Employment contracts and rights: Small employer essentials

Published Thursday 9 July 2026

Table of contents

• What is an employment contract?
• What to include in an employment contract
• When to give a written statement
• How employment statuses differ
• How to create and issue an employment contract
• Changing or ending a contract
• Hire with less admin with Xero
• FAQs on employment contracts

Key takeaways

• Put the key terms in writing, covering pay, hours, holiday, statutory pay, probation, notice, and flexibility so everyone knows where they stand.
• Give every new recruit a written statement of employment particulars on their first day, even if their contract isn't set out on paper.
• Check each person's employment status before they start, since employees, workers, and the self-employed carry different rights and obligations.
• Keep signed contracts for six years after they end, and store your payroll records securely so you can find them when HMRC needs them.

What is an employment contract?

An employment contract is a legally binding agreement between an employer and an employee that sets out the terms of the working relationship, including pay, hours, holiday, responsibilities, and notice.

Employment contracts set out terms for the working relationship between you and your staff. It’s an agreement between the employer and the employee, covering various aspects of working, such as pay, holiday entitlement, roles and responsibilities, and flexibility. There are plenty of employment contract templates UK small businesses can refer to online, but it’s worth getting help from someone who specialises in employment law the first time you create one.

An employment contract formalises the working arrangement. It also provides guidance for both you and your employees, covering what’s expected from both of you throughout the course of working together. It’s a good idea for you and your employees to keep copies of the written contract. If a change is required, or either party needs to check the terms of working together, you can both refer back to the contract.

You and your employees must stick to the terms of the contract until it ends, whether that’s on a fixed date in the future, through redundancy, or an employee choosing to leave.

What to include in an employment contract

Your employment contracts should be comprehensive, covering rights, responsibilities, conditions, and duties for your employees. These are often referred to as contract terms, which are legally binding. Contract terms aren’t just found in employment contracts, they might be included in the employee handbook, or mandated in UK employment law. For example, all employers are required to pay the National Minimum Wage.

When a candidate accepts the job offer, you should be ready to provide them with an employment contract that covers the following areas.

Pay, hours, and compensation

Clearly state the salary, working hours, and payment frequency in your employment contracts.

An employee should be able to read it and understand how many hours they’re expected to work, how much they’ll be paid, and how frequently. You should also highlight any location requirements. For example, if employees are expected to be in the office on certain days or at specific times.

If overtime and bonuses are part of your offering, include the rates of pay and any restrictions. You should also cover expense claims for employees, and signpost to any further guidance on how to get reimbursed for these costs.

Add some information about auto-enrollment for pensions, and any company pension scheme you might often. Benefits such as company cars, gym memberships, and childcare funding should be laid out in the contract with any rules and restrictions for claiming them.

Holiday, statutory sick pay, and other pay entitlements

You’re required by UK employment law to give staff the statutory minimum level of paid holiday, statutory sick pay, along with maternity, paternity, and adoption pay and leave.

Employees who work a five day week are typically entitled to 28 days paid annual leave. You can check the full holiday pay entitlements on the GOV.UK website.

For statutory sick pay, employees are entitled to £123.25 per week, for up to 28 weeks. To qualify, the employee must have:

• an employment contract
• worked under the contract
• been sick for more than three consecutive days
• given you notice and proof of illness where required, and met the other SSP eligibility conditions

When it comes to statutory maternity leave, your employees are entitled to up to 52 weeks, and statutory maternity pay is paid for up to 39 weeks. The first six weeks are paid at 90% of their average weekly earnings before tax, and the remaining 33 weeks is £194.32 or 90% of their average weekly earnings (whichever is lower).

Employees have the option of one or two weeks of statutory paternity pay, and they can choose to take each week separately within 52 weeks of the birth. Statutory paternity pay is either £194.32 per week or 90% of average weekly earnings (whichever is lower).

