Different Types of Employment Contract

There are a number of different types of employment contract. We have set out below a brief description of the different contracts that employers may normally operate.  One size does not fit all. Take care in choosing the right Contract: e.g. Contract of Employment, Directors Agreements, Consultancy Agreement, Contract for Services and Employee Shareholder Agreement.

At Osprey hrc we can guide you through the process of determining the type of employment contract that suits your business and accurately reflects the arrangements you have with your employees and contractors.

The list below is not exhaustive and you should bear in mind that each of the employment contracts listed can have numerous variants. We can provide guidance to you in order to ensure that your contract fits your circumstances perfectly.

Full-Time Permanent Employment Contract

This is probably the most common type of employment contract. Full-time permanent employees are often the cornerstone of a business and many employers are incredibly reliant upon this type of worker. This type of contract can be based upon the employee being hourly paid or salaried and should set out the employees working hours, holiday entitlements, position within the organisation, and various other aspects of the employee’s working arrangements.

A contract of this type can be simple or complicated depending upon the employee’s seniority. For instance, an employer may want to prevent a more senior employee from going to work for competitors by adding restrictive covenants into the employment contract. Alternatively, it may wish to ensure that the confidentiality requirements its senior employees have to abide by are suitable and appropriate for their proximity to confidential business information.

Part-Time Employment Contract

Normally, a part-time employment contract would contain much of the same information as the contract of a full-time employee. In the part-time employment contract, employers need to have a particular focus on the employee’s working hours and pay. It is also important to ensure that the holiday entitlement for part-time employees is clearly and accurately reflected in the contract and meets the relevant statutory requirements.

The law protects part-time workers from being treated unfavourably on the basis that they are employed part-time. It is important to make sure that the terms and conditions of employment for part-time employees are comparable to those of full-time employees in the same organisation.

Zero Hours Contract

The zero hour’s contract has proved to be somewhat controversial in recent times. The government is currently in the process of implementing certain restrictions on how zero hours contracts can be used. The zero hour’s contract can however be a very effective tool for employers.

A normal employment contract would create a mutual obligation between the employer and the employee. The employer agrees to provide a certain amount of work and the employee agrees to go and carry that work out. The zero hours contract waters this obligation down by allowing the employer to require the employee to come to work without guaranteeing to provide work to the employee. This means that the employer can call upon the services of the employee as and when required.

Zero hours contracts can often require a great deal of consideration and it is important that arrangements with employees are such that a zero hour’s contract can be used.

Unenforceability of exclusivity terms in zero hours contracts

Under s.27A of the Employment Rights Act 1996, clauses in zero hours contracts that prohibit workers from working or performing services under another contract or arrangement or that prohibit workers from doing so without consent (i.e. exclusivity terms), are unenforceable (s.27A(3)). Section 27A was inserted into the 1996 Act by provisions in s.153 of the Small Business, Enterprise and Employment Act 2015, which came into force on 26 May 2015.

A “zero hours contract” is defined for these purposes as a contract under which an undertaking to do or perform work or services is conditional on the employer making work or services available but where the availability of work or services is not certain (s.27A(1)). Section 27A (2) specifies that an employer makes work or services available to a worker if it requests or requires him or her to do the work or perform the services.

Under s.27A(4) of the 1996 Act, the fact that s.27A(3) renders exclusivity terms unenforceable is not to be taken into account when determining a zero hours worker’s employment status.

Section 153 of the 2015 Act also inserted a new s.27B into the 1996 Act, giving the Secretary of State a power to make Regulations to prevent zero hours workers from being restricted by contractual provisions from doing work outside their contract of employment. Regulations introducing protection against detrimental treatment and unfair dismissal for breaching exclusivity terms came into force on 11 January 2016.

