Contracts of employment explained

Contracts of service

Some employers issue contracts in addition to, or instead of, the statement of particulars. A contract of service is the normal type of employment contract that an employee has with an employer. However, if an individual is not an employee of the organisation – for example, a self-employed contractor – they are likely to have a contract for services.

Contracts for agency workers and contractors working for umbrella companies now come under the Agency Workers Regulations (see article 31).

Contracts for services

Unlike a contract of service, a contract for services provides limited employment protection since the majority of employment protection legislation is restricted to employees. The question of whether a worker has a contract of service or a contract for services is defined by the circumstances of the case or the reality of the relationship, not by the title given to the contract or individual.

It is important to remember that discrimination legislation and health and safety obligations apply in all cases and not just to employees on a contract of service.

Employee Shareholder contracts

Since autumn 2013 employers have been able to offer Employee Shareholder contracts. Under these contracts an employer gives the new or existing employee shares worth between £2,000 and £50,000 (although only the first £2,000 is free of income tax) in return for the employee giving up the right to claim unfair dismissal, redundancy settlement and the rights to request training and certain elements of flexible working. Both parties must agree that the individual should be an employee shareholder – this type of contract cannot be imposed.

The idea behind Employee Shareholder contracts is to improve ! employees’ emotional engagement with their employing organisation by giving them a stake in it. As shareholders they may have the right to vote at AGMs (this depends on what rights the shares come with), which means the employer has a vested interest in ensuring the employee understands what is happening and contributes ideas as well as labour. A written answer in the House of Lords in February 2015 showed that HMRC had conducted share valuations for around 350 companies in the period between September 2013 and February 2015. The government has issued advice, which is available at www.gov.uk/ employee-shareholders

Employers who wish to offer Employee Shareholder contracts must carry out several steps to make these contracts valid:

• the individual cannot accept the Employee Shareholder contract until seven days have passed, starting on the day after the offer is made. If the contract is accepted during this period it will not be binding

• the employer must pay reasonable costs for the employee or prospective employee to receive advice from an independent advisor (e.g. lawyer or union) before they enter into the contract, or the contract will be invalid; this applies even if a potential employee chooses not to take up the role

• the employee must not pay for the shares in any way and the shares must be ‘fully paid up’ (no money owing on the shares)

• existing employees will be protected from suffering a detriment if they refuse to switch to an Employee Shareholder contract

• employers must provide a written statement of employee shareholder status including which rights the employee has given up, that the employee shareholder must give 16 weeks’ notice of early return from maternity or paternity leave, and provide full details about the shares and the rights they carry.

There are other issues to be aware of: firstly, the employment protections emanating from Europe, e.g. discrimination, health and safety (including working time) and rights under TUPE are unaffected. Secondly, in practice most SMEs do not have publically listed shares which means there is no market value for their shares, so valuing them could be difficult. Also, according to government advice, it is possible for an employee shareholder to sell their shares and for their employee status to remain unchanged.