Employment Contracts for Small Businesses — What You Need to Know

What is an employment contract?

An employment contract is a legal agreement between an employer and an employee. It sets out the terms and conditions of employment — including pay, hours, holiday entitlement, notice periods and job responsibilities. In practice, it is the document that governs the employment relationship and provides the evidence base if things go wrong.

In the UK, employees do not need to sign a formal contract labelled "employment contract" for one to exist — a contract of employment is formed as soon as someone accepts an offer of employment. However, employers are legally required to provide a written statement of the key terms, and failing to do so creates risk.

Is it a legal requirement?

Yes. Under the Employment Rights Act 1996, as amended by the Good Work Plan reforms that took effect in April 2020, employers must provide a written statement of particulars from day one of employment. This applies to all employees and — since 2020 — also to workers (not just employees).

Failure to provide a written statement does not in itself attract a financial penalty, but if an employee brings a tribunal claim, the tribunal can award up to four weeks' pay as a consequence of the failure. More importantly, not having a written contract makes it very difficult to rely on specific terms — such as confidentiality obligations, restrictive covenants or notice periods — if a dispute arises.

What must be included by law

The statutory written statement must include:

• The names of the employer and employee
• The start date and, where relevant, the date of continuous employment
• Pay — the rate or method of calculation, and how frequently paid
• Hours of work and whether they may vary
• Holiday entitlement and pay (including public holidays)
• The job title or description
• The place of work
• Notice periods required on both sides
• Whether the role is permanent or fixed-term
• Any probationary period and its conditions
• Any benefits — pensions, sick pay, training entitlements
• Disciplinary and grievance procedures, or a reference to where they can be found

What should also be included

The statutory minimum is just that — a minimum. A well-drafted employment contract should also include clauses covering:

• Intellectual property — who owns work created during employment
• Confidentiality obligations — protecting business information during and after employment
• Restrictive covenants — limiting what an employee can do when they leave (non-compete, non-solicitation)
• The right to search company property and devices
• Garden leave provisions
• Social media use
• Data protection obligations

Contractors vs employees — why it matters

Many small businesses use contractors to avoid the complexity of employment. However, using someone as a contractor when they meet the legal definition of an employee creates significant risk — including liability for unpaid employment taxes under IR35, and liability for employment rights the person was entitled to all along.

The distinction between employed and self-employed status is determined by the reality of the working relationship, not by what the contract calls it. Key factors include whether the individual must do the work personally, whether there is a mutuality of obligation, and the degree of control the business exercises. If you are using contractors, it is worth getting the arrangements reviewed.

Common mistakes small businesses make

Using a template downloaded from the internet without adapting it to the business. Template contracts often contain generic provisions that do not fit specific situations — or miss protections that are particularly important in a given sector.

Not including restrictive covenants. These must be included at the start of employment to be enforceable — courts are very reluctant to enforce restrictions introduced later in the relationship, unless there is fresh consideration. If someone could harm your business by setting up in competition or taking your clients, the time to address that is before they start.

Treating the probationary period as an automatic shield. A probationary period does not remove the right to claim unfair dismissal (which arises after two years) but it does allow you to manage underperformance more directly in the early stages. However, it needs to be clearly defined and actively managed — it is not enough to simply include one in the contract.

Not updating contracts. Employment law changes regularly. Contracts written five or ten years ago may no longer reflect current legal requirements or best practice.

Buzz Legal's Employment Starter Pack covers the contracts and documentation you need when hiring. See the Employment Starter Pack or contact us to discuss your requirements.