Protection for breaching exclusivity terms in zero hours contracts

From 11 January 2016, zero hours contract workers have the right not to be subjected to a detriment by their employer for breaching an exclusivity term (reg.2(2) and (3) of the Exclusivity Terms in Zero Hours Contracts (Redress) Regulations 2015 (SI 2015/2021)). A detriment is an act or deliberate failure to act, done by the employer and includes being unfairly penalised or disciplined.

Under reg.3 of the 2015 Regulations, a worker who is subjected to a detriment may bring a claim in the employment tribunal. The claim must be brought within three months of the detrimental treatment complained of although the tribunal can hear a claim that is outside this time limit if it is just and equitable to do so.

The burden of proof is with the employer to identify the grounds for the detrimental treatment. Under reg.4, if the employment tribunal finds the claim well founded, it must (if it considers it just and equitable to do so), make a declaration to that effect and order the employer to pay compensation. The amount of compensation is what the tribunal considers just and equitable in the circumstances, having regard to the employer’s default and the loss sustained by the worker.

If an employee who works under a zero hours contract is dismissed and the reason or principle reason for the dismissal is that he or she breached an exclusivity term, the dismissal will be automatically unfair for the purposes of part 10 of the Employment Rights Act 1996 (reg.2 (1) and (3) of the Exclusivity Terms in Zero Hours Contracts (Redress) Regulations 2015).

Casual Work Contract

Casual working arrangements can sometimes be confused with zero hours arrangements. There is however some fundamental differences between the two. A casual work contract is generally applicable to a person who is classed as being a ‘worker’ rather than an ‘employee’. Workers have fewer employment rights than employees. The casual contract is not normally a permanent employment contract and would, for instance, be used for seasonal workers who work only a few weeks of the year.

Unlike the zero hours model, a casual worker would not normally be obliged to accept work offered to them and may not qualify to be paid statutory payments such as statutory sick pay.

Annualised hours

Under an annual hours contract the employee agrees to work for a specified number of hours a year. Annual hours contracts afford employers considerable flexibility in how they schedule work and reduce the need to make overtime payments. They can give employees a degree of freedom to have lengthy work-free periods to pursue other interests and to travel. The employment contract continues during the periods when the employee is not working and he or she maintains continuity of employment and accrues benefits such as paid leave under the Working Time Regulations 1998 (SI 1998/1833).

An annual hour’s contract could be completely flexible, with the employer being able to require the employee to work whenever needed. However, this is unusual. It is more common for some of the hours to be fixed or rostered and others to be kept in reserve until the employer needs the employee to work them. The split between the rostered and reserved hours should be clearly set out in the written statement of terms and conditions of employment, together with the procedure that the employer will follow when it requires the employee to work the reserved hours.

Employers should also make clear the arrangements that apply in relation to, in particular, annual leave, hours of work, provisions relating to sickness absence, frequency of payment and terms relating to overtime payments (i.e. at what stage the rate of overtime will apply).

Annual leave entitlement under the Working Time Regulations 1998 does not have to be taken during rostered hours though employers should identify in the contract the period during which leave can be taken.

The bunching of annual hours into short periods can result in an employee exceeding the limit on working time under the Regulations. Adult workers (i.e. workers aged 18 and over) cannot lawfully be required to work more than an average of 48 hours a week calculated over a rolling (or static) reference period of 17 consecutive weeks. The reference period may be extended to a maximum of 52 weeks under the terms of a collective or workforce agreement. Employees can opt out of the working time limit.

Fixed-Term Employment Contract

A fixed-term employment contract is normally for temporary employees. The duration of the contract can be anything from a couple of weeks to a few years. This type of contract can vary dramatically in its scope and extent.

Temporary staff who are expected to be with your business for a few weeks may only require a very basic set of terms and conditions whereas employees undertaking specific projects over the course of a year or two can sometimes need very carefully drafted and prescriptive employment contracts.

Term-time only contracts

Under a term-time only contract, the employee works only during the periods that coincide with school terms and is not required to work during school holidays. Term-time only contracts are common in the education sector.

