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6 key terms for all SME employment contracts

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If you’re a small business owner taking on staff for the first time, you’ll need to be aware of several essential employment laws and statutes. Failing to comply could damage your business's reputation and land your company in a legal dispute.

The best way to ensure your business is protected is to have an agreement in place with your employees which sets out the terms of your relationship with the employee. In most circumstances, this will be in the form of an employment contract.

This article sets out the key terms that, as an SME, you can’t miss on your employment contracts.

Why are employment contracts important? 

One of the most important employment laws that SME owners should know is that employees (and workers) are entitled to a written statement of specific terms of employment on or before the day they start work. 

Many employers set the terms out in a written employment contract as it’s often easier to put them all in one place; however, this isn’t necessary.

What happens if I don’t give my employees details of the required terms and conditions?

If you don’t give your employees the required terms and conditions, or this section is incomplete, your new employee could take a claim to the Employment Tribunal (either during their employment or within three months from its termination), and the Tribunal may order you to give the employee their terms and conditions section (or amend accordingly). 

In addition, if the employee brings another successful claim, they may also claim compensation for that failure of 2-4 weeks’ pay.

You might have heard about the unwritten terms and implied terms that are applied to all employment relationships. The implied terms aim to protect the employer (e.g. the employee's duty not to compete whilst in employment) and the employee (e.g. the obligation to provide work and pay wages).

These terms need to be set out in the employment contract, but the following are often the terms that employers can fall foul of.

1. Statutory minimum notice period

Your Employment Contract should include the notice period the employer and employee should give each other to terminate the contract.  

However, section 86 of the Employment Rights Act 1996 (ERA) states that there are statutory minimum notice periods.  

The notice period that will apply for both parties is either the notice period set out in the employment contract or if that is less than the employee is entitled to receive or the employer must give under section 86 of the ERA, the statutory minimum notice periods will apply. 

The statutory minimum notice periods are as follows:

For the employer to give to the employee

  • One week’s notice for those employees with between one month and two years’ service
  • After that, they’re entitled to an additional week’s notice for each continuous year of employment (up to 12 weeks for 12 years of service)

For the employee to give to the employer (with at least one month’s continuous work)

  • One week

Remember that there will be times when you don’t wish to provide the employee with any notice, for example, in cases of gross misconduct, and the terms and conditions should also deal with that scenario.

How do I know how much notice to give?

It’s often the case that during the probationary period, the parties can give a shorter notice period of one week.  

After they have passed their probationary period, it’s usual to determine the notice period to be given by either side depending on the employee's role and seniority. It’s advisable to weigh how long it would take to find a comparable replacement against the fact that a long notice period means you will have to pay them for that time.

2. Deductions

Employers are only allowed to make deductions from an employee’s wages if: 

  • It’s required by statute (e.g. PAYE deductions and National Insurance contributions)
  • It’s permitted by a term of the employee’s contract, and it has been notified to the employee in writing in advance of the deduction
  • The employee has previously authorised the employer to make the deduction in writing (e.g. in a training agreement or deductions agreement)

Therefore, it’s crucial that you make sure you have one of the above reasons in place before you make any deduction at all. You should ensure that you give your employees itemised payslips showing (at the very least) their gross and net wages and the amount and reasons for any deductions.

3. Hours of work

Employees’ and employers’ working hours are regulated by the Working Time Regulations 1998. In most cases, employees may not work for more than (on average) 48 hours per week unless they have consented to opt out of this limit.  

Note that this working time doesn’t just mean at your SME – it means anywhere they work.  If you, therefore, have part-time employees who are also working elsewhere (whether as an employee or worker), you’re advised to ask them to sign an opt-out agreement in case their working time exceeds the average of 48 hours.

4. Confidentiality

Employees are bound by an implied duty of fidelity and good faith, which includes an obligation not to disclose the employer’s confidential information whilst they’re employed.  

However, once their employment ends, that implied duty is limited to confidential information that amounts to a trade secret (i.e. highly confidential). 

Employers are advised to include a clause in the contract (similar to an NDA) that not only sets out what the employer’s confidential information covers but also that this duty extends to after they have left their employment with you.

5. Restrictive covenants

For some employees, you may restrict their activity after they have left your employment.  

It’s generally the case that restrictive covenants are unenforceable (because of the doctrine of restraint of trade) unless they go no further than is reasonably necessary to protect the SME’s legitimate business interests.  

You should look at each employee’s role and decide whether restricting their working activity after they have left you is reasonable. 

Ensure that the restriction is a legitimate way of;

  • Protecting your trade secrets
  • Protection of your trade connections 
  • Keeping your workforce stable

6. Wrongful dismissal

Despite unfair dismissal being a statutory right under the Employment Rights Act 1996, wrongful dismissal is a contractual right, so it’s set out in the employment contract.

If unfortunately you need to dismiss an employee, you must be very careful to ensure the dismissal is for a fair reason (on the grounds of their capability, conduct, redundancy, a duty/restriction imposed by, or under an enactment prevents it, or for some other substantial reason) and you follow a proper dismissal procedure.  

If your employee has two years of continuous service with you, they have a right not to be unfairly dismissed. 

Although, do note that there are some unfair dismissal claims an employee can make even if they do not have two years of service.  

Keep other policies in a staff handbook

You should have other policies covering disciplinary and grievance procedures, health and safety (if you have five or more employees), sickness absence, and pension information; these policies should be included in a staff handbook.  

The policies in the Staff Handbook are non-contractual, so they don't need the employee’s consent to be amended. In contrast, if you wish to amend a contractual term, you would usually require the employee’s consent.

Wrapping up

As you can see, the rules and regulations that cover employees are highly complex. You can count on the advice of an employment contract lawyer or an HR  adviser specialising in employment law, which would help minimise the risks and enable you to spend your time on the things that matter – your business.

About the author

LawBite is an online legal platform providing easy-to-access, expert, and affordable legal advice for businesses. All LawBite lawyers and barristers are fully qualified and have experience working with a range of businesses, big and small. With an average of 15 years of experience in commercial law, they’re prepared to assist with all your legal questions and queries. To find out how they can help your business with all employment law matters, book a free 15 minute consultation.

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Updated on
November 18, 2022

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