in place.
1. Duties, obligations and performance
An employment contract will typically outline an employee’s job role and what is expected of them. It will contain a list of expectations and obligations that the employee must meet in their day-to-day activities.
Setting out your expectations from the outset will enable you to manage these expectations. It will be significantly harder to deal with conduct or performance issues if an employee can legitimately argue that they were never informed of what was expected of them.
2. Probationary period
Equally, a clause dealing with probation will provide you with a sort of ‘trial period’ at the start of the employment relationship where you can get an understanding of an employee’s ability to perform their job role and whether they fit within your vision for the business.
Other than providing a useful framework for both parties to decide on a longer term commitment, a typical probationary period clause will enable you to terminate the contract of employment with a shorter notice period. This will allow you to remove an employee who turns out to be unsuitable quickly and at less cost.
Many businesses operate bonus schemes to incentivise employees, such as the opportunity to obtain bonuses and/or commission.
It is important that if you do operate such schemes, the circumstances in which these incentives materialise are clearly worded and set out in a contract of employment. Many disputes arise out of bonus or commission arrangements that are not supported by clear contractual wording. For example, is an employee only entitled to a bonus if he hits certain targets? Do these targets increase the more experienced the employee becomes? Is he entitled to a bonus if his contract is terminated and the bonus is usually paid during the notice period?
4. Term and termination
A clause containing the employment period and its termination should always be included in a contract of employment.
A termination clause will set out the terms and obligations to be complied with by you and the employee upon termination of employment. For example, it will contain details relating to how much notice you must provide the employee and how much notice they must provide you.
A termination clause can give you options in relation to termination and notice – garden leave clauses can be extremely useful where an employee operates in a particularly sensitive part of the business and you think it would be appropriate for them to spend their notice period at home. Alternatively, you may want to pay the employee in lieu of giving them notice. The absence of these options in the employment contract can significantly restrict your flexibility in relation to terminating an employees’ employment with you.
5. Post termination restrictions
Last, but certainly not least, post-termination restrictions can absolutely become one of the most important clauses of any employment contract. As the name suggests, this type of clause will restrict what an employee is allowed to do once they leave your business.
Otherwise known as ‘restrictive covenants’, this clause operates to prevent an employee from, for example, setting up in competition with your business or from poaching employees or key customers. This clause will seek to protect your business and prevent an employee from exploiting its knowledge of your business for personal gain. However, this clause needs to be written carefully as they will only be enforceable if they are protecting a legitimate interest of your business. Also bear in mind that if you breach the contract of employment, the restrictive covenants will not be enforceable!