What are the different types of employment contracts and why are they important?


There are three main types of  contract employees:  permanent contracts, fixed-term contracts and casual contracts.

Documenting the specifics of your employment relationship in writing is not only a legal requirement, but it can also help you protect your business and manage employee relations.

What is an employment contract?

An employment contract is all the rights, duties, obligations and working conditions that constitute the legal relationship between an employer and an employee. It contains a number of terms that are legally binding, whether they are written down or not – for example, the employer’s obligation to pay the employee a salary.

Depending on the individual’s employment status, different types of contracts apply. Therefore, before writing an employment contract, it is important to correctly determine the employment status of the person you are hiring.

What are the different types of employment contracts?

Employment contracts for an indefinite period

Permanent employment contracts apply to employees who work regular working hours and are paid a salary or an hourly rate. Contracts are valid until terminated by the employer or employee and can be full-time or part-time.

Employees with these contracts are entitled to the full range of statutory employment rights.

Fixed-term contracts

Fixed-term contracts provide a set end date, such as six months or one year. You can consider this type of contract if you want to cover maternity leave, staff a large project or take on interns.

Temporary employees are protected and have the same rights as permanent employees (including unfair dismissal and severance pay after two years of service). You cannot offer them less favorable terms because they are for a fixed period.

The fixed-term period can be extended by agreement, but you usually cannot have someone on a fixed-term basis for more than four years; at this point they become permanent employees.

If the employee continues to work after the termination date of the contract but it is not formally renewed, there is a “service agreement” that the termination date has changed and the employer must still provide a reasonable notice period.

Casual employment contracts

A casual contract is suitable for scenarios where you want an individual to commit to work for you, but you are not sure how many hours of work you will be able to offer them each week and cannot guarantee a regular work schedule. The contract should state the minimum number of hours you expect them to work each week, with the understanding that the work schedule and hours offered above this minimum are likely to fluctuate.

Individuals on these contracts will accrue leave based on the number of hours worked and will be entitled to employment rights including statutory sick leave, if eligible, and statutory minimum notice periods

If you are on an informal contract but the working time schedule evolves over time, the contract is much more likely to be based on that work schedule than any written agreement you make ie. they will be deemed to be working on a permanent employment contract and not on a casual basis.

If you wish for a casual employee to work regular hours for a period of time, it is worth making it clear in writing that this is only a temporary working model to suit the needs of the business and does not imply a permanent contractual right to these hours.

When should an employment contract be concluded and when does it start?

Whether you write anything down or not, your new employees will enter into an employer contract with you as soon as they start working for you. For example, just because a new employee doesn’t yet have a written contract doesn’t mean you can avoid paying them or giving them vacation time.

While elements of the contract may remain unwritten, you will need to provide them with a “written statement” within two months of their employment with you, setting out the key terms of pay and working hours. However, it is a good idea to try to ensure this as early as possible in the relationship.

Is it illegal not to provide an employment contract?

An employment contract takes effect as soon as someone starts working for you, so the contract essentially exists regardless of any documentation.

You must by law provide all employees employed for more than a month with a written statement documenting the key terms that have been agreed, such as pay and working hours.

The employee can apply to the employment tribunal for a statement of conditions and claim 2-4 weeks’ pay (depending on the statutory maximum weekly pay) as compensation if you do not provide a statement within two months of the start date.

Why do you still need written employment contracts?

Although not a legal requirement, it can be beneficial to draw up a full employment contract for two main reasons:

  • This prevents misunderstandings and disputes
  • If the finer details of the contract are not written down, you will have nothing to prove your legal position in a dispute.

Manages expectations

Having everything written down will help your employee understand the breadth of their claims and responsibilities and help you manage your relationship with them.

Zero hours work contracts

Another type of contract to be aware of is that which covers workers.

A characteristic feature of these contracts is that the employer is under no obligation to offer a minimum number of hours of work or for the worker to accept them.

Workers on zero hours contracts are still entitled to some statutory employment rights, including statutory minimum levels of paid holiday and the National Minimum Wage / National Living Wage.

It’s also important to note that it’s illegal to require a worker to work exclusively for you, so you can’t include an exclusivity clause in your employment contracts.

Consulting contracts

When it comes to working with self-employed contractors, consultants or freelancers, it is equally important to have a written document – ​​commonly known as a “consultancy agreement” – that sets out the expectations of the working relationship. Also, a Mou agreement can be formed to establish an official Partnership with the company.