The danger of putting too much detail in your staff contracts
When small business owners take on staff for the first time, they often feel as though they are entering “a minefield” of employment law and human resources, which might go off under their feet at any moment.
They therefore try to cram everything that they need into their staff contracts, feeling as though this will protect them.
Sadly, they do this at considerable risk to themselves and their businesses as, once something is written in a contract, it is likely to be legally binding, even if it says that it is not intended to be.
It is often easier to illustrate this with an example.
Picture a business owner in the early stages of their business. They have the glint of adventure and endless possibilities in their eyes, and they want to incentivise their staff to make this the best, the happiest and the most productive place to work. To do this, they introduce a lucrative performance-based bonus scheme into the workplace and write it into their contracts.
Let’s now skip ahead three years into their business journey.
That same business owner is seeing their business running against hard times in the face of a recession. They still have all of their original staff in place, but money is tight and they are having to consider making redundancies. In an attempt to avoid this, they want to remove the lucrative performance-based bonus scheme to free up some much-needed cash.
The problem with this is that the bonus scheme is written into their contracts. Simply removing it would be a breach of contract. Even if the scheme was specified in the contracts to be “non-contractual”, the fact that it appears in the contracts, the frequency with which it has been paid and the amount that was paid each time could still make the bonus scheme contractual.
The business owner consults with their HR provider, who gives them several options, all of which carry a degree of risk, both legally and practically:-
They could negotiate with their staff to remove the bonus scheme from the contracts to save jobs. However, if one member of staff refuses to have the bonus scheme removed from their contract, the problem might not be solved very easily and negotiations might need to take place with that one member of staff, risking opening up a hornet’s nest with the others, who have sacrificed their bonus for the survival of the business and their jobs.
They could simply issue new contracts, but that would risk the breach of contract claim as the staff have not agreed to these changes and not having signed contracts could be problematic in the future too.
They could fire all of the staff and immediately re-hire them on similar terms (omitting the bonus scheme), hoping that the staff do not bring claims of unfair dismissal, but attempting to rely on the necessity of this change to save the business and save jobs if they do.
Soon, the business owner who just wanted to do the right thing from the very beginning resents their own generous nature and wishes that they hadn’t introduced the bonus scheme in the first place because they have a*n impossible decision to make.
Stepping into a handy time machine so that they can fix the past, the business owner returns to the point before they started taking on staff to discuss their intentions with an adviser when the contracts were drafted.
The adviser draws the business owner’s attention to the possibility that, by including the bonus scheme in the contracts, the business owner is risking paying the bonus in any event, even when times are tough.
It is decided that the bonus should be included as a section in the business’s non-contractual staff handbook to give the business more flexibility about how and when it is paid, along with appropriate conditions for doing this. On this basis, some years, staff receive a bonus and on some years they don’t, and the value of the bonus frequently changes on the years when it is paid. Additionally, having flexibility on paying the bonus in the first place means that the business does not have to consider making redundancies when the recession hits.
This is just one example of how including too much detail in your staff contracts can land you in difficulties sooner or later.
Taking a bit more time over your contracts and considering all the things that might happen to your business, despite your plans for it, can help to make your path as a business owner with staff a lot easier.
