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Formation of the employment contract

Updating author: Jeremy Fitzgibbon

Summary

Future developments

There are no future developments.

The offer

A job offer is an expression of a willingness to be legally bound. No particular form is needed. Offers can be oral or even made by conduct - although this is rare. Offers have to be distinguished from material such as advertisements and brochures to interest candidates in applying for work. Similarly an application form is not an offer by the candidate to work for the employer. These are all "invitations to treat". So an employee cannot automatically insist on the benefits as set out in the advert or brochure.

Sorting binding offers from other statements is not always easy. In O'Laoire v Jackel International Ltd (No.2) [1991] IRLR 170 CA, a candidate was appointed as deputy managing director and told that it was envisaged that he would become MD when the current incumbent retired. Someone else was appointed so O'Laoire sued for breach of contract. The Court of Appeal held that he had no contractual right to be MD - "envisaged" fell short of being a promise.

A similar conclusion was reached in Puntis v Governing Body of Isambard Brunel Junior School EAT/1001/95 where the Employment Appeal Tribunal decided that a teacher given an assurance that a job would be hers had not received an offer of the job: "an assurance" was too vague.

Puntis raises another important point. The person making the offer has to have authority to do so. Authority can be either real authority or apparent authority. Real authority is authority that has been given to the individual; apparent authority arises where the individual does not have any real authority but has been put in a position where he or she appears to have it and the other person has no reason to suspect lack of authority.

In Puntis the statement was made by the Deputy Head Mistress. She had no real authority as power to offer employment and dismiss lay with the Governors. This would be known by a teacher and so apparent authority did not apply. However, not all candidates will be aware of the actual limits on an interviewer's powers or on those of the employee sending out the offer and in such circumstances the employer will be bound by the terms offered.

An offer can always be withdrawn before it has been accepted, but a withdrawal is complete only when it actually reaches the applicant.

Additional resources on the offer

FAQs

Policies and documents

Conditional offers and references

Employers frequently attach conditions to the offer. This may be obtaining a degree or qualification, being able to work in the UK or, more commonly, providing references. It is sensible to impose a time limit on the condition to be met.

A conditional offer is not a complete offer until the condition is fulfilled. If a conditional offer is accepted by the applicant, the applicant does not have an enforceable contract, so sensible applicants do not give notice to their current employer until they have been notified that their references have been received by the new employer and are acceptable to it.

Employers usually request "satisfactory references", which leaves open the question of whether it is a general standard or the employer's standard that will apply. This can be avoided by providing that the reference should be "satisfactory to us" (this applies equally to personal and medical references).

Sometimes the employer allows the employee to commence work before it has received all the references. The legal position is unclear, but it may well be that the employer, by allowing the employee to start work without the reference, has waived its right to a reference and could not therefore rely on an unsatisfactory reference to terminate the contract. It would be better to provide that the offer "and any subsequent employment" is subject to the supply of references.

See Termination of employment > Providing references for details of employers' obligations when providing references and Personal data > Data protection > Access to references for information relating to employees' rights of access to references.

Additional resources on conditional offers and references

FAQs

Policies and documents

Line manager briefings

Acceptance and counter offers

An offer is open for acceptance for the time specified in the offer - or for a reasonable time. The applicant can use any normal means of communication - unless one is specified in the offer. If the post is used, acceptance is complete when put in the post box. A reasonable time is hard to define and there are now many means of communication so employers tend to fix both a time limit and the manner of acceptance, eg "To accept this offer please reply in writing, your acceptance to reach us by 30 November 2011".

Acceptance must be an unequivocal positive act. Doing nothing will not amount to acceptance. F W Farnsworth Ltd v Lacy [2013] IRLR 198 HC illustrates this point. The employer wanted to rely on post-termination restrictive covenants in a contract that the employee had never signed. The employee had applied for medical cover under the terms of this contract that were not available under his earlier, original contract with the employer. It was accepted that, case law had established that, for the employee to be bound by the later contract and the restrictive covenants in it the employer had to show an "unequivocal act implying acceptance" of that contract. The High Court held that the application for medical cover under the new unsigned contract meant that the employee was bound by its terms.

