4. Terms of the contract

The contract of employment sets out the rights and obligations of the employee and their employer. These are referred to as the terms and conditions of employment. They may be written down or verbally agreed.

An employee is entitled to a written statement within two months of starting work setting out certain basic particulars (see Chapter 3), but this is not a contract and does not cover all the contractual terms. A contract can be a simple agreement setting out the basic terms or it could be very lengthy and can refer to other documents.

In many cases there is no confusion about what terms have been agreed, but where there is a dispute about what you are entitled to, or about the duties you are asked to do, you will need to be able to establish exactly what the terms of your contract are.

It is often the job of the tribunals and courts to determine what has been agreed between the parties. This is known as “constructing” the contract. It is not always as easy as it may appear, as the terms may not always be contained in one document (if they are written down at all) and can take the following different forms:

• express terms;

• imposed terms;

• implied terms; and

• incorporated terms.

They may be set out in a letter of appointment, signed contract, a collective agreement or some other form.

Express terms

These are terms that have been expressly agreed between the parties, whether verbally or in writing. These terms are paramount and will generally only be overridden if they attempt to take away a statutory right (for example, if the contract says that the employee is entitled to two weeks’ holiday when their statutory right under the Working Time Regulations 1998 is 5.6 weeks, then the term in the contract will be void).

If there is a genuine ambiguity, such as where there are two conflicting terms, then a court or tribunal can consider what the intention of the parties was at the time they entered into the contract. A contract can be avoided if it is an illegal contract (see page 8).

Imposed terms

Some terms are imposed on a contract by law whether or not they have been agreed between the parties. Usually these will be statutory provisions. For example, the Equal Pay Act 1970 imposes an equality clause into every contract of employment stating that men and women will be paid the same for doing the same work.

Implied terms

These are terms that the parties have not explicitly agreed but which they are taken to have agreed. Some terms are implied into a particular contract because of the way that it operates and others are implied into all contracts because they are said to be essential characteristics of any contract of employment.

Terms implied into a particular contract

These can be implied in the following ways:

• to give business efficacy to the contract;

• because they are so obvious they must exist (the “officious bystander” test); and

• by conduct or custom and practice.

Business efficacy

This is a term that the courts will imply must exist in order for the contract to work properly. The EAT held that it was implied into a teacher’s contract that the 20-minute rest breaks that he used to prepare his lessons were included in his hours of work. They said that it was indispensable to his contract that he needed to prepare his lessons and he would need to spend at least that amount of time to do so (Society of Licensed Victuallers v Chamberlain [1989] IRLR 421).

Officious bystander test

This describes a term so obvious that it goes without saying that it must have been intended by the parties. The term comes from a judge’s explanation that if an officious bystander had been on hand when they were making the agreement and had suggested putting in some provision, both parties would have replied “Oh, of course”.

In Star Newspapers Ltd v Jordon UKEAT 344/93, the EAT found an implied term that where a sales representative’s area was reduced her employer would consider a salary review to make up for her loss of commission.

Conduct or custom and practice

If the conduct of the parties demonstrates that they have agreed on a certain term it will be implied into the contract. It must have been followed for a substantial period of time without exception. In the same way, terms that have been regularly adopted in a particular trade or industry or in a particular area and have become standard practice are said to be implied through custom and practice.

In reality, there is little distinction between how the tests are applied — the custom and practice test is that the term sought to be relied upon must be “reasonable, notorious and certain” (notorious meaning that it is well-known). In both cases, if a term is discretionary it will not have become a contractual entitlement unless there is clear evidence that discretion has never been used. Examples include the following cases:

In the case of Albion Automotive v Walker EAT/415/00, the EAT upheld the tribunal’s reasoning that for a scheme to be contractual the following criteria must be met:

• the terms have been drawn to the employees’ attention and are well-known;

• the terms have been followed for a substantial period of time;

• these have been followed on a number of occasions;

• payments were made more or less automatically;

• the policy as communicated to staff indicated that management intended to be bound by it;

• it was adopted by agreement with workplace representatives;

• its terms were incorporated into a written agreement; and

• employees had a reasonable expectation that they would be applied.

