A breach of an employment contract can lead to significant legal and financial consequences for your business. Whether it's an employee resigning without notice, failing to adhere to contractual obligations, or an employer altering terms without agreement, breaches can arise quickly and unexpectedly.
This guide will help you understand what constitutes a breach of contract, how to address potential breaches, and the steps to mitigate risks. We will explore common scenarios, legal remedies, and best practices to uphold contractual obligations and protect your business interests.
If you are facing a contractual dispute or need assistance in drafting robust employment contracts, our employment law solicitors are here to provide expert guidance tailored to your business needs.
Jump to:
- How are the terms of a contract formed?
- How can an employee breach an employment contract?
- How can an employer breach an employer contract?
- How can employers assess the seriousness of a breach of contract?
- What evidence should an employer gather if they believe that a contractual term has been breached?
- Can you dismiss an employee immediately for breach of contract?
- What risks do employers face if they get it wrong?
- What role do disciplinary procedures play in breach of contract cases?
- How can employers respond to a breach in a fair and legally compliant way?
- When should employers seek legal advice for a breach of contract?
- When should employers seek legal advice for a breach of contract?
- What are the time limits for bringing a breach of contract claim?
- Summary
How are the terms of a contract formed?
To understand how a breach of contract arises, it’s worth a quick look at how a contract is formed in the first place. In broad terms, contracts are formed when four elements are present:
- An intention to create legal relations
- Offer and acceptance
- Consideration
- Certainty
Employment contracts are no exception to these requirements but they’re also different from other commercial contracts because the parties don’t have equal bargaining power. Instead, employers have the power to set out their terms and, aside perhaps from some negotiations before the start of employment, the employee has very little power to much about those terms.
When those four elements are present, a contract is formed. It can be express (written), implied or imputed into a contract because of a collective agreement and if one party says or does something that breaches one of those elements, there is a breach of contract.
How can an employee breach an employment contract?
A breach of employment contract occurs when an employee does something which indicates they no longer intend to be bound by the terms of their contract. This can take many forms, depending on the role and the terms of the agreement. Some breaches arise during employment, and others after it has ended.
During employment, the contract could be breached by the employee by failing to comply with express contractual requirements such as attending work at certain days or times, complying with clock in and reporting requirements and adhering to standards of conduct.
Breaches can also arise after employment has ended, too. Employee can do something which the employer believes is a breach of confidentiality obligations or post-employment restrictions on employment, which then causes the employer a loss of some sort, whether that is financial or otherwise.
How can an employer breach an employer contract?
Employers can breach the contract, for example by changing the employee’s duties or reporting lines as they are expressly set out in the contract, or by failing to pay wages on the date specified, or at all.
Breaches by the employer can give rise to two types of claims in some circumstances. Take, for example, unfair dismissal. There is a statutory right not to be unfairly dismissed, subject to meeting qualifying criteria), so an employee who is dismissed for an act of gross misconduct – in other words, a serious breach of an express or implied term of the contract, could bring the statutory claim of unfair dismissal and also a separate claim for the breach of their contract of employment for the non-payment of their notice period. Another example is where an employer tries to force through major changes to work patterns and imposes the change on staff. This presents the risk that one or more employees will accept the breach of their contract (the significant change in their duties) and resign in response to that breach, before bringing a constructive dismissal claim.
How can employers assess the seriousness of a breach of contract?
Not all breaches are equal, and the seriousness of the breach will affect how an employer should respond. Some breaches are minor and may only require informal action or a warning, if employment is continuing. Others may be more serious and justify formal disciplinary action, or enforcement action if employment has ended.
In the most serious cases, a breach may be considered “repudiatory”, meaning it is serious enough to justify ending the employment relationship. Employers should be aware that a repudiatory breach by them can result in restrictive covenants failing because of their breach, so as with all employment-related matters, any procedure should be approached carefully and with thought.
To assess seriousness, employers should consider the nature of the obligation that has been breached, the impact on the business, whether the breach was deliberate or repeated, and whether trust and confidence between the parties has been damaged. A careful and proportionate assessment is important, as overreacting to a minor issue can create legal risk.
What evidence should an employer gather if they believe that a contractual term has been breached?
Where there is activity that may be a breach of contract during employment, that is, misconduct of some sort, the employer should follow their normal practice of investigating, gather evidence and then consider whether disciplinary action should follow.
Similar investigatory steps should be taken where an issue arises after employment has ended. Before taking any formal legal action, employers should ensure they have a clear understanding of what has happened. This means gathering relevant evidence and documenting the issue properly.
This might include reviewing the employment contract, internal policies, emails, system records or witness statements. It is also important to give the employee an opportunity to explain their actions, as there may be mitigating circumstances. Whilst it isn’t possible to hold a disciplinary hearing after employment has ended, in most cases it’s sensible to contact the former employee and put the findings to them. This is often done in the form of a letter which reminds the employee of their contractual obligations, informs them of the evidence that has been found and the reasons why it suggests there has been a breach of contract, and requests some form of resolution, usually in the form of the former employee stopping the activity and / or paying damages.