Your employees can also have up to 52 weeks statutory adoption leave. Statutory adoption pay is 90% of average weekly earnings before tax for the first six weeks, and the remaining 33 weeks is £194.32 or 90% of average weekly earnings (whichever is lower).

Statutory maternity, paternity, and adoption pay is subject to National Insurance and Income Tax. Small employers can reclaim a large proportion of statutory pay types, providing you pay £45,000 or less in Class 1 National Insurance. This is known as Small Employers’ Relief.

Job title and duties

Your new employee needs to know exactly what’s expected of them once they’re in the role. This should be clearly outlined in your contract, with key responsibilities and deliverables covered.

This might include information about who they report to, key performance indicators (KPIs) they’re expected to meet, and departments or teams they’re responsible for. List all of their core responsibilities, and any additional tasks that might occasionally fall into scope of their role.

Probation and notice

If there’s an initial probation period for new starters, make it clear in your employment contract how long this lasts, as well as the terms for dismissal. Probation periods often run for between three and six months, but it’s up to your organisation to set the timeline.

You should also include information on your notice period, should an employee wish to hand in their letter of resignation further down the line. By law, employees are required to give at least one weeks’ notice to their employers if they’ve been in the role for at least one month. You might decide on a longer notice period for your organisation, in which case, this needs to be stated in the contract for it to be binding.

Confidentiality and data

Some organisations choose to include a confidentiality clause in their employment contracts, especially where individuals could be exposed to sensitive, private company data, or trade secrets. You might find it helpful to work with an employment law expert, who can help you draw up the confidentiality clause for you.

Information security isn’t just about confidentiality. It’s about having the right processes in place and being transparent with your employees about how their data is managed. You should outline how employee data is used in their employment contract, expectations for both parties, and highlight the importance of compliance with GDPR.

Flexibility and exclusivity

Flexible working arrangements are growing in popularity, as more people explore remote and home working options in particular. If you offer flexible working, make sure the options are clear for employees. There are lots of different types of flexible working, so be clear on what’s available, can employees be fully remote or hybrid? Do you have office hours, or completely optional start and finish times? Are compressed hours allowed?

Some businesses have exclusivity clauses where employees are prevented from working for other employers. Sometimes this is necessary, especially in cases where an employee working for another business would be a conflict of interest. Exclusivity clauses are banned for certain types of workers, including zero hour contracts and those with income on or below the lower earnings limit of £123 per week.

Zero hour contract rules

Zero hour contracts work differently from employment contracts. If you give someone a zero hour contract, it means the person is on call to work as and when you need them. But they don’t have to accept the work, nor do you have to offer it to them. They can also work for other employers, following the ban on exclusivity clauses for zero hour contract workers. Just as your employed staff are, zero hour contract workers are entitled to statutory annual leave and the National Minimum Wage.

Implied terms

Not everything will be covered in your employment contracts, sometimes there are expectations that aren’t articulated there. These are considered implied terms, and include things like having a valid driving license if driving is an essential part of the job, or providing a safe and secure working environment for your staff. These terms are assumed, even if they’re not spelled out in a contract. Two of the most important implied terms are the duty of trust and confidence, which means you and your employee won’t act in a way that damages the working relationship, and the duty of care, which means you take reasonable steps to protect your employee’s health and safety.

When to give a written statement

Alongside the employment contract, you must give employees a written statement of employment particulars that covers the main conditions of working for your organisation. This document has two parts: the principle statement and the wider written statement.

The principal statement is due on the employee’s first day, and the wider written statement should be provided within two months of their start date.

What to include day one

In your principle statement, you provide similar information to what’s covered in the employment contract. This includes:

• employer name
• employee name, job title, start date, and description of job and responsibilities
• pay, pay frequency, and hours and days of work
• location/s of work and requirements for relocation
• how long the job is meant to last
• how long the probation period lasts
• holiday entitlement, benefits, and obligatory training
• working abroad (if required)

You also need to share information about sick pay, other types of paid leave, and notice periods. This information can be included in the principle statement or a separate document your employee has easy access to.