Terms implied into all contracts

There are also terms that the courts have considered to be essential to a contract because they are characteristic of the employment relationship. For example, the High Court has held that there is an implied duty that employees are expected to adapt to new methods of work, as long as they were reasonably introduced and employees were given appropriate training (Cresswell v Inland Revenue Board [1984] IRLR 190). These are generally referred to as the duties of the employer and employee and the main examples are outlined below.

Employers’ duties

To pay wages and provide work

The employer has a duty to pay the wages agreed between the parties in return for their work or service. This right is also protected by statute under Section 13 of the Employment Rights Act 1996.

Although there is no general duty on an employer to provide work, as long as the employee is paid, there are some circumstances in which the courts have decided that the employee does have the right to work. This usually arises in cases where the employee is put on “garden leave” after they have resigned, meaning that they are prevented from attending their workplace during their notice period.

The obligation to provide work has been established in the case of performers who depend upon the publicity that their work generates (Herbert Clayton & Jack Waller Ltd v Oliver [1930] AC 209, HL) and this has been applied to employees who have a specialist skill:

The Court of Appeal in the above case stressed that whether or not there is a right to work depends on the nature of the particular contract. If there is a right to work then there will have to be a specific clause in the contract entitling the employer to put the employee on garden leave.

To provide a safe system of work

This includes selecting proper staff, providing adequate materials and providing a safe system of working, having regard to both physical and mental health. Claims based on this term are generally personal injury claims brought through the civil courts, but there is an overlap: an employee can be constructively dismissed on account of their employer’s failure in this respect, as long as they can show that there is a fundamental breach (see Chapter 8).

To provide a suitable working environment

In addition to the requirements of health and safety legislation, employers have an implied duty to provide their employees with a working environment that is reasonably suitable for the performance of their duties. This implied duty was established by the case of Waltons & Morse v Dorrington [1997] IRLR 488 in which a secretary worked in the same office as colleagues who were allowed to smoke. The EAT found that her employer had been in breach of contract by failing to do anything that improved her working environment.

If an employer allows bullying to carry on in the workplace this is also likely to be a breach of the employer’s duty to provide a suitable working environment.

To inform employees of contractual rights

In some circumstances an employer has a duty to inform an employee of their contractual rights. Following the decision of the House of Lords in Scally & others v Southern Health and Social Services Board [1991] IRLR 522, this will apply where:

• the term has been negotiated with someone other than the employee, for example as part of a collective agreement;

• the employee has to take some form of action in order to gain from the benefit; and

• the employee cannot reasonably be expected to know about it unless it is brought to their attention.

This duty does not extend to warning an employee that the way they were proposing to exercise their pension-related rights might not be the most financially advantageous to them (University of Nottingham v Eyett [1999] IRLR 87).

Not to destroy mutual trust and confidence

The House of Lords in the case of Malik v Bank of Credit and Commerce International [1997] IRLR 462 held that there is an implied term of mutual trust and confidence in any contract of employment, which they defined as:

“The employer shall not without reasonable and proper cause conduct itself in a manner calculated and likely (sometimes the test applied is “calculated or likely”) to destroy or seriously damage the relationship of confidence and trust between employer and employee.”

A breach of this term is often the basis on which a claim of constructive dismissal is brought (see Chapter 8).

Singling out an employee for different treatment can be a breach of trust:

In the case of Morrow v Safeway Stores UKEAT/275/00, the EAT held that publicly reprimanding an employee was a breach of trust and confidence.

In Secession Ltd t/a Freud v Bellingham EAT/0069/05, the employee became ill and was signed off work for a month. During her illness the employer only agreed to pay Statutory Sick Pay (SSP) even though in the past it had been more generous. Believing that she was entitled to more than SSP (there was no written agreement to this effect), Mrs Bellingham resigned and claimed constructive dismissal.