Keeping a clear record of the evidence and the steps taken will be important if the matter escalates, particularly if legal action is considered later.
Can you dismiss an employee immediately for breach of contract?
In some cases, an employer may be entitled to dismiss an employee without notice. This is known as summary dismissal and is usually reserved for gross misconduct. Gross misconduct typically involves serious breaches such as theft, fraud, serious insubordination or significant breaches of confidentiality. Even where the conduct appears serious, employers should be cautious and a fair, thorough investigation and disciplinary procedure should be followed.
Immediate dismissal without following a fair process can expose the business to claims for unfair dismissal or wrongful dismissal. Employers are generally expected to carry out a reasonable investigation and follow a fair disciplinary procedure before making a decision. Acting too quickly without proper process is a common source of legal risk.
What risks do employers face if they get it wrong?
Accusing an employee of misconduct which amounts to a breach of contract without proper grounds can have serious consequences. If an employer dismisses an employee without sufficient evidence or without following a fair process, the employee may bring a claim for unfair dismissal. There may also be a claim for wrongful dismissal if notice pay has not been given.
In some cases, the way the employer handles the situation could damage trust and confidence, potentially leading to a constructive dismissal claim. There may also be reputational risks, particularly if allegations are made publicly or handled poorly.
Getting it wrong in matters that arise after employment has ended can also be tricky and potentially costly for the employer. Taking steps to enforce a restrictive covenant can be a process that moves very quickly, incurring significant costs as a result. If court proceedings are commenced and then fail, the employer could be liable for their own accosts and also those of the former employee. Of course, if the proceedings succeed, then the employee may well be liable for all costs instead, but predicting the outcome of that type of legal action can be very difficult. This highlights the importance of taking a measured and evidence-based approach.
What role do disciplinary procedures play in breach of contract cases?
Misconduct is potentially a breach of contract, so although internal disciplinary proceedings will be referred to as disciplinary matters, the findings of the disciplinary hearing may also affect the contract, whether it continues and how it is terminated with or without notice. Disciplinary procedures play a central role in managing breaches of contract. They provide a structured framework for investigating issues, allowing the employee to respond and making decisions in a fair and consistent way.
Employers should follow their internal disciplinary policy and ensure it aligns with the ACAS Code of Practice. This typically involves carrying out an investigation, holding a disciplinary hearing and giving the employee the opportunity to be accompanied and to appeal any decision.
Following a fair procedure not only supports better decision-making but also helps protect the employer if a claim is brought.
How can employers respond to a breach in a fair and legally compliant way?
Employers should focus on acting reasonably and consistently. This means investigating the issue properly, considering all the evidence and applying the same standards across the workforce.
Decisions should be proportionate to the seriousness of the breach, and employees (or former employees) should be given a fair opportunity to respond. It is also important to document each step of the process and the reasons for any decisions made. Consistency is key. Treating similar situations differently without good reason can increase the risk of claims.
When should employers seek legal advice for a breach of contract?
Where a breach has occurred, employers may have several options depending on the circumstances. In many cases, the issue will be resolved internally through disciplinary action or dismissal. There may also be situations where the employer suffers financial loss and considers taking legal action.
Potential remedies could include claiming damages for losses caused by the breach or seeking an injunction to prevent certain actions, such as misuse of confidential information or breach of restrictive covenants. The appropriate remedy will depend on the nature and impact of the breach. It is important that you act quickly and take prompt advice if a post-employment breach may have occurred, or the ability to seek an injunction may be lost.
When should employers seek legal advice for a breach of contract?
Legal advice can be helpful at an early stage, particularly where the situation is complex or involves senior employees. Employers may wish to seek advice where the breach could justify dismissal, where there is a risk of a claim, or where they are considering taking action against the employee. Early advice can help ensure the correct process is followed and reduce the risk of costly mistakes. It can also be important where there are issues involving restrictive covenants, confidentiality or reputational risk.
What are the time limits for bringing a breach of contract claim?
Time limits will depend on the type of claim and where it is brought. Claims for breach of contract in the civil courts generally have a limitation period of six years and can be brought by employers or individuals. Employment tribunal claims, such as wrongful dismissal, typically have much shorter time limits, often three months from the date of termination. Employers may only bring employment tribunal claims in certain limited circumstances so if a claim from a former employee is received, prompt advice should be taken to consider whether there is any counterclaim that may be brought in the employment tribunal or how that claim may be preserved and brought in the county or high court instead.
Because these time limits can be strict, employers should act promptly and seek advice where necessary.
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 speak to our expert employment law solicitors at an early stage.