In Puntis (see The offer) the Employment Appeal Tribunal said that, even if there had been an offer, Miss Puntis had not accepted it. Having been assured that the job was hers she had done nothing. However, if an applicant does not reply to an offer but turns up to work that can be acceptance, and certainly will be if he or she is permitted to work.

If the applicant appears to accept, but alters one of the terms, for example requiring a better car, this is not an acceptance but a continuation of negotiations.

Additional resources on acceptance and counter offers

FAQs

Collateral contracts

Collateral contracts commonly arise out of oral discussions at a stage when parties are negotiating the terms of a new contract of employment. Essentially, they are inducements to enter into the main contract. If the inducements fail to materialise, the prospective employee may have a claim for damages.

A good example is Gill and others v Cape Contracts Ltd [1985] IRLR 499 HC. While working for Harland and Wolff, Mr Gill and his colleagues were offered a six-month contract by representatives from Cape Contracts Ltd. They were also aware that, when they arrived at the new employer, they would have to undergo a medical examination and sign a contract that would entitle them to only two hours' notice of termination during their first month of employment and a week's notice thereafter. When the offer terms were confirmed they resigned from Harland and Wolff. Cape Contracts Ltd withdrew the offer of employment and Mr Gill and his colleagues brought a claim for lost wages for the six-month period. The High Court held that Cape Contracts Ltd's offer of six months' work gave rise to a collateral contract between the parties, which was enforceable.

It is not difficult to visualise additional promises being made during recruitment, with the HR department being entirely unaware of this. Cape Contracts shows that signing a later contract on standard terms will not prevent the collateral contract being binding. However, it may be possible to restore the situation in the offer letter itself. The offer must make it clear that the only terms applying to the employment relationship are those in the offer and that this offer supersedes any other agreement or arrangement that may have been made between the parties. The offer should embrace everything that was discussed.

Another point at which collateral contracts are important is when managers are explaining contract changes and persuading employees to sign them. In relation to a new, wide, mobility clause a manager might well be asked "does that mean I may have to move to any site in the UK?" and he or she might reply "Oh no. You would not be moved outside London". That would be a collateral contract limiting the mobility clause.

Consideration

Although "consideration" is an essential element in the formation of a contract, it rarely gives rise to any difficulties. Contracts are in the nature of a bargain so each party has to get some benefit from the contract; this is "consideration". The consideration has to have some value, but the deal does not have to be a fair one. There is no requirement of a fair day's pay for a fair day's work - or vice versa. Consideration can be money or goods or work or a promise. In employment contracts the consideration is usually an exchange of promises - a promise to be ready and willing to work in return for a promise of pay.

There is, however, a different problem when it comes to a wage increase. If the wage increase is granted without any additional work or change on the employee's part the employer would appear to have received no consideration for the increase. The court got round this in Lee and others v GEC Plessey Telecommunications [1993] IRLR 383 HC by finding that the advantage of the avoidance of industrial action and the fact that employees would not look for better-paid work could amount to consideration.

The contract as a compromise but with flexibility

The contract does not have to be fair or reasonable. The courts will enforce it as agreed. However, it is well to recognise that a contract that is too one-sided is not likely to result in a long or harmonious relationship. The contract is best regarded as a compromise between the, albeit sometimes conflicting, needs of both parties.

Nor is there any automatic power to change the contract terms. An employer that wants flexibility must build this into the contract (see Contracts of employment > Variation of contracts). Similarly neither employer nor employee should assume that conduct contrary to the contract terms will change the contract. Conduct or custom can fill in gaps in the contract but cannot override contract terms.

Additional resources on the contract as a compromise but with flexibility

Policies and documents

It is not the actual intention of the parties that is relevant in the creation of legal relations but their perceived intentions from their outward acts. Some agreements specifically provide that they are not to be legally binding and are known as "gentlemen's agreements". The intention to create legal relations is usually presumed except in three instances:

  • Collective agreements. These are presumed not to be legally binding unless the agreement is in writing and states that it is intended to be binding (s.179 of the Trade Union and Labour Relations (Consolidation) Act 1992).
  • Volunteers. Although they are generally not employees, if the arrangement closely resembles employment or self-employment there may be an enforceable contract (see Contracts of employment > Types of contract > Volunteers).
  • Family or friends who help in a small business. If they are helping out of the kindness of their heart there will be no intention to create legal relations.

