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Why businesses must review their employment contracts or face (expensive) consequences

May 12, 2022
Insight
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Quite often, we see employment contracts which have not been updated for a number of years and are out of date in terms of the law and those which offer businesses very little protection (or sometimes both). Either the key terms which have been used in the contract have not been properly drafted/defined or they do not take into account future eventualities (to an extent) to properly protect the business.

We came across this very issue in a recent case whereby an employee had taken confidential information after they had handed in their notice and the business could do very little to protect such confidential information as the contract did not safeguard the information that the company regarded as highly confidential. This resulted in a loss worth several thousands of pounds for the business as well as ongoing future losses.  This is why it is important that businesses treat employment contracts as a form of insurance because in the event an issue arises or a claim is brought in the employment tribunal or other court, the contract of employment is usually always the first document referred to.

Here are the five key clauses in an employment contract which businesses should review regularly:

1. Protecting confidential information

Whilst businesses can protect confidential information while the employee is employed, in the absence of an express provision, protection after termination will only extend to information which is so confidential as to amount to a trade secret. It is important to ensure that the contract covers all types of information which the business considers confidential and to which the employee would have access. Failing to ensure adequate protection may mean the information the business considers confidential is not properly protected after the employee’s employment terminates and which means the employee can then share the information with future employers or use it to their own or another’s advantage in competition with the business.

2. Post-termination restrictions

This point ties in with point 1 above. Depending on the nature of the business and seniority of the employees (this also applies to junior employees in some cases), it is important that contracts include certain restrictions which the employee must adhere to following their departure from the business. This is because, departing employees are often well-placed to take advantage of confidential information, strategic plans, customer and client details or other information about their employer's business, after the termination of their employment. They may attempt to use this information for the benefit of their new employer, or in order to set up a rival business. This can seriously harm the former employer's business.

Furthermore, even when a contract does contain post-termination restrictions, it is highly unlikely that what a business considered to be competitive or restricted 5 or 8 years ago when it first hired an employee is still adequate to cover what it considers competitive or restricted today. The nature of the business may have expanded or changed and for this reason it is important to ensure contracts are regularly updated to reflect this and to ensure the restrictions are enforceable and the legitimate business interest is properly defined and updated.  any businesses are not actually aware that employees will be bound by the terms of any restrictive covenants or confidentiality provisions that are included in their contract at the start of employment (assuming that the relevant provisions are enforceable). Where employees are promoted, or transferred into new internal roles, business should review the post-termination restrictions to consider whether any contractual restrictive covenants remain appropriate.

3. Notice periods

This is important because, generally speaking, employers overlook notice periods and are not actually aware of the fact that if an employee’s contractual notice period in their contract is shorter than what the employee is statutorily entitled to, then the statutory notice period prevails.  For example, if an employee has a one-month contractual notice period under their contract but has been employed by the company for 8 years, then the notice that they are entitled to receive under their contract is actually 8 weeks. Business should update their contracts to ensure that the employee is also required to give the same amount of notice otherwise in this scenario the employee would only be required to give one months’ notice. If the contract was completely silent on a notice period all together, than the employee is only under a statutory obligation to give their employer one week's notice if they have been employed for one month or more.  Furthermore, it is worth reviewing the length of an employee’s notice period particularly where they are subject to post-termination restrictions. If an employee is subject to a short notice period, then they can argue that long post-termination restrictions are not enforceable on the basis that they were only subject to a short notice period.

4. General updates in the law as of 6 April 2020

Employment law is continually updating and for those starting employment on or after 6 April 2020, businesses are now required to:

- Provide employees with a section 1 statement by no later than the beginning of the employment. There is now no minimum service requirements for an employee or worker to be given a section 1 statement.

- Set out what training entitlement is required to be undertaken by the employee or otherwise on offer to them.

- set out details of any paid leave (other than holiday and sick leave) which the employee is entitled to take.

- Set out what benefits will be provided to the employee, other than sick pay, pension, holiday pay.

Failing to do so may entitle the employee to make a compliant to the employment tribunal where an employer has failed to provide a section 1 statement or provides an inaccurate or incomplete statement.

5. Data protection

The General Data Protection Regulations and the Data Protection Act 2018 replaced the Data Protection Act 1998 (DPA 1998) on 25 May 2018. The GDPR continued to apply in the UK until the end of the UK-EU transition period, alongside the DPA 2018. At the end of the transition period, the GDPR and parts of the DPA 2018 are part of the new body of retained EU law. As such, it is important to ensure that the employment contract is up to date and complaint with the current law and many contracts see have still not been updated in respect of this.

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