1. What makes an employment contract

A contract is an agreement made between two or more parties that is enforceable in law. Obviously the essential exchange recorded in a contract of employment is that the individual will undertake work in return for payment. There will also usually be a range of additional matters that are set out, such as holiday entitlement, sick pay and hours of work.

A contract can be wholly or partly in writing or agreed verbally. It is obviously beneficial if the terms of the agreement are recorded in writing. Both parties will then know what is expected of them and disagreement about what the terms of the contract are and mean will be substantially less likely. Whichever form the agreement takes, certain conditions still have to be met in order for the arrangement to be legally enforceable. The five key requirements can be summarised as follows:

• offer and acceptance;

• consideration;

• an intention to create legal relations;

• certainty; and

• capacity.

Offer and acceptance

The offer of work must be sufficiently clear so the employee is in a position to accept it, and it needs to be communicated to the person to whom it is made. The person making the offer must have the authority to make a binding contract on behalf of the employer.

If the offer of employment is conditional, for example, subject to receipt of a satisfactory reference or a medical examination, the contract will usually take effect once that condition has been met — although sometimes employment will start beforehand. If the employee starts work and the condition is not met then the employment may be lawfully terminated.

According to the decision of the Court of Appeal in Wishart v NACAB [1990] IRLR 393, the test for assessing whether a reference is satisfactory is probably a subjective one. In other words it is what the employer thought, rather than what a third party is likely to have thought, about a reference that probably is definitive. However, the unsatisfactory reference must be the real reason for terminating employment. Additionally, in the case of medical information, the employer’s reaction to a poor health report may give rise to a claim of disability discrimination.

If an offer of employment is conditional, the employer must make this clear to the individual. If not, the offer of employment cannot be withdrawn for a failure to comply with that condition.

The offer remains open until it is accepted, rejected or withdrawn. An employer can give a time limit for acceptance of an offer. If no time limit is given, then the offer lapses after a reasonable period. If the employee does not respond within the given time limit or, where there is no time limit, within a reasonable time, the employer will be entitled to assume that its offer has been rejected.

If an employee does not formally reply to an offer of employment but turns up and starts work anyway, s/he will be taken to have accepted employment on the terms offered. This means that if you fail to sign a contract of employment because you do not wish to accept one of its terms but you still do the job, you will be bound by its terms.

However, if you make a conditional acceptance by stating that you do not accept certain terms and you are still allowed to start work, your employer might be deemed to have accepted your revised terms. It is always better to put this in writing, otherwise if there is a dispute over your terms it may be difficult to prove what was agreed.

Acceptance will have occurred once it has been communicated to the employer, although the method of communication may be by signing a contract, writing a letter, by phone, fax or e-mail or by conduct.

Consideration

For a legal contract to exist, each party must bring something to it. “Consideration” is the legal term given to this. In a contract of employment, consideration will generally be the offer to carry out work or provide a service on the part of the worker and the offer to pay wages or a fee on the part of the employer. If there is no consideration there can be no contract, as the following case shows:

Intention to create legal relations

There will be no legal contract unless the parties intended that they would be legally bound by the terms that were agreed. This may well be an issue where something has been verbally agreed or where a discretionary, non-contractual bonus has been paid — the intentions of the parties in these cases can determine whether something is part of an ongoing negotiation or a formal contract. For example:

Certainty

The terms of the contract must be sufficiently clear and certain to be enforceable. A term that is too vague to have any meaning cannot be interpreted by the courts. In Polymer Products Ltd v Pover EAT 599/80, the employee was told that when he transferred to a new location he would have new duties, a relocation allowance and new salary, all of which were to be mutually agreed. The EAT held that this was too vague and uncertain.

Capacity to contract

There are restrictions on the ability of minors, those with a mental impairment and drunk people to enter into a contract. In other cases, as long as all the above conditions are met, the contract is formed once the offer has been accepted.

