Sophie Rothwell writes for Employment Law Journal on demystifying employment contracts
Sophie Rothwell, Associate, concludes Employment Law Journal's series on demystifying employment contracts with a look at some of the optional clauses employers may wish to include in their contracts to reduce the risk of future employment disputes.
Read her full article below:
It might seem unusual to consider termination or the prospect of a dispute between employer and employee before employment has even commenced. However, thinking ahead to all eventualities and putting the groundwork in when drafting the employment contract will only be helpful should a problem ever arise. There is a wide array of clauses that may assist the employer and employee during the course of the relationship. If the contract covers all the key areas, then hopefully there is less scope for dispute later in the relationship.
The contract of employment is a vital document that sets out clear expectations for what is permitted by or required from each party throughout the entire employment relationship; it will contain express, implied, incorporated and statutory terms. In this article, I focus on potential express terms that the parties may set out in the contract, other than those required by s1 of the Employment Rights Act 1996 (the ERA) (discussed in part 1 of this series). While express terms can be agreed orally, this is not satisfactory as establishing the terms if a dispute arises will be difficult and wholly reliant on witness evidence. The courts are likely to resolve any ambiguity by finding against the party seeking to rely on the provision.
These are some optional clauses to consider.
Flexibility
The employer may want to include a clause allowing it to make variations to the contract. This may be in the form of a specific flexibility clause (perhaps a ‘mobility clause’ allowing it to change where the employee works) or a more general flexibility clause purporting to enable the employer to make wide contractual changes.
Even with such a clause, the courts tend to restrict employers’ ability to make unilateral changes and the employer should behave reasonably. The more extreme the change, the harder it will be to rely on such a clause. Nevertheless, the clause may be a helpful starting point to encourage employees to agree to certain variations.
The employer may want to include a clause that specifically prevents any variation not agreed by both parties in writing. This may help if an employee seeks to claim they were promised a bonus or pay raise in a conversation.
Expenses
To reduce the scope for dispute, it is helpful to include an expenses clause that sets out how and when an employee will be reimbursed for their ‘reasonable’ expenses and what limitations there may be on reimbursing them. If the company also has an expenses policy, then this clause should be tailored to reflect this.
Intellectual property
In many roles, intellectual property (IP) rights will not be an issue. However, if an individual is likely to (or even just may) create IP rights during their employment, the employer will want to ensure it is the first owner of rights to materials and inventions created during the course of employment (so far as permitted). These clauses need specialist input to ensure they are fit for purpose and the more creative or technical the role, the more extensive the clause will need to be.
If an IP clause is included, it will generally include a power of attorney. The employee would then appoint the employer as their attorney for the purpose of executing any documents required to deal with the matters covered in the clause, including the assignment of rights to the employer. For the power of attorney to be effective, the employment contract will need to be executed as a deed.
Annualised hours
The employer may want to consider an annualised hours arrangement, for example if it needs workers seasonally. This will allow flexibility, while still guaranteeing the employee a minimum amount of work. If including a clause like this, employers need to give thought to how holiday will work following the recent Supreme Court decision in Harpur Trust v Brazel [2022] (see ‘Part-year workers get holiday bonanza’ by Joanne Moseley in last month’s issue of ELJ).
Holiday
In addition to setting out an employee’s holiday entitlement, the employer should consider if it will be useful to designate certain days as holiday to facilitate a shutdown (for example, between Christmas and New Year). It may also wish to require an employee to take outstanding holiday while under notice of termination to avoid having to make any payment in lieu on termination.
Homeworker and hybrid working clauses
Agile working has become much more prevalent since the pandemic. Clauses that set out how this should work, what arrangements are in place (for example, on equipment, insurance and utilities) and whether the employer can terminate the arrangement will help protect the business as working practices evolve. However, thought should always be given to how prescriptive a contract’s terms need to be and whether some information might be best contained in a policy (which can be more easily amended).
Outside interests
While employers often focus on restrictions on the employee after employment has ended, they should also consider controlling the employee’s outside interests during employment. While there is an implied term of good faith and fidelity, an express clause can be broader, preventing outside business activities unless the employer has given its agreement. This type of clause is unlikely to be appropriate for part-time workers. It can be broad or limited to similar businesses.
Post-termination restrictions
The courts will not imply post-termination restrictions, so employers must include these in the contract and take care over the drafting if they need such protection. These clauses are used to protect a business for a certain period after the employment has ended but the starting point is that courts do not like to enforce them. They do not want to prevent an individual from earning a living.
Any restrictions must be no wider than is necessary to protect the employer’s legitimate business interests. Legitimate business interests include protecting the relationship with clients, customers or the employer’s workforce and protecting trade secrets or confidential information. The types of restraint that the courts have enforced are those that seek to prevent a former employee from soliciting or dealing with customers or clients with whom they had a connection during their employment or from poaching staff with whom they worked. The duration of restrictions is often the subject of dispute. They should be for no longer than the employer reasonably needs.
