Employers and employees need to be aware of what they are agreeing to when they commit to an employment contract as breaches can be costly. Below, we discuss some of the main points relating to breach of employment contracts that employers might find useful. For specific advice on a particular breach of an employment contract, please contact our employment solicitors.
Jump to:
- How can an employment contract come to an end?
- How can an employee breach a contract of employment?
- How can an employer breach a contract of employment?
- Will a breach of an employment contract always lead to litigation?
- Can an employer sue an employee for breach of contract?
- What if a breach of employment contract occurs before the employee’s start date?
- What is a ‘material breach of contract’ in employment law?
- Does withholding wages count as a breach of employment contract?
- Breaching implied terms of an employment contract
- Breaching restrictive covenants in an employment contract
- When do breach of employment contract claims go to an Employment Tribunal?
- Remedies and compensation for breach of employment contract claims
- Summary
How can an employment contract come to an end?
The employer or the employee can bring an employment contract to an end:
- Under the notice provisions of the contract;
- By the doctrine of frustration (because of illness, death, or imprisonment of an employee meaning that it is impossible to perform the employment contract) but this is rare; or
- By fundamentally breaching the contract, allowing the other party to treat the contract as coming to an end.
But what counts as a material breach of contract by you or your employee, so that the other party can treat an employment contract as if it has been terminated?
How can an employee breach a contract of employment?
Breach of an employment contract by an employee might include:
Failure to turn up to work or give proper notice of resignation (unless the employee is claiming constructive unfair dismissal)
- Failure to carry out duties.
- Acting dishonestly or some other misconduct which justifies summary dismissal for gross misconduct such as working for another business at the same time as for the employer.
- The employee would also be in breach of contract if they are breaching restrictive covenants active and enforceable from their former employer, without their new employer’s knowledge.
How can an employer breach a contract of employment?
Breach of an employment contract by an employer might be:
- Breach of a fundamental term such as failure to pay an employee their contractual salary, bonuses or commission payments (meaning the employee can resign and claim constructive dismissal if they have at least two years of continuous service with the employer);
- Failure to follow contractual procedures or contractual policies;
- Dismissing the employee without paying them or without giving them the correct notice under their contract of employment (wrongful dismissal); or
- Breach of the implied term of mutual trust and confidence, by for example, making unreasonable demands of an employee or acting in a discriminatory manner.
If you are unsure about whether action or inaction might constitute a breach of an employee’s contract of employment, it is advisable to seek early professional advice from an employment solicitor.
Will a breach of an employment contract always lead to litigation?
If there is a minor breach of employment contract, this could be resolved internally without the need for litigation. For example, you may have an informal chat with your employee, or they might submit a formal grievance.
Alternatively, you might choose to instigate internal disciplinary proceedings if your employee was in breach of their contract. If an employee’s behaviour constitutes gross misconduct, you may be entitled to dismiss an employee without notice. However, this is more likely to lead to litigation and so depending on the circumstances (and in particular whether there is any doubt around the decision) you may want to agree the employee’s terms of exit, by way of settlement agreement.
However, where the matter cannot be resolved internally, formally or informally, or if the employment has already terminated and post-termination negotiations have failed to resolve matters for you or the employee, a claim in the employment tribunal or the courts may be required.
Can an employer sue an employee for breach of contract?
Yes. If an employee breaches the terms of their employment contract, as the employer and the other contracting party, you can sue the employee for any losses that resulted from the breach.
If, the employee breaches an express term of their contract, for example, if an employee leaves their job without providing you with adequate notice, or leaves immediately to work for a competitor, you would have the right to sue the employee for any financial loss arising out of their breach of employment contract. An example of such financial loss could be your business has to pay for a locum to cover the former employee’s work until a permanent employee can be recruited as a replacement. Your business may also be able to apply for injunctive relief through the courts to prevent the employee from working in breach of any restrictive covenants in their employment contract.
You can also take action against an employee who breaches their obligations of confidentiality or restrictive covenants. You may seek damages for any loss you suffered, or you could also apply for an injunction to stop the employee from any further breaches.
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What if a breach of employment contract occurs before the employee’s start date?
