Demystifying employment contracts: Starting the employment relationship the right way – Ed Livingstone and Katrina Hennessy write in the Employment Law Journal

This article was originally published in the September edition of the Employment Law Journal and can be viewed here.

Ed Livingstone and Katrina Hennessy provide a step-by-step guide to the key topics which feature at the start of the employment relationship, including offer letters, preconditions, the commencement of employment and the probationary period.

The search for the perfect candidate is over. Both parties are keen for the new hire to start work, ideally yesterday. However, the logistics should be nailed down and the contract put in place in good time before employment is due to begin, as the risks of jumping the gun are many. For example:

• the employment might be in breach of legal restrictions on starting work, including right-to-work checks for non-UK nationals or non-compete obligations owed to the former employer;
• the new employer might inadvertently waive the right to rely on important preliminary steps such as satisfactory references or background checks;
• regulatory conditions, such as Financial Conduct Authority (FCA) approvals or certification, may not be satisfied, leaving the new employer in breach of the Senior Managers and Certification Regime or similar requirements;
• starting employment without written terms could give the new employee a stronger negotiating position when it comes to finally recording the terms of employment in writing; and
• if the job description is not finalised before commencement, there may be nasty surprises for both parties as to what they think is – and what is not – part of the role, which could lead to an early and unnecessary dispute.

There are ways to mitigate these risks. For starters, it is important to ensure that the potential new hire is not still under notice or subject to any relevant non-compete obligations owed to a former employer. A warranty in the employment contract or offer letter that the employee is not under legal restrictions on starting can help flush out any potential impediments.

It is important to carry out this due diligence at an early stage as the new employer may be held liable for knowingly inducing a breach of the new hire’s contract with the former employer.

What should the offer look like?

An ‘offer letter’ can mean many different things, as there is no formal definition in law. For many – perhaps most – employers, it is merely a non-binding summary of the key terms offered to the potential employee, which will be superseded by a full employment contract or statement of terms.

In other cases, it may form part of the contract, containing the key commercial terms and conditions precedent (see ‘Jargon buster’ below) before more generic terms and conditions of employment. It may be that there is only an offer letter which contains all of the terms.

In all cases, where there is an offer letter, its relationship to the employment contract must be clear on the face of both documents: this might mean that the ‘entire agreement’ clause in the employment contract preserves the terms of the offer letter or explicitly supersedes it. If the offer letter is not a contractual document – but merely an ‘invitation to treat’ – it should be headed ‘subject to contract’ so it is clear that the offer of employment is subject to the new employee signing a full contract.

The contents of the offer letter might include:

• the job title;
• the start date and any pre-conditions before the offer becomes unconditional (which may include the signing of a full employment contract);
• any particular features of the job, such as part-time hours or a fixed term;
• the starting salary and other benefits; and
• the job location, including whether the job will be subject to hybrid or other remote working arrangements.

What if we have a change of heart? Withdrawing the offer before commencement

Plans change – sometimes so quickly that an organisation needs to end someone’s employment before it has even begun, for example if it no longer requires the role to be filled. This was a common tale of woe when the Covid-19 pandemic started early in 2020, particularly for the hospitality and travel sectors, with employers retracting offers they had made before movement was restricted and purse strings were tightened.

Although employers could be withdrawing an offer for legitimate reasons, it can open the door for prospective employees to allege the withdrawal was for an unlawful reason (such as discrimination). Or they might claim a breach of contract, for example if the employer waived the right to rely on a pre-condition.

Breach of contract

If the employee has genuinely not met a pre-condition – if they have failed to obtain satisfactory references or provide right-to-work documentation – then the contract has not come into effect and the organisation may withdraw the offer at any time. However, if the pre-conditions are fulfilled or waived, then a binding contract has come
into being, even though the time for performance of the contract (ie the specified employment start date) has not yet been reached. Employers are very unlikely to have a specific provision in the contract to deal with notice of termination before employment has even started. Therefore, reneging on the agreed employment is likely to be a breach of contract, specifically known as an ‘anticipatory breach’. The employee’s right to damages from the would-be employer will nevertheless be minimal, and no more than the salary they would have received if the new employer had performed its obligations to a minimum. In almost all cases, this would have meant terminating the contract as soon as employment
commenced, in which case the employee might only be entitled to one week’s notice.