What to include in the wider written statement

According to government guidance, employers need to give new employees a wider written statement within two months of the role starting. This statement should include information on:

• pensions
• collective agreements (these are agreements with trade unions and staff associations)
• rights to non-mandatory training from the employer
• disciplinary and grievance procedures

Contract vs written statement

An employment contract is a legally binding agreement. It goes much farther, and much deeper, than a written statement, covering a broader range of areas relating to the individual’s employment.

The written statement contains some of the information in a contract, but in a more condensed format. It covers the key aspects of a person’s employment with the company, but doesn’t have the broader detail of contract. Your employee must receive the written statement of employment particulars on their first day, but their employment contract doesn’t actually have to be in a written format (though it’s advisable).

If you don’t provide a written statement

A written statement must be provided on the first day of work. If your employee requests but does not receive one, they can raise a grievance. Ultimately, the employee could make a claim to an employment tribunal if you don’t provide the statement.

How employment statuses differ

You might not need an employment contract for everyone who works for you. Here’s what you need to know.

Main types of employment contract

Before you check someone’s employment status, it helps to know the main contract types you can offer in the UK. Here are the four you’ll come across most often:

• Permanent or full-time: an ongoing contract with no end date, usually for a standard working week
• Part-time: an ongoing contract for fewer hours or days than a full-time role
• Fixed-term: a contract that runs for a set period or until a specific task is complete
• Zero-hour: a contract where you offer work as and when you need it, and the person can accept or decline

Employee vs worker

Some of the people you hire might be workers, not employees. Workers tend to have a more casual arrangement with an employer than employees do.

If someone is hired as a worker, it means you don’t always have to give them work, and they also don’t have to accept it. An example of this is a gig economy worker who drives for a ridesharing company turning down a customer. If you hire a worker, you still need to have work available for them for the duration of the contract. You may also be responsible for deducting tax and National Insurance on behalf of them (unless they’re self-employed). Freelancers, agency staff, and zero hour contract holders can all be classified as workers, though sometimes they’ll be self-employed instead.

Employees have additional rights compared to workers. They’re also expected to meet the responsibilities and deliver the work outlined in their employment contract, they don’t have the same right to refuse work, the way workers do. Both employees and workers are entitled to most types of statutory pay, but only employees are entitled to statutory pay and leave. Employees also get minimum notice periods, the right to request flexible working, and time off for emergencies.

It’s worth checking government guidance on employees vs workers to make sure you’re meeting the right set of obligations. In many cases, freelancers are actually self-employed, which means they have fewer protections than workers, and are liable for their own tax and National Insurance. UK government guidance recommends checking if someone might be self-employed in UK tax law, and in employment law, because this has implications for their tax, benefits, and rights.

Fixed term vs part time

A fixed term contract has an end date, and can be for any length of time: six months, one year, two years. An example of where you might hire a fixed term employee is if an existing team member goes on maternity leave or takes a sabbatical. A fixed term contract can help you fill a gap in the business, but there’s always the chance to extend the contract should you and the employee wish to continue. Fixed-term employees receive the same rights as full time employees.

A part-time contract doesn’t have to have an end date in the future, but is for fewer hours or days than a full-time contract. A part-time employee has the same rights as full-time employees, but may receive less leave entitlement (which is tied to the days and hours worked).

How to create and issue an employment contract

Having a process in place for issuing employment contracts makes it easier to fulfil all your obligations and get staff set up properly. Here’s a step-by-step guide.

1. Confirm employment status

Check whether your new hire should be classified as an employee. They could come under the worker or self-employed bracket, and it’s best to refer to government employment status guidance if you’re not sure. You can also use the Check Employment Status for Tax (CEST) tool to work out whether someone you hire is classed as employed or self-employed for tax purposes. Self-employed people generally take care of their own tax and National Insurance, while employed people have this taken care of by their employer.