A typical reason for employees to choose to work term time only is so that they can meet childcare demands. Employers may offer term-time working to aid recruitment and retention.

Although employees who are employed on a term-time basis work for only part of the year, they remain employees throughout the whole year and the whole year counts toward their continuity of employment. Payment may be by 12 monthly or 52 weekly equal instalments, with the pay for the term-time periods of work spread out over the calendar year. Alternatively, a term-time employee may be paid only during the periods of actual work (and during annual leave).

Term-time work is effectively a form of part-time working and, under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551), employees who work on this basis are entitled to the same terms and conditions as full-time employees, on a pro rata basis.

Terms of employment should make clear the benefits to which the employee is entitled and how they will be calculated. The working arrangements, in particular when the employee is required to work, and any requirements regarding when the employee may and may not take annual leave, should be specified in the written statement of terms and conditions of employment.

Director’s Service Agreement

A service agreement is generally the most detailed and heavy-duty type of employment contract. Normally this document would contain specific details about how the director should behave within the business and the scope and extent of their duties. Service agreements are often very comprehensive documents.

As a director would usually have unlimited access to a company’s financial and confidential information, a service agreement almost always contain restrictive covenants and thorough confidentiality requirements.

Consultancy Agreement / Contract for Services

A consultancy agreement is normally used when an organisation wants to engage the services of an individual who will not be employed. Where an individual will be self-employed, they will normally need to be provided with a consultancy agreement (Contract for Services). A contract for services is a common law term and not defined by legislation. However, a contract of service is defined in employment and tax legislation, meaning an employment contract.

It is suitable for any service provider, including:

• professional tradesmen such as builders, plumbers, electricians, plasterers, decorators and gardeners
• professional service providers, such as domestic energy consultants, or business marketing consultants
• self-employed people undertaking specific pre-defined project work, e.g. commissioned artists, or graphic designers

If an individual is self-employed, they should make sure that your terms with the client, as far as possible, define the relationship as a business to business one. If HM Revenue & Customs could argue that in reality your agreement was in fact not a contract of service then your client would be deemed to be the individual’s employer and be compelled to hold back tax and National Insurance contributions under the usual PAYE rules.

This document can take a variety of forms. It can be a simple letter or it can be a lengthy contract. A consultancy agreement is often a key tool in protecting the parties from complicated tax issues. Perhaps more importantly, the consultancy agreement is essential to protect the organisation engaging the consultant from being susceptible to challenge from HMRC on the basis that the consultant is actually an ‘employee’.

Without a consultancy agreement in place the consultant may allege that they are employed and consequently should be given normal employment rights, including the right not to be unfairly dismissed. This could create a very troublesome and expensive situation for the organisation engaging the consultant.

Secondment

Under a secondment agreement, an employee is loaned by his or her employer to another part of the same organisation, another organisation in the group or an external organisation. During the period of secondment, the employee remains employed by the original employer. He or she does not transfer employment to the host employer or department.

Secondment may be used for a number of reasons, for example to enable the employee to learn new skills, for the host to benefit from the services of a skilled employee without having to employ one or to set up a joint venture without the need to recruit.

Whether or not an arrangement is a true secondment depends on the terms of the contracts between the employer and the host and the employer and the secondee, and the way that the secondee is treated. An employer that wishes to ensure that a secondee remains in its employment (rather than becoming an employee of the host) should retain and exercise as many employment powers as it can and ensure that the employment relationship is reflected in the contract between it and the host.

Secondments should not be permanent or lengthy. If a secondment is to be long-term, it should be reviewed regularly.