The restrictions should be carefully tailored to the specific employee and will be judged as at the time they are entered into. As a result, as someone is promoted, the business should revisit their restrictions to ensure they are appropriate to new positions. Any changes to restrictions during the course of employment will need to be accompanied by consideration (such as a pay rise accompanying a promotion).
Garden leave
When a senior employee is put on notice or resigns, the employer may want to put them ‘in the garden’ for some or all of their notice. This is to keep them away from clients and colleagues and to stop them working for another company during that period. If there is no express garden leave clause, any such attempt may be a breach of contract and risks invalidating other clauses under the contract.
The garden leave clause should set out what the employer can do if it invokes this clause. For example, it might limit access to the office, prevent removal of company property and require the employee to carry out alternative, limited or no duties. Additionally, it would be helpful to say that any outstanding holiday will be deemed to be taken during garden leave as this reduces the additional liability on termination.
Where a contract contains both a garden leave clause and post-termination restrictions, employers and advisers should consider the length of the two together when assessing how long it is reasonable to keep an individual out of the workplace. It may be appropriate to reduce post-termination restrictions by any time spent on garden leave.
Confidentiality
There is a common law duty of confidentiality that is implied into every contract of employment but ideally the employer will expand on this in an express confidentiality clause. The employer needs to consider the type of confidential information the employee has access to.
Change of control
It is not only employers who can propose contract clauses. Sometimes, an individual who is applying for a senior role and in a strong negotiating position may ask for certain provisions, such as a change of control or ‘golden parachute’ clause. This will give a senior employee additional protection if the controlling interest in the employer transfers to another party, such as entitlement to an enhanced severance package.
Bonus provisions
Bonus clauses – either contractual or discretionary – are often included in the contract. The bonus provision can be based on individual, team or company performance.
The employer may want to include provision for the clawback of any bonus paid in certain circumstances (see below).
Clawback
The employer may want to include provisions to claw back training costs and bonuses.
If the employer has paid significant sums on training, it may be aggrieved if the employee leaves shortly after the course before it has had any benefit. A clawback provision will enable the employer to recoup some or all these costs in certain circumstances. The clawback should be tapered, so that the repayment reduces the longer the employee remains in employment and, after a certain period, no sum should be recouped at all.
In terms of bonus payments, the employer may want to include clawback provisions covering certain situations (such as wrongdoing by the employee or a restating of the company accounts). If the company is listed, there are corporate governance recommendations that remuneration schemes and policies should enable the company to recover or withhold sums in specified circumstances.
Suspension
It is wise to include an express power to suspend an employee who is suspected of serious misconduct during the investigation if there is reasonable and proper cause to do so. In the absence of an express power, an employee could argue that they have an implied right to work.
Additionally, it can be useful to enable the employer to disapply or amend its disciplinary and grievance procedures for employees with less than two years’ service. This will give it more flexibility where staff have not yet accrued unfair dismissal rights.
Deduction from wages
Under the ERA, no deductions can be made from an employee’s wages unless this is required by law or the employee has previously consented in writing to the deduction. Including a specific clause in the employment contract allowing a deduction to be made for money owing is a helpful provision. However, employers still need to act with caution as the tribunals will construe any ambiguity in the drafting against them.
Lay offs and short-time working
Lay offs and short-time working are common in industries with fluctuating working patterns. These clauses can also be useful in recessions as an alternative to redundancies and many employers made use of them during the unprecedented events of the pandemic. There are statutory provisions that allow employees who have been laid off or put on short-time working for a certain period of time to claim a statutory redundancy payment.
Governing law and jurisdiction
These clauses are not generally essential in most employment contracts. However, they are more common in senior employee contracts, particularly where the individual may be undertaking some work outside the UK. They may also be useful for employees with hybrid working arrangements who wish to work regularly from abroad (see ‘Working overseas: plain sailing?’ by Robert Maddox in this month’s issue of ELJ).
A choice of law clause cannot be used to try and exclude the jurisdiction of local mandatory rules. So, for example, such clauses cannot be used to contract out of unfair dismissal rights or the right not to be discriminated against.
The clause could be used to determine the law governing certain aspects of the contract that do not relate to mandatory laws, for example bonus provisions and long-term incentive plans.
Entire agreement
Often, parties will have various discussions leading up to the agreement of a contract. To ensure there is no debate about the final terms agreed, the parties may want to include an ‘entire agreement’ clause. This will set out that the contract represents the entire agreement between the parties and that no earlier discussion or documents are part of the agreement. While this is useful, the courts can look behind the clause if they think the reality of the way the contract operates means there are other provisions in play.
The article was first published in the October issue of Employment Law Journal (www.lawjournals.co.uk).
