The Small Business Guide to Employment Contracts
An employment contract is one of the most important documents you'll create as a business owner. It defines the working relationship, protects both sides, and gives you something to point to when questions arise. Yet many small businesses either use vague templates grabbed from the internet, adapt contracts written for a different country or industry, or skip written agreements altogether.
This guide walks you through what belongs in an employment contract and why each element matters.
Why You Need a Written Contract
In most jurisdictions, employers are legally required to provide certain terms in writing within a specific timeframe. In the UK, for example, the written statement of employment particulars must be provided on or before day one.
Even where the legal requirement is less strict, a written contract is essential:
- Clarity: Both parties know what is expected. No "but I thought you meant..." arguments eating up your management time.
- Protection: The contract protects you against claims and protects the employee against misunderstandings. Both of you win.
- Dispute resolution: When disagreements arise — and they will — the contract is the first point of reference.
- Compliance: Employment law requires certain terms in writing. Breaking compliance costs more than preventing it.
A verbal agreement is technically binding, but good luck proving it was ever agreed. Put employment terms in writing.
Essential Terms Every Contract Needs
Job Title and Role Description
State the job title and a brief description of the role. You don't need the full job description you posted when hiring — just enough detail to define the scope.
Include a clause allowing reasonable changes to duties over time. A clause like "The company may reasonably require you to perform other duties consistent with your role and experience" gives you flexibility without creating disputes.
Start Date and Continuous Employment
The date employment begins. If the employee has continuous service from a previous employer (for example, following a business transfer), state the date continuous employment began. This matters for statutory rights like redundancy pay.
Place of Work
Where the employee will normally work. If the role involves travel or multiple locations, state it. If you offer flexible working — hybrid, remote, or variable — specify the arrangement and whether you can change it.
Working Hours
The normal hours of work per week or per day, and whether overtime may be required. If you need flexibility in hours to cover busy periods, include a clause requiring reasonable flexibility with notice.
Salary and Payment
The gross salary or hourly rate, pay frequency (weekly, monthly), and payment method. Include any regular additional payments such as shift premiums or allowances.
State when salary reviews take place, but do not guarantee increases. A clause like "Your salary will be reviewed annually, but there is no obligation to award an increase" protects you from implied commitments.
If your business uses payroll software to manage these details, the contract should reference where employees will find their pay information.
Holiday Entitlement
The number of days or hours of paid annual leave, including or excluding public holidays. State the holiday year and any rules about carrying over unused holiday.
Include a clause about what happens to holiday when the employee leaves — specifically, whether you can deduct overpaid holiday from final pay. Without this clause, recovering overpaid holiday can be difficult.
Pension Scheme
Details of the workplace pension scheme, including who contributes and at what rates. If the employee will be auto-enrolled under UK law, state this clearly.
Notice Periods
How much notice each party must give to end employment. Notice periods often vary by length of service — for example, one week for the first two years, then one additional week per year of service up to a maximum.
State whether you can make a payment in lieu of notice (PILON). If your contract includes PILON, notice pay is treated as earnings for tax purposes.
Sickness Absence
Your policy on sick pay — whether you offer occupational sick pay above the statutory minimum, and if so, the rates and duration. Include notification requirements for reporting sickness.
Disciplinary and Grievance Procedures
Reference your formal disciplinary and grievance procedures (either in the contract or elsewhere, such as an employee handbook). These procedures must align with the Acas Code of Practice on Disciplinary and Grievance Procedures. Tribunals can adjust compensation awards by up to 25% if the Code has not been followed.
Confidentiality and Data Protection
A clause requiring the employee to keep business information confidential during and after employment. This protects trade secrets, client lists, and sensitive data.
Also include a clause confirming how you'll process the employee's personal data and their rights under data protection law. The ICO's employment practices guidance sets out what employers must disclose under UK GDPR.
Restrictive Covenants: When You Need Them
If the role involves access to clients, suppliers, or sensitive information, consider including restrictive covenants:
- Non-compete: Prevents the employee from joining a direct competitor for a specified period after leaving.
- Non-solicitation: Prevents them from approaching your clients or employees for a specified period.