To reduce the likelihood of uncertainty and conflict, employers should make clear in an agreement between the parties to a secondment arrangement

• that the secondee will remain an employee of the original employer;
• the work to be undertaken;
• the place of secondment;
• terms relating to the hours of work, wages, benefits and annual leave arrangements;
• requirements regarding confidentiality and intellectual property;
• that the secondee will carry out the lawful instructions of the host;
• how the secondee will be appraised and by which party;
• relevant policies and procedures, with which the secondee must comply (for example policies on data protection, health and safety and dignity at work);
• the arrangements for terminating the secondment; and
• the secondee’s position when the secondment ends (i.e. whether or not the original employer will hold a position open for him or her and the terms relating to that position)

Terms concerning the work itself and the place and hours of work, will be based on the agreement with the host, which must be able to protect its property and give instructions to the employee. Control over terms relating to pay, sickness absence, holiday (including the timing of holiday) and other benefits should remain with the original employer.

Appraisals will require input from the host, which may need to be involved in setting targets and assessing performance, but the original employer should normally retain overall responsibility. It should also retain control over discipline, dismissal and grievances and, although input from the host may be necessary, the decision should ultimately be the employer’s.

Termination of a secondment is distinct from the termination of employment. The host, employer and secondee have the right to terminate the secondment. Requirements relating to the period of notice and grounds for termination should be made clear in the agreement. Statutory minimum notice requirements do not apply because only the secondment, rather than employment, is terminated.

In most circumstances, the host will have the right to remove the secondee from the premises, without notice. The secondee and employer also have the right to terminate the employment (subject to the usual employment rights). Statutory and/or contractual notice will apply. The parties to a secondment agreement need to take care, when ending it, that they do not breach the agreement, or breach the duty of mutual trust and confidence, as this could amount to a constructive dismissal.

The host and the original employer should agree terms relating to the reimbursement of wages and other costs and insurance. Both the host and employer could be liable for negligence by the seconded employee.

Volunteers

There is no legal definition of “volunteer”. Volunteers are individuals who offer their skills or labour to an organisation (usually in the public or third sector) in return for no payment.

In the event of a dispute, an individual may challenge his or her volunteer status, and argue that the arrangement in question constitutes an employment contract and that he or she has employment rights.

To establish whether or not an individual is a volunteer rather than an employee, it is necessary to measure the purported volunteer arrangement against the key elements of an employment contract. The essential elements of employment are:

• the existence of a contract;
• that the work is done in person;
• that mutuality of obligation exists; and
• that there is control over the work that the individual is doing

The areas of uncertainty in relation to volunteers are whether or not there is mutuality and if there is a contract. In a volunteering arrangement, it would be unusual for the organisation not to control the work or for the volunteer to be able to send in a substitute.

National minimum wage

An exemption from entitlement to the national minimum wage applies to volunteers engaged by certain types of organisation.

Employee Shareholder Agreement

A new type of employment status came into effect in England, Wales and Scotland on 1 September 2013, “the employee shareholder”. Employee Shareholder status is not currently in place in Northern Ireland.

The legislation is aimed at providing businesses with greater flexibility in the way they engage staff and how they manage their employer obligations, particularly in relation to dismissal.
An employee shareholder is an employee who has agreed to have different employment rights, in return for being issued shares in the employer’s company.

To be an employee shareholder, the following conditions must be met:

• the employee and employer agree that the employee will be an employee shareholder
• the company issues or allots shares of a minimum value of £2,000 to the employee
• the company provides the employee with a written statement of particulars of the status of employee shareholder, explaining the rights that attach to the employee shares
• the employee gives no consideration other than by agreeing to become an employee shareholder

Tax implications

Shares acquired under an employee shareholder agreement on or after 1 December 2016 are subject to income tax and capital gains tax.

Where an employee shareholder agreement was entered into before 1 December 2016, shares acquired up to the value of £2,000 were not subject to income tax and National Insurance Contributions when they were acquired. With regard to agreements entered into before 1 December 2016 profits made by the employee on disposal of up to £50,000 worth of shares will be exempt from capital gains tax. However for those agreements entered into on or after 17 March 2016 and before 1 December 2016 there is a lifetime limit of £100,000 on gains eligible for this capital gains tax exemption.

