HR for SMEs - Contracts of Employment

An extract from 'HR for SMEs'

When it comes to managing your human resources, the contract of employment is, quite simply, the most important document you can have.

A good contract of employment will protect the business and provide it with the flexibility it needs to adapt to changing circumstances. A bad contract, however, will restrict the business, leaving it inflexible to change and vulnerable to disputes (as well as their associated costs).

At its very simplest, a contract is what allows you, as an employer, to do something or not! Generally, whenever there is a dispute, the first question will be ‘what does the contract say?' closely followed by ‘what does the policy say?'

So what makes a good or bad contract?

Well, there are various answers to this, many of which depend on where you stand. An employee might have a very different view to that of a business owner.

There are, of course, legal requirements to consider; there's the timing in which the written contract is actually given to an employee; and there's the specific wording used and how much clarity is given to the obligations set out for both the employee and employer. 

Getting the most flexibility and protection from your contracts will take some time and effort but believe me when I say it will be worth it. The pay-off will be a game plan that, rather than being stuck in the realms of fantasy football, actually starts to materialise.

One thing to understand is that, contrary to popular belief, a contract does NOT have to be made in writing. A contract of employment is formed when you offer the job to someone, they accept it and you agree to pay them. That can be (and often is) done verbally. The problem with this is that usually, at this stage, very few of the terms have actually been discussed. You may have talked about hours and pay, but probably little else.

Let me be clear on this though. If you do not have ‘written' contracts in place, it does NOT mean you do not have obligations and terms in place with your employees.  There is still a contract of employment but, because it is verbal, the terms may be unclear. There is more room for misunderstanding and therefore an increased likelihood of disagreements and disputes! I have seen this time and time again.

The commercial reality of having good contracts of employment is that they can save you time, hassle and money (and in extreme situations can even help save your business)! Let me illustrate some of practical considerations by means of a more detailed example:

Imagine two competitive companies (ABC Ltd and DEF Ltd), both suppliers and fitters of electronic doors. They are of a similar size with approximately 2-3 teams of fitters, 3 field sales staff and 10 back office staff.

Here's the difference.

ABC Ltd has never had written contracts of employment and prefer to work on a 'hand-shake'.

DEF Ltd has comprehensive written contracts and is very particular about making sure their associated documentation is in place.

Now, imagine both companies are facing a number of staff issues and a possible downturn in business around the corner. This is how their options to some of those situations pan out:


1. Damage to Vehicles:

Both ABC and DFE have had vehicles damaged in minor accidents, but the fitters did not get any details from the driver of the other vehicle.

The vehicle insurance excess in both cases is £500.

ABC have no contract and therefore no deductions clause. They therefore do NOT have the right to make a deduction for the excess. It will be an illegal deduction.

DEF have contracts with a clear deductions clause. They can make a deduction for the excess. DEF can recoup the £500.

2. Training Courses

ABC and DEF each sent a member of their fitting team on a specialist training course covering new methods of installation. The course was expensive, costing around £1000 per delegate. Both of these employees have now resigned.

ABC have no contract and therefore no deductions clause. They therefore do NOT have the right to make a deduction for the excess. It will be an illegal deduction.

As well as having a training deductions clause in their contract, DEF also made sure the employee signed a training form before he went on the course confirming these deductions if he left the company.  DEF can recoup the £1000 by making a deduction from the employees final pay.

3. Downturn in Work

Both companies are concerned that there could be a temporary downturn in work in the near future.

ABC will need to consider making redundancies.

DEF have the contractual right to put staff on short-time working or even lay them off for a short period. While this would not be a popular decision, or something they would consider lightly, this would be preferable to making permanent redundancies. It would also ensure that they retained their workforce ready for when things pick up.

Moving to a 2/3 day week for a short period, with the proportionate cut in the salary bill will give DEF time to recover reducing their costs significantly during the period.

From these situations, DEF could save / reduce costs by many thousands of pounds. They will also save a lot of time and heart-ache!

These are just some examples and you can see how this puts your company in the best position to manage HR effectively - giving you options relating to how you want to deal with any given situation and enabling you to legally pursue whatever course of action is best for your business.

Without a contract, you can do very little! Are you really ok with not having those choices?

Further information:

The above is an extract from 'HR for SMEs - a practical guide', by Paula Fisher.


For bespoke contracts, please contact our HR consultants - call us on 01702 216573

For cost effective contracts visit