2. Draft the core terms

Cover off the fundamentals in your employment contract, things like pay, work schedule, annual leave and other entitlements, job title and responsibilities, probation and notice periods, and flexibility.

3. Issue and record acceptance

Share the contract with your prospective employee. If they’re happy with the terms and sign the contract, you can record acceptance. Keep a copy of the signed contract, and recommend your new employee does the same.

4. Complete a new employee checklist

UK Businesses will have different steps that need to be completed before the employee is ready to work. For example, your new hire may need to complete certain training, set up software accounts, or provide bank details so that they can be paid. Make a list of these new employee tasks, and check them off as you go along.

5. Set up payroll for first employee

If your new recruit doesn’t have a P45, or has a student loan, they may need to complete a starter form for PAYE, so that your payroll team has all the information to make the correct payments and deductions. Depending on the payroll software you use, you may need to go through a few steps to get your employee set up. This can include setting up their rates of pay and deductions, ready for the next payrun.

6. Store signed documents and records

Businesses should keep employment contracts for six years following the end of the contract, which is the total period for contract claims. PAYE and payroll records should be kept for three years following the end of the period they pertain to. Storing records in cloud-based software is a great way to keep them secure but still retrievable, should you need them as evidence for HMRC in the future.

Changing or ending a contract

Sometimes the work your employee carries out needs to change, or the contract comes to a conclusion. There are also instances where employees are made redundant, or dismissed. In all of these cases, you need to fulfil the terms of the contract and meet your obligations as an employer.

Vary terms with agreement

If an employee needs to take on new responsibilities or the nature of their work changes, you may need to vary the terms in their contract. Both you and your employee need to agree on the changes before they take effect. You’ll need to make a formal amendment to the contract, in writing, to ensure the changes are legally binding.

Notice and termination

If you’re dismissing an employee, they must be given the full notice period stated in your contract, or the statutory notice period, which is one week for each year they’ve worked, whichever is longer. Immediate dismissal is only allowed for gross misconduct, which includes cases of theft, violence, or fraud.

Employees and employers both have the right to end a contract. An employee might move onto a new business, start their own company, or seek early retirement. Or, you may no longer require their skills in the company, and terminate the contract.

If you’re ending the contract, you should give employees a written statement setting out the reason for dismissal, and ensure you have justification for termination.

Garden leave and restrictions

If you dismiss an employee and ask them not to come into work, or to work from a different location during their notice period, this is known as garden leave. They should still receive the same pay and benefits during this period.

Hire with less admin with Xero

Hiring new staff should be an exciting time. But often, small businesses are bogged down in the admin of getting a new recruit set up. That’s where modern accounting software like Xero can help.

While you get your new hire trained up, Xero payroll can speed up some of the admin that slows you down. Automate Real-Time Information submissions so that the right information is sent to HMRC on time, every time. Pay, tax, and leave entitlements are calculated automatically in Xero, so you don’t need to do any complex calculations or track holiday allowance in a spreadsheet. The Xero Me employee app also saves small businesses time on admin, by giving staff the tools to submit timesheets, expenses, and view payslips from their smartphone.

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FAQs on employment contracts

Here’s some extra information on the technical details of employment contracts.

Do all UK employees need a written employment contract?

No, an employment contract does not need to be written down. But it’s best to have a written contract, so that you and your employees can refer back to it and clear up any questions and concerns. Employees are legally entitled to a written statement of employment particulars, which must be given on their first day of work.

Can I write my own employment contract?

Yes, you can write your own employment contract as an employer, provided it meets your legal obligations and includes the required terms. For your first contract, or for complex clauses like confidentiality, it’s worth getting advice from an employment law specialist.

Can an employer change the terms of an employment contract?

You can only change the terms of an employment contract if it has been agreed, ideally in writing, with the employee.

What rights do employees have during their probation period?

Employees in the probation period have the same statutory rights as other employees. This includes things like holiday and sick pay. Additional benefits you offer as an employer, gym memberships, home office stipends, or additional holiday days, can be reserved until after probation.