Contract of Employment
Contract of Employment: Guide for SMEs
A contract of employment is one of the most important documents in any employment relationship. It sets out the legal terms and conditions under which an employee works for an organisation, including key details such as pay, working hours, duties, notice periods and workplace policies. In the UK, employers are legally required to provide employees with certain written information about their employment from the start of their role. This is often referred to as the “written statement of employment particulars” and forms a core part of the employment contract. For SMEs, having clear, well-drafted employment contracts is essential not only for legal compliance, but also for setting expectations, reducing the risk of disputes and ensuring consistency across the workforce. A well-structured contract provides clarity for both employer and employee and forms the foundation of a positive working relationship.
This guide explains what a contract of employment is, what must be included, when it must be provided and the key differences between a contract and a written statement of terms, along with common mistakes employers should avoid.
What Is A Contract of Employment?
A contract of employment is created when an offer of employment is made and accepted. Contrary to popular belief, the contract does not need to be in writing for it to exist.
This means that an employment contract may be formed before an employee’s first day of work and before any written documentation has been issued. The written contract simply records the terms that have already been agreed between the parties.
A contract of employment is like any other contract between two parties; once agreed, its terms cannot usually be changed unless both parties agree to the change. If one party attempts to change a contractual term without agreement, they may be in breach of contract.
Employment contracts contain a combination of ‘express’ and ‘implied’ terms.
- Express terms: are terms that have been specifically agreed between the employer and employee, such as pay, working hours or place of work. These terms may be agreed verbally, in writing or through a combination of both.
- Implied terms: are terms that exist even though they have not been specifically discussed or recorded. Some implied terms arise through legislation, whilst others have been developed through case law. One of the best-known examples is the implied duty of mutual trust and confidence, which requires employers and employees to behave fairly towards one another.
If an employer breaches an employment contract, the employee may be entitled to bring a breach of contract claim. In more serious cases, a fundamental breach of contract could entitle an eligible employee to resign and claim constructive dismissal.
Although employment contracts do not have to be in writing, employers are legally required to provide employees with certain written information about their employment. This is known as the written statement of employment particulars, often referred to as a Section 1 Statement.
What Is The Difference Between A Contract Of Employment and a Section 1 Statement?
The essential difference between an employment contract and a section 1 statement is that an employment contract is formed, even though it may not be in writing, the minute the employee agrees to work for the employer. The section 1 statement has to be given to the employee on or before their first day of employment, and is merely evidence that the contract exists.
The Section 1 Statement contains certain information prescribed by law, including details such as pay, hours of work, holiday entitlement and notice periods. Whilst this satisfies the statutory minimum requirement, it does not necessarily cover all of the terms an employer may wish to include in an employment contract.
In practice, most employers combine the Section 1 Statement and the wider contractual terms into a single document known as a Contract of Employment. This approach helps ensure legal compliance whilst also providing additional protection for the business by clearly documenting matters such as confidentiality, intellectual property, restrictive covenants and references to workplace policies.
What Must Be Provided in Writing (Legal Requirement)
On 6 April 2020 the rules about what must be included in the Section 1 Statement were extended. This means there is less opportunity to refer out to another document such as an Employee Handbook. The aim of the changes around the Section 1 Statement were to increase transparency between employees and employers as well as improving the enforcement of employment rights.
Information Which Must Be Provided On Or Before Day One
The following information must be contained in one document, known as the section 1 Statement:
- Names of employer and employee or worker
- Address of the employer
- Date employment and continuous employment started (for a new employee these will be the same date
- Job title or a brief description of the job
- Probationary Period: including its duration and any conditions that apply (such as a shorter notice period) during the probation;
- Places or addresses where the employee or worker will work;
- Pay: including how pay is calculated, how it is paid i.e. bank transfer, cash or cheque and the frequency of payment i.e. weekly, monthly etc. (for example, £1,000 per month, paid on the last Friday of the calendar month);
- Benefits: such as pension scheme, death in service benefits etc, both contractual and non-contractual benefits should be included;
- Working Hours: specifically, which days the employee or worker will normally work, whether such working days are variable and if so, the basis on how that variation is determined and whether the employee is expected to work overtime or unsocial hours;
- Holiday Entitlement: including bank and public holidays, how holiday entitlement and pay are calculated;
- Sick Leave and Pay: if this information is not included in the document, the employer must state where to find it;
- Other Paid Leave: if this information is not included in the document, the employer must state where to find it
- Training Entitlements: including details of any compulsory training, including whether the employer will pay for it;
- Notice Periods: length of notice of termination required from employer and employee or worker.
- Details of any collective agreement that directly affect the employee’s conditions of employment; and
- If the worker is required to work outside the UK for over a month: arrangements for working outside the UK (including period, currency of pay, additional pay and benefits and return terms)
Temporary Status: if the employee or worker are not permanent the section 1 statement must also state how long the job is expected to last.
Terms That Can Be Provided In Instalments
The following information can be provided within 2 months of the start date of the new employee:
- pension arrangements (if this information is not included in the document, the employer must state where the employee can find it)
- any ‘collective agreements’ (terms and conditions that apply to other employees too)
- details of any training provided by the employer that is not compulsory (if this information is not included in the document, the employer must state where to find it)
- disciplinary rules and disciplinary and grievance procedures
If the written statement refers to other documents or steps it is important to state what they are and where to find them.
