Employment Law: An Introduction for Small Businesses

Considering hiring your first employee? Here's a simple guide to steer your small business clear of legal hot water

Employment Law: An Introduction for Small Businesses

Whilst employment law may seem like a complex and daunting topic, the issues are actually fairly simple for business looking to employee its first employee. As a business who is new to employment issues, you are only likely to run into a few specific areas in the early stages.

This article covers the basics of employment law from the point of view of a beginner. We cover all the areas of law you are likely to encounter including contracts of employment, discrimination issues, sickness and sick pay and how to dismiss employees safely. If you need more information, see our employment law section, which includes in-depth articles on all of the topics we touch on here and much more.

What do I need to know about employment contracts?

Employment contracts are the agreement between you and the employee that they will perform a certain kind of work in exchange for remuneration. By their nature, employment contracts grant people certain rights, such as the right not to be unfairly dismissed. Unless you use agency workers or contractors, everyone you employ will be under some kind of contract of employment. Key features of employment contracts you should be aware of:

The contract doesn’t have to be in writing

Nothing needs to be in hard copy for an employment contract to take effect – a verbal or implied agreement is all that is needed. If someone works for you and you pay them for this work, they are almost certainly your employee (unless they are a freelancer, contractor, agency worker or partner).

An employment contract is created when an employee accepts your offer of a job

Because of this, it is vitally important you don’t make any promises to candidates until you are certain about your choice.

You can’t change an employee’s contract without their consent

If you do change the terms to their detriment, they may have the right to quit and claim constructive dismissal against you. Because of this, you should draft contracts of employment to give you flexibility to change aspects of the job, such as place of work.

The rights workers gain when they enter into a contract of employment

Certain rights are given to an employee from the moment they enter into employment. To start with an employee has the right to a written statement of terms and conditions of employment. This is a full written statement of their terms and conditions of employment within two months, as well as any existing employee who asks for one. If you don’t do this, an employee will be able to claim additional compensation if they win an employment-related claim against you. The written statement can make reference to other documents, such as your IT policy.

At the least, the written statement of employment particulars must contain your business’ name, the employee’s name, the job title or a description of work along with start date, how much and when the employee will be paid, hours of work, including any overtime, holiday entitlement, including whether this includes public holidays, the employee’s place of work and whether or not the employer reserves the right to relocate, grievance and disciplinary procedures, and notice periods. It must also include the end date of a fixed-term contract or how long a temporary contract is expected to last, pensions, and collective agreements.

New employees also have the right not to be illegally dismissed, protection from discrimination, victimisation and harassment, and the right to a safe place of work with regular risk assessments. A new staff member also has an obligation to obey reasonable instructions, to use skill and care in their work, and a requirement not to breach the ‘duty of mutual trust and confidence’ between employer and employee.

What do I need to know about discrimination law?

Since the Equality Act 2010, the law against discrimination has become unified and much easier to understand. For an in-depth look at this topic, click here. To avoid falling foul of the law, you should make sure to never treat someone less favourably because of a ‘protected characteristic’. The protected characteristics are age disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation.

Also never impose a ‘provision, criterion or practice’ which would put a certain group at a disadvantage. Essentially, unless you can objectively justify it as a requirement of the job, you should avoid imposing rules which are neutral in theory, but discriminate against a certain group in practice. An example would be requiring a production line worker to have GCSE English (as it would put those with non-English national origins at a disadvantage that could not be justified by the requirements of the job).

Make sure to pay men and women equally for equal work. This applies to promotion and training opportunities as well and avoid ‘positive discrimination’. Treating someone more favourably because of a perceived disadvantage is also (generally) illegal, so you should err on the safe side and avoid trying to correct social justice issues yourself.

Consider ‘reasonable adjustments’ for people with disabilities. The Equality Act imposes a positive duty on you as an employer to consider what adjustments you could make to enable a disabled person to do their job more easily (such as ramps for wheelchair users). You are allowed to refuse to make a reasonable adjustment on cost grounds.

And ensure employees follow the law. You need to draft a clear policy on discrimination, harassment and abuse and make sure your employees understand it, as you can be held responsible for an employee’s discriminatory behaviour.

What do I need to know about dismissing employees?

You need to be especially careful when dismissing employees, as it is perhaps the hardest area of employment law to get right. Types of dismissal you should be aware of include:

Wrongful dismissal

Employees become entitled to a wrongful dismissal award if you dismiss them without giving them the right notice period – this will either be the notice period specified in their contract or the statutory minimum, whichever is longer. If an employment tribunal makes a finding of wrongful dismissal, you will have to pay the salary and benefits an employee would have received during their notice period. The only exceptions are when you dismiss an employee for gross misconduct, or have paid them in lieu of notice having reserved the contractual right to do so. The minimum notice periods if an employee has worked for plus four years is four weeks, for an employee who has worked between three to four years this is three weeks, and for an employee who has worked two to three years then the minimum notice period is two weeks. Finally an employee who had worked under two years has to complete a notice period of one week.

Unfair dismissal

If your employee started work after 6 April 2012, they will need two years’ continuous service to qualify for protection against unfair dismissal (if they started work before that date, they only needed one year). Unfair dismissal law requires you to act ‘fairly and reasonably’ when dismissing an employee – the reason must be potentially fair, and the decision to dismiss must have been one that a reasonable employer could have made. You should use the Acas Code of Practice on Disciplinary and Grievance Procedures to help you dismiss employees fairly. The current limit for unfair dismissal awards is £74,200.

Constructive dismissal

Constructive dismissal is a type of unfair dismissal where the employer has breached the contract of employment in such a way that the employee is entitled to quit their job immediately and sue their employer. Examples of such a breach could be failing to pay an employee, changing their place of work to another city with no good reason, or putting pressure on them to quit.


If you dismiss an employee for genuine business reasons (generally related to their job no longer existing) they become entitled to redundancy pay, assuming they have completed two years’ continuous service. Read more about redundancy here.

What do I need to know about sickness?

Some issues you should be aware of Statutory Sick Pay (SSP). After four or more days’ continuous sickness, employees normally qualify for statutory sick pay – this is £87.55 per week at the time of writing (the 2014/15 tax year). This is payable for a maximum of 28 weeks, and workers must earn over the National Insurance lower earnings limit (£111 per week in 2014/15). Learn more about SSP here.

Another thing to be aware of is the ‘fit note’. This is a note you can ask the employee to get from their doctor, and will indicate whether the employee is fit for work or not fit for work (or fit for certain kinds of work).

Also remember that you  can withhold SSP in certain situations. If you reasonably suspect someone is faking illness, you can withhold SSP. You can also apply for a referral from HMRC if you want to stop paying SSP to someone who has been off more than four times in a year.

What other employee rights should I be aware of?

Other rights to be aware of when employing your first – or any – employee include you must pay all employees at least the National Minimum Wage (NMW). For more information on rates and how NMW effects your small business, check out our guide here.

You must give all employees payslips, which should contain a statement of earnings before and after deductions, an explanation of any deductions and information on how the wage is paid. And remember employees retain most of their rights when the business falls into new hands. Read more about this (the TUPE regulations) here.

Taking on staff is a new development all successful businesses have to make but it is also a stressful one that adds to your workload. Ensuring you follow the law and stay out of trouble is one thing, you must also hire the right person and manage your staff, their expectations and development.

For more hiring staff help, check out our sister site’s taking on staff category here and for advice on motivating and managing employees, check out our people section.

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