An employment contract is binding once an unconditional offer of employment has been accepted by the employee. Therefore, any breach of the employment contract by you or the employee after the time of acceptance of a contract by the employee, will be a breach of the employment contract.
There might be a breach of employment contract before the start date by the employee, for example:
- If the employee accepts a job offer but then changes their mind and decides that they do not wish to join the employer after all. Once the contract has been signed there is a contract in place and failing to start as planned and carry out duties under the contract is technically a breach, unless terminated by agreement with the employer or otherwise in accordance with the contract, usually by giving notice.
- If the employee provides false information before they are provided with an offer of employment by an employer, for example on their CV or in pre-employment questionnaires fraudulent or negligent misrepresentation would be a breach of contract.
Whilst technically, there will be a breach of contract in all of the above cases, unless there has been significant provable loss as a result of the breach by the employee, it is more likely that you would concentrate your time, costs, and efforts in securing a replacement recruit instead of looking to sue the prospective employee for a breach of contract.
The employer might breach the employment contract by withdrawing the job offer before the start date. If an employer wants to withdraw a job offer because an employee cannot start on a certain date, as originally planned, they cannot do this without breaching the contract unless the date was an agreed term and condition of the employee’s employment, not just a suggested start date.
If you wanted to withdraw the offer of employment for any other reason then you would likely need to give notice under the contract. Depending on whether the employee was due to start work before the end of the notice period, you may or may not have to pay the employee for any period of the notice period.
What is a ‘material breach of contract’ in employment law?
A ‘material breach of contract’ means that the employer or employee has fundamentally breached the employment contract by breaching a term that goes to the root of the contract. A ‘material breach’ of contract means that the contract can be lawfully ended by the other party on the basis of that breach.
For example, if you do not pay an employee, this is a material breach of contract, as the employment agreement is generally made on the basis that the employee carries out their duties and in return the employer makes payment to the employee. If you breach this fundamental term then the employee has the right to treat the contract as if you have terminated the contract and to resign and claim constructive unfair dismissal (if they have two or more years of continuous service) or to otherwise claim a breach of contract in the employment tribunal or civil courts.
If an employee fundamentally breaches the employment contract, for example by committing gross misconduct (such as theft from your business) and you are sufficiently certain of this and have thoroughly investigated the matter, you can dismiss the employee with no requirement to make a payment in respect of notice, as the employee has broken the contract through their course of conduct.
Does withholding wages count as a breach of employment contract?
Technically speaking if an employee is working as per their contract of employment, a failure to pay wages would be in breach of contract and also an unlawful deduction from wages.
However, a single breach does not normally justify resignation and a claim for constructive dismissal, particularly where there has been a genuine mistake or dispute over what payment is owed. A formal grievance would be more appropriate in the first instance to resolve the matter. Continued non-payment is likely to be considered a fundamental breach of contract going to the root of the contract and entitling an employee to bring a claim against you.
If there is a term in the employee’s contract of employment stating that you can, in certain circumstances, deduct monies owed to you from the employee’s wages, provided that the circumstances fit with those stated in the employment contract then you can withhold wages without breaching the employment contract.
Similarly, if there is a statutory provision allowing for a deduction (for example for income tax or national insurance contributions or an Attachment of Earnings Order made by the court), those circumstances would not be a breach of contract.
Breaching implied terms of an employment contract
As well at the express terms written in an employment contract, as mentioned above, there may also be implied terms. These terms may be:
- Implied by statute (for example the right to equal pay, the national minimum wage, and a statutory notice period)
- Implied by common law (for example the duty of trust and confidence meaning that employers should act fairly, and employees must act faithfully)
- Or implied by custom and practice of the employer or industry.
If an implied term in an employment contract is breached, this has the same effect as breaching an express term and can lead to action being taken for breach of contract by the innocent party, in the same way. For more information on this area of contract law, read Contracts: express and implied terms.