Opportunities To Refer Out To Another Document
Although the scope for referring employees to other documents has reduced significantly since April 2020, some information can still be provided separately provided the employee is told where to find it. They are:
Many employers continue to use an Employee Handbook to provide more detailed information about workplace rules, procedures and benefits. The contract of employment can then refer to the relevant policies whilst ensuring that all legally required particulars are provided in writing.
When Must Employees Receive Their Contract?
From 6 April 2020, the issuing of Section 1 Statements became a day 1 right. Meaning the Section 1 Statement must be provided on or before the first day of work. Therefore, removing the two-month grace period.
Can Employment Contracts Be Changed?
Employment contracts cannot normally be changed unilaterally by the employer. In most circumstances changes require employee agreement, consultation or a contractual right to make the change.
You can read more about changing terms and conditions of employment in our guide to Changing Contracts of Employment.
Common Mistakes SMEs Make
Employment contracts are one of the most important documents in the employment relationship, yet many SMEs continue to rely on outdated templates or fail to review their contracts as employment law develops. The result can be unnecessary disputes, compliance failures and increased legal risk.
Some of the most common mistakes employers make include:
- Not issuing written terms on time: employees and workers are entitled to receive their written statement of employment particulars on or before their first day of employment. Delays can result in compliance issues and weaken the employer’s position in the event of a dispute.
- Using outdated contracts: employment law changes regularly. Contracts that have not been reviewed for several years may no longer reflect current legal requirements or business practices.
- Relying on generic templates: contracts downloaded from the internet are often not tailored to the specific needs of the business and may omit important protections.
- Failing to clearly define contractual terms: unclear wording relating to pay, hours of work, place of work, notice periods or benefits can lead to disagreements and misunderstandings.
- Assuming the Employee Handbook can contain everything: since April 2020, much more information must be included in the written statement itself, reducing the ability to rely on separate documents.
- Not reflecting actual working practices: contracts should accurately reflect how employees work in practice. Where reality and documentation differ, disputes are more likely to arise.
- Failing to review contracts as the business grows: contractual provisions that may have been suitable for a small start-up business may no longer be appropriate as the organisation expands.
Perhaps the biggest mistake employers make is viewing contracts as a one-off administrative task. Employment contracts should be reviewed periodically to ensure they remain legally compliant, commercially appropriate and aligned with the needs of the business.
Failure To Comply?
Failure to provide a compliant section 1 statement does not, on its own, allow an employee or worker to bring a standalone Employment Tribunal claim. However, where an employee or worker succeeds in another employment-related claim, the Tribunal may award additional compensation or 2 to 4 weeks pay if the employer has failed to provide the required written particulars.
The penalty for breaching this requirement is quite small, although total costs might be significant if a number of employees bring claims as part of some other litigation.
Uncertainty Over Terms and Conditions Of Employment
When there is uncertainty in the terms and conditions of employment, as a general rule, an employment tribunal or a court will give judgement in favour of the employee, on the basis that the onus should be on the employer to make sure that the employee’s terms and conditions of employment are clear and unambiguous.
Because a court or an employment tribunal will probably find in favour of an employee if there is a dispute as to an unclear term in the employment contract it follows that an employer should make sure that the employment contract is as clearly worded as possible and gives as much flexibility for change as possible.
Top Tip
Although you probably have much of the required information available care will be needed to ensure that an appropriate level of detail is included within the Section 1 Statement itself, as there is less scope to rely on ancillary documents such as policies in an employee handbook.
How Kea HR Can Help
Employment contracts are one of the most important documents in the employment relationship. They establish the legal framework between employer and employee, help clarify expectations and provide protection for both parties when issues arise.
A well-drafted Contract of Employment does more than satisfy a legal requirement. It helps protect your business, sets clear expectations and provides a framework for managing the employment relationship effectively.
Many SMEs continue to rely on outdated contracts, generic templates or documentation that no longer reflects current employment law or the way the business operates. Unfortunately, these issues often only come to light when a dispute arises or an employee leaves the business.
Kea HR can help you create, update and implement Contracts of Employment and supporting documentation that reflect your business, your working practices and your future plans. Whether you are employing staff for the first time, updating outdated contracts or reviewing your existing documentation following changes in employment law, we can help ensure your contracts remain legally compliant and commercially practical. We can also advise on the practical application of contractual terms and help ensure that employment documentation aligns with your wider HR policies and procedures.
Our support includes:
- Deciding which types of employment contracts are right for your business
- Drafting Contracts of Employment and Written Statements of Employment Particulars.
- Reviewing and updating existing contracts.
- Ensuring compliance with current employment legislation.
- Advising on probationary periods, notice provisions and contractual benefits.
- Supporting changes to terms and conditions of employment.
- Aligning contracts with employee handbooks and workplace policies.
Whether you are recruiting your first employee, reviewing outdated documentation or introducing new contractual arrangements, obtaining advice at an early stage can help reduce risk and prevent costly problems later.
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