Employment contract tips for UK employers: contents, bonuses and restrictive covenants

How do you make an employment contract legally binding, and how do you use it to protect your business? A template is a starting point, but the contract has to contain the information the law requires, give you flexibility where you need it, and include restrictive covenants that a court will actually enforce. This page covers each of those points from the employer's side.

What must an employment contract include?

Section 1 of the Employment Rights Act lists the kind of information you must include in an employment contract. It is essential that this information is in there, both to make the contract legally binding and to reduce the chances of being sued by the employee later. A contract that misses the required particulars is a weak contract from the employer's point of view before you even get to the commercial terms.

Keep the job description broad

When drafting employment contracts for clients, I always advise them to keep the job description fairly broad. The reason is flexibility. Business needs change, and a broad description lets you move the employee between tasks and responsibilities without having to renegotiate the contract or risk an argument that you have changed their role. A narrow, highly specific job description does the opposite: it ties you to the role as described on the day of hiring.

Salary and bonuses in an employment contract

Salary and bonuses should be treated differently.

• Salary. Usually the salary in an employment contract is fixed. Every month you know, and the employee knows, what is going to be paid. There is no benefit in making the salary uncertain.
• Bonuses. I advise clients to make bonuses discretionary. That means if you want to pay a bonus, you pay it, and if you do not want to pay it, you do not. A discretionary bonus does not become an entitlement the employee can demand.
• Performance targets. If you intend to include performance targets in the employment contract and associate a corresponding bonus with them, make the targets very specific. Vague targets lead to disputes about whether they were met and whether the bonus is due.

What are restrictive covenants?

One of the main things I see clients miss out on in employment contracts is restrictive covenants. Restrictive covenants are clauses in an employment contract that restrict the employee's ability to do something after the employment has ended.

The classic example is a non-compete, which stops the employee from competing with your business once they have left. Without one, an employee can walk out with everything they have learned about your customers and your methods and set up against you the following week, and the contract gives you nothing to rely on.

Are restrictive covenants enforceable?

Including a restrictive covenant is not enough on its own; it has to be one a court will uphold. There are three main things a court will consider when determining whether a restrictive covenant in an employment contract is legally binding: the scope of the restriction, its duration and its geographical reach. The theme running through all three is that the restriction should go no further than your business actually needs.

• Scope. The restriction should match what your business does. If your business only sells mobile phones, you should not stop your employee from selling laptops. A restriction wider than your business activity looks like an attempt to stop the employee working at all, rather than to protect you.
• Duration. You may want to avoid making the covenant last more than two years from the end of the employment contract. Keeping it shorter minimises the chance of it being found unenforceable.
• Geography. The restriction should match where you operate. If you only operate throughout the UK, you should not restrict an employee from competing with you if they are only doing it in Australia.

In my experience employers tend to draft covenants as widely as they can, on the theory that more protection is better. With restrictive covenants the opposite is true: an overreaching clause risks being struck out entirely, leaving you with no protection at all, whereas a narrow, well-targeted one is far more likely to be enforced.

Using a template

A free template is a reasonable starting point and can help you see what a contract should contain. Bear in mind, though, that a template is just that: it is not tailored to your business, your sector or the particular employee. I always advise clients to have a bespoke contract that is tailored to them and to the role, particularly where the employee will have access to customers, pricing or know-how worth protecting.

Next steps

Check that your current employment contracts contain the information required by section 1 of the Employment Rights Act, that job descriptions are broad enough to give you flexibility, and that bonuses are expressed as discretionary. Then review your restrictive covenants against scope, duration and geography and cut back anything wider than your business genuinely needs. If you are hiring into a role that matters to the business, have an employment solicitor tailor the contract rather than relying on a template.