The EAT, finding for the employee, held that where there is no written term, it is right for a tribunal to look at what happened in the past as well as what the understanding of the parties was. Mrs Bellingham had always received full sick pay in the past, with no indication that it was discretionary.

The EAT held that withholding enhanced sick pay as well as denying that it was due, amounted to a breach of contract which was sufficiently serious to justify resignation. Mrs Bellingham had therefore been constructively dismissed.

Employees’ duties

Service

An employee must be ready and willing to work for their employer. If they refuse to work this may give grounds for the employer to refuse to pay them for that time. In the case of Miles v Wakefield Metropolitan District Council [1987] IRLR 193, the House of Lords held that a registrar who would not undertake marriage services on Saturday mornings could not recover pay that his employer had deducted for the time that he had refused to work. In this case Mr Miles had refused to work as part of industrial action.

This does not apply in cases of incapacity through sickness or injury or where there is a layoff: in those cases the employee is willing to work but unable to do so.

Competence and care

It is an implied term in any contract that the employee has promised that s/he is reasonably competent and will take reasonable care in carrying out their duties. Failure to do so can justify summary dismissal for breach of contract, but it is more likely that an employer will rely on the statutory fair reasons for dismissal under the Employment Rights Act 1996, which would also allow dismissal on these grounds.

To carry out reasonable instructions

An employee must carry out the reasonable instructions of his or her employer, as long as those instructions are lawful. Failure to do so will be a breach of contract and can lead to dismissal.

An employee does not have to carry out orders that are unlawful or that are beyond the scope of his or her contract. In Morrish v Henlys (Folkestone) Ltd [1973] IRLR 61, a van driver was dismissed after refusing to falsify the employer’s records and his dismissal was held to be unfair.

The Court of Appeal held that a junior hospital doctor could not lawfully be required to work so much overtime in one week that it was reasonably foreseeable he would damage his health, even though there was an express term in the contract requiring him to be available to work the overtime (Johnstone v Bloomsbury Health Authority [1991] ICR 269).

Employees need to be sure of their ground if they refuse to carry out instructions on the grounds that it is not in their contract of employment, keeping in mind that the terms of the contract are not just those that are written down.

Fidelity and good faith

An employee has a general duty to render faithful service, which means that they must not act in a way that is contrary to their employer’s interests.

This implied term can prevent an employee from setting up in competition or working for a rival while they are still in employment. But this may depend on the nature of their involvement; for example, an odd job man carrying out jobs for a rival was not in breach of contract because the type of work he carried out did not amount to competition (Nova Plastics Ltd v Froggatt [1982] IRLR 146). The term does not prevent an employee from doing other work in their spare time as long as it does not harm the employer’s interests.

A cleaner who worked for a contract cleaning company was in breach of contract when he bid for work that his employer was doing (Adamson v B&L Cleaning Services Ltd [1995] IRLR 193).

The term also includes a duty not to disclose confidential information or trade secrets to a third party during their employment but do not necessarily extend after the employment has ended:

In that case, the Court of Appeal said that the following factors must be considered when deciding whether information is protected by an implied term:

• the nature of the employment — in an organisation that deals with a high degree of confidential material there may be more of an obligation;

• the nature of the information;

• whether the employer has made the employee aware of its confidential nature; and

• whether the information could easily be separated from other information which the employee is free to use and disclose.

The court said that the implied term of confidentiality was more restricted after the employment had ended and drew a distinction between trade secrets such as chemical formulae, designs and methods of construction and other information (although in practice it may be hard to make this distinction).

However, if the confidential information is obtained during employment and used afterwards in a way that damages the employer’s business this may be a breach of contract, as the Court of Appeal found in the case of Roger Bullivant Ltd v Ellis [1987] IRLR 491, when the employee removed a card index containing details of trade contacts.