Mistakes

An operative mistake will make the contract null and void, but is difficult to prove. If the mistake is common, ie both parties have made it, then they can agree to correct it, but the position is more difficult if the mistake is unilateral, ie only one party is mistaken. If the contract itself is clear the mistake will be relevant only if it is based on fraud and goes to the root of the contract. Obvious clerical errors such as offering employment at £200,000 instead of £20,000 can be corrected. However, offering a wage at the top of a wage spine rather than at the bottom as the employer intended is not a clerical error.

Misrepresentation

Misrepresentation renders a contract voidable, that is to say the contract can be set aside at the request of the innocent party, so long as the person acts promptly and does not affirm it. Damages can be awarded and the contract set aside under s.2 of the Misrepresentation Act 1967 where a person has entered into a contract after a fraudulent or negligent misrepresentation has been made to him or her. If the misrepresentation is innocent (ie not negligent) no damages can be awarded but the contract can still be set aside.

Misrepresentation can take the form of exaggeration of skills or qualifications on the part of the employee, or overselling the job on the part of the employer. In McNally v Welltrade International Ltd, T James and Welltrade Middle East Ltd [1978] IRLR 497 HC a recruiter assured a job candidate that, although he had experience in only chemical plants, he was suitable for a position in an oil refinery. The employee had questioned whether he was suitably qualified before he accepted the position. The employee's tenure in the position was short and he was successful in his claim for negligent misrepresentation.

However, in Cheltenham Borough Council v Laird [2009] IRLR 621 HC, the High Court rejected the employer's claim for damages for fraudulent or negligent misrepresentation against a director who failed to disclose a history of depression when she applied for a job. The High Court held that, even if the employee's answers to questions in a pre-employment questionnaire were false, they were not made fraudulently or negligently. The medical questionnaire should be construed through the eyes of a reasonable person in Mrs Laird's position as a lay person rather than a medical professional.

Misrepresentation can also be relevant when the parties are changing the contract or entering into a settlement agreement (known as a compromise agreement prior to 29 July 2013). In Crystal Palace FC (2000) v Dowie [2007] IRLR 682 HC the employer entered into a compromise agreement with the employee on the basis that he was not going to work for a rival football club but intended to move north for family reasons. In fact he joined a different club. The settlement was based on a fraudulent misrepresentation and the employee had to pay damages to the employer.

Illegality

If a contract is "tainted with illegality" it remains a valid contract, but one that the courts will not enforce. A contract may be overtly illegal, eg a contract to steal, or it may on the face of it be legal but be performed in an illegal way. Unlawful acts do not automatically make a contract illegal. For the illegality to affect the contract there must be a misrepresentation or an attempt to conceal the true nature of the relationship (Enfield Technical Services Ltd v Payne; BF Components Ltd v Grace [2008] EWCA Civ 393 CA).

The question of illegality is a particular problem with breach of statute where the court or tribunal has to decide whether it was intended that the contract be rendered illegal. For example, an employee's failure to follow statutory safety regulations would not make the contract illegal.

In Hall v Woolston Hall Leisure Ltd [2000] IRLR 578 CA (which concerned a sex discrimination claim), the Court of Appeal set out the circumstances in which an illegality argument will succeed, namely where:

  • the contract is entered into with the intention of committing an illegal act;
  • the contract is prohibited by statute; and
  • the contract, although lawful at inception, is illegally performed and the claimant knowingly participated in the illegal performance.

Ms Hall discovered that her employer was failing to deduct the correct tax and national insurance. She queried this but was unable to do any more about it. The Court of Appeal held that she had no active role in the illegality. She did not benefit from it and her acquiescence in the arrangement was in no way causally linked to her sex discrimination claim. The Court said that Ms Hall's complaint of sex discrimination was based in tort, not in contract, and, according to the principles of the law of tort, her claim would be barred because of illegality only if that claim was inextricably bound up with the illegal conduct. Therefore, she was able to proceed with her claim.