Unlawful behaviour

Given the lack of a meaningful remedy for breach of contract, the prospective employee could suggest there was an unlawful reason for pulling the offer. They could allege discrimination or automatically unfair dismissal, neither of which require two years’ service. To try and minimise this risk, employers should document and explain the genuine reasons for the withdrawal.

Misrepresentation or negligent misstatement

These claims are unlikely in practice. However, they may be possible if the potential new employer induces the employee to serve notice to their current employer (for example, by telling them that the paperwork had been finalised), then withdraws the offer. In this case, the individual may argue that the inducement was negligent and caused them loss.

Pursuing such a claim would be difficult, particularly when there is a signed employment contract with an entire agreement clause, which may remove the employee’s right to claim misrepresentation or negligent misstatement.

What if we get gazumped?

Another familiar scenario, particularly in view of current labour shortages in a number of sectors, is ‘job gazumping’: you find the perfect candidate, get the contract signed and a start date in the diary, only to be told that your star new hire has been lured away by a sweeter offer from another employer. What can be done?

In short, not a lot unfortunately.

If a candidate decides to accept an offer with another employer, perhaps they were not the right person after all, although that is minimal consolation after the time, effort and cost that has gone into the hiring process. There may be scope to make a counter-offer, although any ensuing bidding war might make this prohibitively expensive.

If the new employer successfully gazumps you for the candidate, this will mean the candidate will not honour your already-signed employment contract. Strictly speaking, the employee would be required to terminate the contract by serving notice. If the contract does not (as it most likely will not) deal with how the contract will be terminated before employment has even commenced, it is likely that a reasonable period of notice is implied.

What is reasonable depends on the circumstances. If the employee does not give this notice, then there is technically a breach of the contract. However, in practice, the would be employer will not be entitled to substantial damages, and it will not be worth threatening to make such a claim.

To try and deter employees from accepting an offer and subsequently withdrawing their acceptance, employers could protect themselves by including a ‘no show’ clause in the employment contract. This might require the withdrawing employee to cover the costs of recruiting a replacement. The new employer might, in practice, bear this as a cost of ‘buying out’ the offer. However, this risks being an unenforceable penalty – particularly if the cost is set too high – and the company would be unlikely, given the expense and inconvenience of a formal dispute, to pursue the prospective employee in any case.

It might be better to pursue the new employer for knowingly inducing a breach of the original contract, but it is unlikely a claim would reach the courts, not least because the damages recoverable would be minimal.

The probation period

Most employers are familiar with probation periods and regularly use them to assess an employee before the employment is confirmed on an indefinite basis.

Despite this, there are many potential pitfalls to look out for, especially if probation periods are not effectively managed or the drafting of the clause is unhelpful. The main benefit to the employer of having a probation period in the contract is to have a shorter notice period if the employee is deemed unfit for purpose or things otherwise don’t work out. However, within the first two years of employment, the notice period must be at least one week to comply with the minimum statutory notice under s86 of the Employment Rights Act 1996.

Employers should consider whether the drafting of their probation clauses addresses the following points.

Feedback

It will usually be important not to wait until the end of the probation period before providing constructive feedback to the new hire. Regular probation review meetings can be useful to identify any concerns and give the employee an opportunity to improve their performance, with the aim of ‘passing’ that probation period. This can give the employer an opportunity not only to record any performance concerns but also to address them in the early stages of employment without the need for a more formal performance management process. These intermediate stages might be recorded in the clause or at least made clear to the employee at the outset.

Duration

The clause should set out how long the probation period will last. This will depend on the type of role and how long the employer thinks it will need to assess performance properly. Most will be either three or, perhaps more commonly, six months in duration.

Right to extend

The clause should usually allow the employer to extend the probation period if required. To do this successfully, it needs to be able to explain why it is extending the period. The employer cannot extend probation indefinitely but if there are some niggling initial concerns or issues that it could address with additional time, support and training, then it should explain this to the employee and notify them in writing of the extension.

This is important as the employee could see the extension as a sign of weakness or poor performance and they will want to know how they can address the concerns and when the extension period will end. The probation period should only be extended for as long as necessary, which could be a few weeks or a few months, depending on the situation.

Probation outcome

When the probation period expires, an easy mistake to make is to forget to notify the employee in writing of the outcome. The clause might state that the probation period will not be deemed complete unless the employer confirms employment on a permanent basis in writing. However, there are limits to the effectiveness of this type of provision: the employer cannot rely on it to hold the probation period open indefinitely if it has simply forgotten about the end date and treats the employee for all purposes as permanent.