Case Study - Contractual Terms in Action

This case study looks at how the right contracts of employment can make a practical difference to your business and save money! 

Imagine two competitive companies (Bodge-it Ltd. and Doors for Life Ltd.), both suppliers and fitters of electronic doors. They are of a similar size with approximately six teams of fitters (three people per team), three field sales staff, six warehouse staff and 10 office staff: a total of 37 people.

Here’s the difference:

• Bodge-it has never had written contracts of employment and prefers to work on a 'hand-shake'.
• Doors for Life has comprehensive written contracts, and they are very particular about making sure their associated documentation (policies and procedures)  is in place.

Now, imagine both companies are facing a number of HR issues and a likely downturn in business. This is how their options to some of those situations pan out:

HR issue 1 - damage to vehicles
Both Bodge-it and Doors for Life have had vehicles damaged in minor accidents and the fitters were at fault. 
The vehicle insurance excess in both cases is £500.

Bodge-it outcome (no contract)
Bodge-it have no written contracts and will have to pay the insurance excess and cannot make a deduction from the employee as they do not have the contractual right to do so. Any deduction would be illegal.

Doors for Life outcome (with contract)
Doors for Life have deductions clauses in their contracts covering vehicle excess in these situations. They can therefore make a deduction for this if they choose to.

Doors for Life are able to recoup the £500.

HR issue 2 - training courses
Bodge-it and Doors for Life each sent a member of their fitting team on a specialist training course covering new methods of installation. Both of these employees have now resigned. 

The course was expensive, costing £1,500 per delegate.

Bodge-it outcome (no contract)
Bodge-it have no written contracts and therefore cannot recoup the cost of training as they do not have the contractual right to do so. Any deduction will be illegal.

Doors for Life outcome (with contract)
As well as having a training deductions clause in their contract, Doors for Life also made sure the employee signed a training deductions form before he went on the course, confirming deductions if he left the company within a specified period of time. As he has left so soon after attending the course, they can recoup the full £1,5000 by making a deduction from his final payment and/or requiring him to make a repayment.

HR issue 3 - resignation in the office
Bodge-it and Doors for Life have both had someone in their office resign, giving a month's notice. They don't really want them to work their notice period and would prefer to release them immediately with minimum cost to the company.
The employee has three weeks holiday they have accrued and not taken.

Bodge-it outcome (no contract)
Bodge-it will have to pay the employee her full notice and should (strictly speaking) also allow her to work her notice as they have no contractual provision to make a payment in lieu of notice. 
They will also have to pay any holiday accrued on top of this.

Doors for Life outcome (with contract)
Doors for Life will have to pay the employee her full notice, but they can ask her to take any holiday owing to her during her notice period as this is a term in her contract. 
They also have a ‘pay in lieu of notice’ clause so, after she has had her three weeks holiday, they will pay her remaining notice in-lieu. They will not have to pay holiday on top. 
Based on the employee’s annual salary of £23,000, this saves Doors for Life £1327.

HR issue 4 - downturn in work
Both companies are concerned that there could be a temporary downturn in work in the near future. This is due to some planned changes in the industry, and work schedules outlined by a number of larger clients.

Bodge-it outcome (no contract)
For Bodge-it, the downturn could put them in a very difficult financial position, which could ultimately place the whole business at risk. They have no contractual options to adjust to short-time working during a downturn in business.
Bodge-it can consider making redundancies. However, there would be a cost to implementing these and, if the downturn is temporary, they will not want to lose their skilled workforce, but they have no choice but to start looking at making redundancies. 

Doors for Life outcome (with contract)
Doors for Life have the contractual right to put staff on short-time working or lay them off for a short period. While this would not be a popular decision, or something they would consider lightly, this would be preferable to making permanent redundancies or putting the company at risk.
The Doors for Life payroll bill is approx. £1.1million per annum (£92k per month). With staff on short-time working for 2 months (e.g. three days per week), they can reduce their salary bill by nearly £74k. This will help cash flow during the downturn while allowing them to hold onto staff in the long-term (and avoiding redundancy costs).

From these four situations, Doors for Life have saved a considerable amount of money as well as a lot of time and heartache!

Bodge-it and Doors for Life may be fictitious, but the situations described are real and happen frequently in SMEs. Use the contract templates and associated documents to make sure you have the right contracts in place and take further advice if needed.