In Hounga v Allen and another [2014] UKSC 47 SC, the Supreme Court held that the connection between the employee's immigration offences and the statutory civil wrong of discrimination was insufficiently close to prevent her from making a claim for pre-dismissal racial harassment. The employee's illegal entry into the UK was arranged by the employer, with the employee's full knowledge and participation. However, the Supreme Court distinguished the circumstances of this case from those in V v Addey & Stanhope School [2004] All ER (D) 561 (Jul) CA. In V, the Court of Appeal had held that the contract made with the claimant was illegal because he had falsely indicated in his application form that he did not need a work permit. This prevented him from bringing a race discrimination claim as the circumstances surrounding his claim were so inextricably bound with the illegality of his conduct in obtaining and continuing employment with the employer that, if he were to recover compensation for discrimination, the tribunal would appear to condone his illegal conduct. The Supreme Court in Hounga stated that in V the claimant's criminal deception had caused the employer "to risk [itself] committing an offence, quite innocently". The Supreme Court overturned the Court of Appeal decision in Hounga v Allen and another [2012] IRLR 685 CA, in which the latter had followed the reasoning in V.

In Patel v Mirza [2016] UKSC 42 SC, the majority of the Supreme Court judges summarised the approach for considering illegality saying that it would be contrary to public interest if enforcing a claim would harm the integrity of the legal system. In determining if public interest would be harmed, it is necessary to consider both the underlying purpose of the prohibition and other relevant public policies that could be affected by denial of the claim. Finally, it is necessary to consider if it would be a proportionate response to the illegality to deny the claim.

In Okedina v Chikale [2019] EWCA Civ 1393 CA, the Court of Appeal held that a worker's former employer could not block her contractual claims by arguing that she was working without the required immigration status. The worker had been unaware that she was working illegally and her employer had concealed her true immigration status from her. Therefore, the only possible defence for the employer was "statutory illegality", where, the Court noted, legislation either prohibits the making of a contract so that it is unenforceable by either party or provides that a contract, or a particular contractual term, is unenforceable by either party. The knowledge or culpability of the party seeking recompense is irrelevant. The Court held that the relevant statutory immigration provisions do not prevent the parties from entering into a contract of employment where the employee does not have the required status. Nor do they make the contract unenforceable. They merely impose penalties on employers that employ illegal workers. For this reason, the employer could not argue that "statutory illegality" prevented the worker from bringing contractual claims. The Court also noted that "common law illegality" arises where the formation, purpose or performance of the contract involves conduct that is illegal or contrary to public policy and where the denial of enforcement of the contract to one or other party is an appropriate response to that conduct. This defence could be argued where an employee knowingly participates in the illegality, but that was not the situation in this case.

In Soteriou v Ultrachem Ltd and others [2004] IRLR 870 HC, an accountant provided false information to the Inland Revenue in order to be classed as self-employed, so rendering his employment contract illegal. He claimed that the tribunal's refusal to hear his unfair dismissal claim because of this illegality offended Article 6 of the Convention on Human Rights, which guarantees a fair trial. This was rejected. Article 6 applied only where a valid claim existed.

In Shrewsbury and Telford Hospitals NHS Trust v Lairikyengbam EAT/0400/08, the trust was found to have acted ultra vires (ie beyond the scope of its legal power or authority) when it appointed a consultant locum for three years, under consecutive six-month contracts, when it was required under statute to limit employment to 12 months. Although his employment contract was null and void during the final two years, the Employment Appeal Tribunal (EAT) held that he had performed his duties and been treated as if he had been employed. Therefore he was an employee of the trust for the purpose of the Employment Rights Act 1996 and could bring a claim of unfair dismissal.

However, in Secretary of State for Justice v Betts and others [2017] IRLR 804 EAT, the EAT held that the claimants' contracts of employment were ultra vires and of no effect (although they retained their status as workers). The claimants were engaged as sessional workers. The employment tribunal held that they were employees. The appeal concerned the way in which they had entered the civil service. The employment tribunal had drawn a distinction between appointment to the office of civil servant, which was subject to statutory recruitment principles including "merit on the basis of fair and open competition" and Crown employment, which was determined by reference to tests. Therefore, it was possible for the claimants to be employed but not appointed to the office of civil servant, and the Secretary of State had the power to enter into employment contracts outside the recruitment principles. The EAT declined to follow this distinction. It was common ground that the claimants had not been appointed on the basis of fair and open competition. As a consequence, the claimants' appointment to the civil service was not in compliance with this mandatory requirement, which could not be waived. There was no suggestion of wrongdoing, but the contracts of employment were necessarily ultra vires and void due to illegality.