Written Statement of Terms & Conditions / Contract of Employment

Employee shareholders have the right to be issued with a written statement of particular of employee shareholder status and the rights attaching to their shares.

This written statement must explain:

• the specific employment rights that do not apply to the employee shareholder
• the different notice periods that would apply in the case of the employee shareholder in relation to maternity, adoption and additional paternity leave

The written statement must also provide specific information about the rights that attach to their shares. This includes, but is not limited to, details of whether:

• any voting rights attach to the shares;
• the shares carry any rights to dividends;
• the shares would (if the company were wound up) confer any rights to participate in the distribution of any surplus assets;
• there are any restrictions on the transferability of the shares;
• the employee shares are subject to other rights

Excluded statutory employment rights

An employee shareholder has the same statutory employment rights as an employee, with the following exceptions. Employee shareholders must give up the right to:

• request time off work to undertake study or training;
• request flexible working (but this right does remain in limited circumstances on returning from parental leave);
• make a claim for ordinary unfair dismissal;
• a statutory redundancy payment

Where protection from unfair dismissal remains

Employee shareholders exclusion from the right not to be unfairly dismissed is only in cases of ordinary unfair dismissal, that is to say cases where dismissal is on the grounds of conduct, capability, redundancy, some other substantial reason or statutory ban. Employee shareholders retain the protection from unfair dismissal where the dismissal is for the following reasons:

• a discriminatory reason in breach of the Equality Act 2010
• a reason that would be automatically unfair
• in cases of health and safety

Working families

Employee shareholders retain the majority of rights available to working parents.
However, where an employee shareholder wishes to return to work early from a period of maternity, adoption or additional paternity leave, the notice requirement is extended to 16 weeks.

Employee shareholders are generally excluded from the right to make an application for flexible working. However there is a limited exception where an employee shareholder is returning from a period of parental leave.

Employee shareholders returning from a period of parental leave are entitled to make an application for flexible working within a period of 14 days of returning to work. If such a request is made, the employer must comply with the statutory flexible working procedure.

Discrimination

Employee shareholders have the same protections from discrimination under the Equality Act 2010 as other employees. Employers therefore, must ensure that employee shareholders are not treated unfavourably on the grounds of any protected characteristics.

Particular care must be taken when dismissing an employee shareholder to ensure that the reason for the dismissal is not discriminatory under the Equality Act 2010. An employee shareholder would still have the right to pursue a claim of unfair dismissal in those circumstances.

Validity of the Agreement

In order for an employee shareholder agreement to be valid, the following requirements must be met before the agreement is made:

the employee must receive independent legal advice as to the terms and effect of the agreement;

any reasonable costs incurred by the employee receiving advice must be paid by the employer;

a period of seven days has passed since the day on which the individual receives advice

What are considered ‘reasonable costs’ is not defined in legislation. The employer has this obligation whether or not the individual agrees to become an employee shareholder.

In most cases the employer will, therefore, pay the full cost incurred in the employee receiving advice unless there is a basis to argue that the particular cost is not reasonable. In any event, given the potential flexibility available to employers who successfully negotiate an employee shareholder agreement, the employer is more likely to pay the costs in full to help secure the employee’s agreement.

Detriment and Dismissal

1. Existing employees are under no obligation to become employee shareholders.
2. An employee has the right not to be subjected to a detriment by the employer on the grounds that the employee refused to become an employee shareholder.
3. An employer must not, therefore, treat an employee unfavourably on the basis of such a refusal. For example, it would be unlawful to refuse training or promotion opportunities if the reason for this was on the grounds of the refusal to become an employee shareholder.

Similarly, an employee will have the right to claim unfair dismissal if the reason, or the principal reason, for the dismissal was that the employee refused to become an employee shareholder. Such a dismissal will be automatically unfair. The employer can however, make an offer of employment to a new employee conditional on the individual agreeing to become an employee shareholder.