If an employer wants an employee to be bound by terms after their employment has ended they must include a specific term in the contract. This is called a restrictive covenant. But there are limits on the extent to which an employee can be bound by a restrictive covenant. A clause that is a restraint of trade is unenforceable; but a clause that protects an employer’s legitimate business interests is allowed.

There is nothing to prevent someone setting up in competition with their former employer after they have left but a restrictive covenant may prevent them from soliciting or having dealings with customers or from taking similar employment for a certain period of time.

A restrictive covenant will only be enforced if it is reasonable. This will depend on:

• the extent to which it tries to limit the employee’s activities;

• the geographical area covered; and

• for how long it lasts.

If a term is too wide it will not be enforced (i.e. where a clause is too restrictive, the whole clause will fail and the employee won’t be bound by the restriction at all).

Note that the implied term relating to confidentiality does not apply to protected disclosures that are made in the public interest under the Public Interest Disclosure Act 1998, the provisions of which are contained in Part IVA of the Employment Rights Act 1996.

Not to destroy mutual trust and confidence

The duty not to act in a manner that destroys mutual trust and confidence applies to employees as well as employers, even though the wording in the Malik case (see page 29) where it was first set out, puts the onus on the employer.

This applies equally to “last straw” cases, where a trivial act by the employee can be treated as sufficient reason for dismissal after a number of previous incidents that together undermine trust and confidence between the parties (Instrument Transformers Ltd v Keyes EATS/0001/04).

Incorporated terms

An incorporated term is one that is brought into the contract after it has been agreed in another form. The terms of a collective agreement between the employer and the union and staff handbooks are capable of being incorporated into the contract. However, to be contractually binding the terms must actually be incorporated, either expressly or impliedly.

Often the contract will make specific reference to the collective agreement, such as in a clause saying that rates of pay are in accordance with the agreement as negotiated from time to time. This is express incorporation.

But if they are not referred to expressly, it can still be implied into a contract that the terms of the agreement are incorporated, such as through conduct or custom and practice.

If there is an agreement, express or implied, to incorporate the terms of a collective agreement, it makes no difference whether or not the employee is a member of the union as long as they have agreed to be bound by those terms under their contract of employment.

Once a term is incorporated it continues to exist independently of the collective agreement. In the case of Gibbons v Associated British Ports [1985] IRLR 376, Mr Gibbons had the right to continue to be paid at a rate originally set by a collective agreement even after that agreement had ended.

A written term in an agreement will be an express term so it will only be overridden in rare circumstances. Care should therefore be taken when drafting terms because it will generally not be possible to argue at a later date that the wording of the agreement was not really what the parties intended.

Not all terms are capable of incorporation — some agreements operate at a collective level only, for example dealing with dispute procedures and union recognition. In Kaur v MG Rover Group Ltd [2004] IRLR 279, the Court of Appeal held that an agreement saying that there would be no redundancies was ‘’aspirational’’ and not a contractual term.

Works rules are generally not incorporated and therefore are not contractually binding:

In the following case the Court of Appeal said that whether a code of practice becomes a part of the contract depends on whether it confers a right on an employee or just sets out good policy for managers to follow.

But it is possible for policies, including grievance and disciplinary procedures, to be part of the contract. In that case, if an employer fails to follow the procedure it will amount to a breach of contract. Note that this does not prevent non-contractual procedures from being relied on in unfair dismissal claims as evidence that an employer’s actions were not reasonable.

Unfair contract terms

In some circumstances it may be possible to challenge a term under the Unfair Contract Terms Act 1977 (UCTA). It is very rare to bring a claim under UCTA in relation to a contract of employment, and until recently it was thought not to apply at all.

A term will be unfair under UCTA if it tries to restrict the employer’s liability as a result of a breach of contract, or if it entitles one of the parties to exercise the term in a way that is substantially different from what was expected of them.