Identifying the contract terms

The terms of the contract are fixed when the parties enter into the contract, even if they have not negotiated all the terms or reduced them to writing. Where there are gaps in the contract these may be filled in by implied terms, but relying on these places the parties at the mercy of the court or tribunal (see Contracts of employment > Express and implied contract terms).

The agreement must, at this point, be sufficiently precise to enable the key terms to be identified. In Loftus v Roberts [1902] 18 TLR 532 CA, a man was employed on a West End salary to be mutually agreed. So no wage had been fixed and there was no contract. If an arbitration clause or some other machinery for deciding the wage had been included it would have been a valid contract.

Because the terms are fixed at this point the employer will need to take care in the following instances:

  • Where a formal contract is to be issued at a later date, the initial contract should provide that the parties agree that it will be replaced by a formal contract at a later date.
  • Where it is known that new contract terms are to be introduced, the contract should provide that the employee will be employed on these new terms when they are introduced.
  • Where there is a considerable gap between the date of acceptance and the date of commencement of employment (such as when offering employment to undergraduates) and there is the possibility that terms may have changed, the employment could be offered on the terms prevailing for that position at the date of commencement of work.
  • Where the employer issues a written statement of particulars after work has started, the particulars must reflect the terms as at the date of agreement.

Once the contract has been entered into the terms can be changed only if the contract itself provides for the change or both parties agree to the change.

Additional resources on identifying the contract terms

Policies and documents

The importance of written terms

Although there is no legal requirement to put an employment contract in writing, it is advisable to do so. Inevitably there will be disagreements about the terms and conditions of employment. These may be resolved without recourse to litigation if the contract terms are clear and unambiguous. If the terms are oral, or not specifically agreed by the parties, the situation is ripe for dispute and there is nothing available to clarify the terms. A written contract is evidence of the terms of the agreement and it is these terms that apply in the event of a dispute. (Note that there is a requirement to provide a written statement of employment particulars (see Contracts of employment > Written statement of employment particulars).)

In Spence and others v City of Sunderland Council EAT/1255/98, employees claimed that their contractual hours were 45 a week. Their sick and holiday pay was based on 45 hours a week. However, their written contracts specified 39 hours a week. The fact that they had "for several years" worked 45 hours and that sick and holiday pay were based on actual pay rather than the 39 hours did not matter. Their contracted hours were 39. Their hours were fixed in the contract, and the additional hours were voluntary overtime.

The written contract can take various forms, and it may be a simple offer letter. Before drafting this the employer should consider:

The contract may be a formal contract signed by both parties. These tend to be more detailed, containing more terms, but may still refer to other documents.

It is important to ensure that the contract (in letter or formal contract format) covers all the terms that the parties want in the contract, either expressly in the document or by incorporation. Any gaps may be filled in by a court or tribunal and may not be what the parties expected or wanted.

Ambiguity should also be avoided. There are no set rules for interpreting contracts but common approaches taken by the courts or tribunals are:

  • to interpret the term against the party relying on it;
  • where the term has been drafted by one party and the other has taken a reasonable interpretation of that clause, to interpret the term against the party drafting it; and
  • if the clause has no meaning to ignore it.

When employment starts there may be several versions of the contract in existence. The one that will apply is the last one before the employment commenced.

It should not be assumed that oral terms cannot be proved. In the event of a dispute, the claimant (frequently the employee) must prove his or her claim and provided that he or she has some evidence the burden of proof passes to the employer. The court or tribunal will then make its decision on the balance of probabilities. In practice the evidence may be no more than what each party alleges it said or heard. Both employee and employer therefore have, statistically, a 50% chance of success. Therefore, if terms are agreed orally, it is helpful to have a note, made at the time or immediately afterwards, of the terms. This could be placed on the file or take the form of a letter confirming the agreement or new term. This is not absolute proof of the term but is admissible in evidence and can be valuable.

Additional resources on the importance of written terms

Policies and documents

Key references

Legislation

Employment Rights Act 1996