Breaching restrictive covenants in an employment contract
There may be restrictive covenants which the employee agrees to when signing their employment contract or a subsequent contract such as a settlement agreement so that you can do what is reasonably necessary to protect your business’ legitimate business interest without unlawfully restraining trade. Once the employee leaves your employment it may be that they remain bound by a number of clauses relating to confidentiality, intellectual property, non-dealing, non-compete, non-solicitation and non-poaching.
Provided that the restrictive covenant is valid and enforceable (which can depend on the employee’s role, their risk to the business and the length of the restriction), if an employee is in breach of a restrictive covenant and you have not already breached the employment contract (during the employment or when terminating the employee’s employment) you can enforce restrictive covenants against a former employee. You can consider the following options:
- Applying for an interim injunction – this can be used in the most serious of cases and where damages would not be a sufficient remedy. This must done quickly after you discover any breach and it is a time consuming and costly process. However, where there is clear evidence of breach, this is a very effective option to stop any further damage to your business.
- Seeking damages from the employee – in this case the court would assess whether a restrictive covenant is enforceable, has been breached, and whether this had caused your business loss and how the loss should be assessed. There can be an account of profits for breach of a restrictive covenant, but usually only in breach of fiduciary duties or duty of confidentiality cases.
- Requesting undertakings – the former employee can offer undertakings through a solicitor or by way of court order to observe the contractual restrictions. This option saves both parties time and money and gives greater protection from breach of the covenant.
- Applying for a court declaration – the court can, but rarely does, make a binding declaration in respect of post-termination restrictions.
Please see our article Restrictive covenants in employment law for more on enforcement of restrictive covenants by employers.
When do breach of employment contract claims go to an Employment Tribunal?
If an employee no longer works for an employer, they can bring a claim in the Employment Tribunal within three months of the breach of contract. If an employee is still in employment, they should instead bring a breach of contract claim in the County Court or High Court.
If a breach of contract claim might also be an unlawful deduction from wages claim (for example non-payment of wages) it is usually better to make a claim in the Employment Tribunal rather than in the court and this can be done even if the employee is still in employment. Wrongful dismissal claims relating to notice period should also ideally be brought in an Employment Tribunal. However, if an employee misses the three-month deadline for the Employment Tribunal claim the court will accept a claim for breach of contract, normally up to six years after the date of the breach.
If an employee expects a claim to be in excess of £25,000, they should make the claim to the court, as the Employment Tribunal will only make a maximum award of £25,000 for breach of contract claims.
Interactions between claims, time limits and court and tribunal jurisdictions can be complex and so it is worth getting professional advice on this at an early stage, our employment solicitors are able to help with this.
Remedies and compensation for breach of employment contract claims
In breach of contract cases, financial loss is assessed, and damages awarded by the court or tribunal accordingly. There is no financial loss for distress or injury to feelings in a breach of contract claim.
If an employer fails to pay correct notice pay or allow the employee to serve this, the employee may also be entitled to bring a wrongful dismissal claim in order to be paid the correct notice pay.
If an employer fails to pay an employee’s wages, fails to pay holiday pay or sick pay the employee may submit a claim to an Employment Tribunal for an unauthorised deduction of wages. This will enable the employee to recover the financial loss suffered as a result of the deduction made by the employer.
Further, if the employee has more than two years of continuous service and there has been a fundamental breach of contract by the employer such as repeated non-payment of wages, the employee may be entitled to resign and bring a claim for constructive dismissal.
In the case of constructive unfair dismissal, the remedy is damages, and it is calculated on the same basis as unfair dismissal with a basic and compensatory award being made by an Employment Tribunal. Employees bringing constructive dismissal claims should bear in mind that the employer would be entitled to countersue for any losses sustained as a result of the employee’s conduct. This is particularly relevant where the employee has resigned without notice and the employer has had the expense of covering the role until they find a replacement.
Summary
One of the ways in which a contract can come to an end is where a fundamental breach of contract is committed by either you or the employee. This is a breach of a fundamental express or implied term of the contract and if there is a loss which flows from this breach, the party who is not to blame and bears the loss can sue for damages. If you are concerned that you have breached or may be about to take action in breach of an employment contract or that you have suffered from a fundamental breach of contract by your employee, it is advisable to seek professional advice at an early stage.