Illegal contracts

If a contract of employment is found to be illegal then the employee may be unable to enforce any of their contractual rights, and they may lose some of their statutory rights as well. The principles are set out by the Court of Appeal in the case of Colen & another v Cebrian (UK) Ltd [2004] IRLR 210:

• if a contract is unlawful at its formation or there is an intention to perform the contract unlawfully, the whole contract is unenforceable;

• if the contract is lawful at the outset but becomes unlawful in its performance, that does not automatically make it unenforceable — it depends on the degree of participation in the illegal performance.

The issue of illegality in employment contracts often arises over the payment of wages or other sums of money without deductions for tax and national insurance, and this will be an example of a contract that has become illegal in its performance. Whether or not such a contract can still be enforceable depends on the knowledge and participation of the employee as the EAT states in the following case:

If an employee was found to be aware of the illegality and to have gone along with it, they may not be able to bring a claim of unfair dismissal because this is a claim that is founded on a contract of employment. In Soteriou v Ultrachem [2004] EWHC 983 (QB) ([2004] IRLR 870), the High Court decided that preventing an employee from bringing an unfair dismissal claim on this basis does not breach the principle of the right to a fair trial (i.e. it is not a breach of an individual’s human rights).

However, an illegal contract does not usually prevent someone from bringing a claim of discrimination because those rights do not flow directly from the contract, as found by the Court of Appeal in the case of Hall v Woolston Hall Leisure Ltd [2000] IRLR 579. It should be noted that this is not necessarily the case where the contract was illegal from the outset, as the following decision of the Court of Appeal shows:

In some circumstances part of an individual’s claim can be admitted:

Working in other European Union member states

All workers temporarily working in a European Union (EU) state have the right to the same statutory minimum terms and conditions as those permanently working in that state. This right is acquired under the EU Posting of Workers Directive 1996 which came into force in the UK at the end of 1999.

The effect of the directive is to change any terms in the temporary worker’s contract that are inferior to those statutory terms applying to workers permanently in the host state. It does not prevent them from keeping any more favourable terms from their own member state.

Equally it does not entitle them to more generous collectively agreed terms and conditions enjoyed by the local workforce — a principle illustrated by controversial decisions of the ECJ (for example, Rüffert v Land Niedersachsen C-346/06) on the interaction between the right to strike and the right to establish an undertaking in another member state.

The main legislation to which the directive applies are the Working Time Regulations, National Minimum Wage Regulations, discrimination legislation (on grounds of sex, race, disability, sexual orientation and religion or belief), health and safety legislation and legislation relating to the employment of children.

The territorial limits in the Equal Rights Act 1996 (ERA 96) were also removed in accordance with the directive. Disputes arising over the contract of employment are brought in the courts of the place where the employee habitually carries out his or her work, in accordance with the Brussels Convention. The ECJ in the case of Weber v Universal Ogden Services [2002] IRLR 365, said that where the employee works in more than one member state, this will be the state in which they had worked the longest, unless the employee had settled to work in one state permanently.

In the joined cases of Serco Ltd v Lawson; Botham v MoD; Crofts & others v Veta Ltd & others [2006] UKHL 3 [2006] IRLR 289, the House of Lords considered how individuals working abroad can show sufficient connection to the UK to be able to bring an employment tribunal claim.

Stephen Lawson (a security supervisor for the RAF base on Ascension Island), John Botham (a youth worker at Ministry of Defence bases in Germany) and George Crofts (a Heathrow based pilot flying for the Hong Kong airline Cathay Pacific) complained that they had been unfairly dismissed. The employers argued that the individuals could not bring claims in the UK employment tribunal because the individuals worked outside Great Britain.

In its decision, the House of Lords distinguished between “expatriate” employees (Lawson and Botham), who do work abroad that has strong connections with Great Britain, and “peripatetic” employees (Crofts), whose work constantly takes them to different places. For both types, it said, the decision about eligibility should be based on where the employee worked at the time of dismissal.

Crofts’s tour of duty began and ended in London and he was based there indefinitely; this meant he was based in the UK and could bring his claim here. In the case of expatriate employees, the Lords said it is unusual for employees who work and are based abroad to come under UK law, but if employees are posted abroad by a British employer for the purposes of a business carried on in Great Britain, they can bring a claim in the UK. Lawson and Botham came into this category, so were entitled to proceed with their claims.