- Non-dealing: Prevents them from working with your clients even if the client initiates contact.
Restrictive covenants must be reasonable in scope, geography, and duration to be enforceable. An overly broad covenant will not hold up in a tribunal. Consult an employment law adviser when drafting these.
Additional Clauses Worth Considering
Probation period: A period (typically three to six months) during which either party can end employment with shorter notice. This gives you a chance to assess fit without full notice obligations.
Intellectual property: If the employee creates anything in the course of work — software, designs, content, inventions — assign IP rights to the company. State this explicitly.
Company property: Require the return of all company property (laptop, phone, keys, documents, access cards) when employment ends.
Deductions from pay: A clause authorising specific deductions from pay, such as overpaid holiday or unreturned property. Without written authorisation, deductions can be challenged.
Common Mistakes to Avoid
Using a template without adaptation. Internet templates are a starting point, not a finished product. Every contract should be tailored to the specific role, your business, and the employment law that applies. A contract designed for the USA will not work for a UK business. A contract for a salaried role looks very different from one for an hourly role.
Including unenforceable terms. Terms that are overly restrictive, unreasonable, or contrary to employment law undermine the entire contract. When in doubt, ask an adviser.
Not updating contracts when things change. When you change an employee's role, salary, hours, or benefits, update the contract in writing. Changes to contractual terms require the employee's agreement.
Issuing contracts late. Many jurisdictions require written terms on or before day one. Issuing the contract weeks later creates a compliance gap.
Forgetting the holiday deduction clause. One of the most commonly omitted clauses and one of the most frequently needed. Without it, you may not be able to recover overpaid holiday from an employee who leaves having accrued less than they took.
When you're managing employee benefits or handling redundancies, you'll thank yourself for having clear, current contracts.
Getting Professional Help
For your first few contracts, or whenever you hire for a new type of role, consider getting professional advice. An employment law solicitor or HR consultant can draft a template tailored to your business, advise on restrictive covenants and their enforceability, ensure compliance with current employment law, and review and update contracts when legislation changes.
The cost of professional advice on a template is modest compared to the cost of a dispute arising from a poorly drafted contract.
Storing and Managing Contracts
Once contracts are signed, store them securely and ensure both parties have a copy. Digital storage is fine — most businesses now sign and store contracts electronically.
When you need to reference a contract — during a disciplinary process, a leaver calculation, or a salary review — you need to find it fast. Modern HR platforms allow you to store employment documents alongside employee records, so everything is in one place.
Frequently Asked Questions
Do I need an employment contract for every employee? Yes. In most jurisdictions, written terms of employment are legally required. A verbal agreement is technically binding but nearly impossible to prove.
Can I use a template from the internet? Templates are a starting point, but they must be adapted to your specific business, role, and employment law. Edit ruthlessly.
What happens if I don't give an employment contract? In the UK, you must provide written terms within two months of employment starting. Failure to do so is a statutory breach, and employees can claim compensation.
Can I change the contract after employment starts? Yes, but you need the employee's written agreement. Unilateral changes to contractual terms can be challenged.
What should I do with signed contracts? Store them securely — digital storage is fine. Ensure you have a copy and the employee has a copy. Keep them accessible for future reference.
How often should I review and update contracts? Review annually, particularly after significant business changes. Also update them when employment law changes — changes to minimum wage, pension rates, or statutory leave often require contract updates.
What's the difference between a contract and a job description? A job description outlines duties and responsibilities. A contract outlines legal terms of employment (pay, hours, leave, notice). A job description can change more easily than a contract.
Can I use a contract to prevent an employee from working for a competitor? Yes — through a restrictive covenant (non-compete clause). But it must be reasonable in scope, geography, and duration. Get legal advice on enforceability.
The Bottom Line
An employment contract is not a formality. It's a foundational document that defines the working relationship, protects your business, and sets clear expectations for both parties. Take the time to get it right — adapt a good template, get professional advice on the tricky bits, and keep it up to date as your business evolves.
Every employee should have a signed contract. It protects them as much as it protects you. And when questions arise — and they will — you have something to point to besides "I'm pretty sure we agreed to that."