The Potential Complications of Unsigned Employment Contracts
An employment contract is a legal document that sets out the terms and conditions of an employment relationship between an employee and an employer. To prevent the possibility of complications later, it is in a company’s interest to obtain a signed contract from each employee to establish the terms of the working relationship. If an employee elects not to sign a contract, the following complications can arise:
1) Lack of certainty as to the terms of the contract
A company has the legal obligation to provide a statement setting out the principal terms in accordance with s1 of the Employment Rights Act. There is no legal requirement for an employment contract to be signed by either party.
However, it is clearly in the employer’s interests to obtain a signed agreement, otherwise it may be difficult to establish what the terms are. The employee’s signature signifies consent to what is set out in the contract. Lack of certainty may mean that you end up in dispute with the employee.
Once you are in dispute with an employee, the starting point is always what was agreed at the time of entering into the contract and then to establish whether a particular term has been varied and if so, how. Without a signed contract you are going to struggle to show what was agreed in the first place. It may be inferred that an employee has accepted certain terms offered by the employer by their conduct (in effect by continuing to turn up for work), even if the contract has not been returned and signed by the employee. However, if a term of the contract is unclear and the parties are in dispute, the Courts and employment tribunals will have to determine what the parties intended by a particular provision (whether oral or written). Any ambiguity in the relevant term will be resolved against the party seeking to rely on it (usually the employer!). Verbal agreements are hard to evidence and so are more likely to be contested and to lead to litigation.
Although you can infer consent to particular terms from the employee’s performance of the contract, if the relevant term does not have immediate practical impact, (such as a mobility clause or a restrictive covenant), an employer may find it difficult to establish that this was an agreed term of the contract if you do not have the employee’s written agreement.
Consequently, without a signed contract you may run into difficulties when you ask the employee to do something, or not to do something because it will lead to a dispute as to contractual terms. This is likely to make the employee difficult to manage as soon as any form of a dispute arises. You cannot simply point to a term of the contract and say “look – this is what you agreed to”. In effect the lack of a signed agreement means that the employee can cherry pick over the terms that it suits them to accept and to dispute any agreement over any terms that they do not wish to adhere to at any given point.
2) Inability to make a deduction from wages
You can only make a deduction from an employee’s salary if:
- It is required or authorised under statute (PAYE deductions, attachment of earnings orders etc)
- It is required or authorised under the contract.
- The worker has given prior written consent.
It is particularly important for the employer to obtain the employee’s written consent to certain deductions from wages, for example where you accidentally make an overpayment of salary. It is therefore usual to have a clause covering this off in the contract of employment. Without signed authorisation to make a deduction from pay, you would have to pursue the employee for any sums owed through the civil courts.
3) Inability to keep confidential information safe
If no express terms are agreed then you will have to rely on the implied term of fidelity in relation to confidential information.
During employment this is less of a problem because there is an implied obligation not to disclose confidential information to third parties, or use such information for the employee’s own purposes. This applies to confidential information of the employer which has been obtained during the course of, and as a result of, the employment and includes information which the employee is told is confidential or which is obviously so from its character.
The real risk kicks in when the employee leaves, because once they have left, the only implied obligation of confidentiality that employees continue to owe post termination is in relation to confidential information that amounts to a “trade secret”.
Without agreed terms as to confidentiality you cannot properly protect your business from the employee using confidential information after they have left the business either for their own use, or to pass to a competitor.
4) Inability to place an employee on Garden Leave
If you do not have an agreed clause allowing you to place an employee on garden leave then to do so would be in breach of contract.
5) Uncertainty as to who owns certain Intellectual Property rights
It is important to be sure who owns IP rights and for the company to secure ownership of those rights. Without a written agreement there may be doubt as to whether an employee or their employer owns IP rights in relation to an invention or process developed by the employee during the course of their employment. This may lead to litigation and to valuable IP rights being lost.
6) The Employee can leave and work for a competitor with no restrictions
Without the employee’s signature it would be extremely hard to impose any of the post termination restrictions set out in the Service Agreement. There would be nothing to stop the employee from competing with the company – he/she can poach customers, business and other staff members if he/she wants to.
Where you have an employee who will not sign terms and conditions, it is important to get to the bottom of why they will not sign the contract and to endeavour to resolve the issue. Of course, the best time to do this is before the employee starts to work with you. Alternatively, you bring in a new contract with a promotion or a bonus opportunity as an incentive to sign.
In terms of a way forward, set up a meeting with the employee in relation to the unsigned contract in order to discuss any areas of concern. If the employee’s concern is that he/she does not understand the terms then offer to pay for him/her to take legal advice on the contract and give the employee a timescale for this. If you still hit a brick wall with this, then ultimately you may need to write to the employee to set out the steps that you have taken to try to agree the contract and the extent of any dispute between the parties in terms of what is/isn’t agreed. You should then set out that these are the terms and conditions that are in place and that will govern his/her employment moving forwards.
If the employee does not wish to accept the contract but continues to work, the employee should make it clear that he/she is working under protest and set out which of the terms he/she does not agree with. If the employee does not do so, then you may be able to argue that the employee has impliedly agreed to the terms. As set out above, where the term is of immediate practical effect (such as pay, location etc) and the employee continues to work without clear objection, a court would be likely to conclude that the employee has impliedly agreed to the term. If, however, the change does not have an immediate impact on the employee, a court will be more reluctant to conclude that there has been an implied agreement.
If the employee still does not sign and return the contract then there will always be a question mark over which terms of the contract are agreed and which terms the employee is bound by. If litigation results, the burden will be on the employer to show an “unequivocal act implying acceptance”. The test of whether the employee has impliedly accepted the change in terms is an objective, rather than a subjective one and depends on the employee’s conduct, rather than his intentions.
Two examples from case law:
In Attrill and others v Dresdner Kleinwort Ltd and another , improved contractual terms were announced by an employer to employees. The court had to determine whether the fact that the employees continued to work after the announcement was enough to imply or infer their acceptance of the new terms. The court found that, had acceptance of the offer been required, it could not have been inferred from the fact that the employees continued to work following the announcement.
In FW Farnsworth Ltd and another v Lacy and others , the court found that an employee who did not sign his new contract and simply filed it away in his desk drawer, was nevertheless bound by it from the point at which he applied for private medical insurance cover, a benefit only available to him under the new contract. The case illustrated the importance of an employee making it clear that they are working under protest where their employer imposes contractual changes they do not wish to accept.
Founder & Director of Employment Law in Action Ltd
Do you need help creating Contracts of Employment but aren’t sure where to start? The team at ELiAction can review and update your contracts for you or create new contracts from scratch. Call 01494 817193 or visit: Contracts of Employment
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