Employers and employees need to be aware of what they are agreeing to when they commit to an employment contract, what constitutes a breach of contract and what the penalty for breach is. Below we discuss some of the main points relating to breach of employment contracts, to assist employers in this tricky area of employment law. For specific advice on a particular employment contract breach, please contact our employment solicitors.
- What is an example of breach of an employment contract?
- Can an employer sue an employee for breach of contract?
- Breaching an employment contract before the start date
- What is a ‘material breach of contract’ in employment law?
- Does withholding wages count as a breach of contract?
- Breaching implied terms of an employment contract
- Breaching restrictive covenants in an employment contract
- When do breach of contract claims go to an employment tribunal?
- Remedies and compensation for breach of employment contract claims
What is an example of breach of an employment contract?
An employment contract can be broken or breached by either the employer or employee not acting in accordance with the agreed terms of the contract, but there are consequences to this, depending on the circumstances. Either 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 (illness, death, imprisonment of employee) or by fundamentally breaching the contract, allowing the other party to treat the contract as coming to an end.
Breach of an employment contract by an employee might be amongst other things: failure to turn up to work or give proper notice on resignation (unless 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.
Breach of an employment contract by an employer might be breach of a fundamental term such as failure to pay an employee meaning the employee can resign and claim constructive dismissal if they have at least two years of continuous service with the employer. Also, failure to follow contractual procedures or policies, dismissing the employee without paying or allowing the employee to serve the correct notice under the contract (wrongful dismissal), continuous micromanagement or making unreasonable demands of an employee.
Can an employer sue an employee for breach of contract?
The employer is able to sue an employee for breach of contract. For example, the employer could sue the employee or, if there is a clause in the employee’s contract allowing this, there is an attachment of earnings order made by the court or it is allowed by statute, the employer can withhold payments due to the employee, to compensate the employer for any loss flowing from the employee’s breach of contract.
An employer may be able to sue an employee if they were to resign without working their notice and the employer sustains a direct financial loss as a result (for example if the employer has to pay for a locum to cover the former employee’s work) until a permanent employee can be recruited as a replacement.
Also, if an employee breaches their restrictive covenants the employer can take action against an employee. For more information see Breaching restrictive covenants in an employment contract below.
Breaching an employment contract before the start date
An employment contract is binding once an unconditional offer of employment has been accepted by the employee. Therefore, any breach of a term of the employment contract by the employer or 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 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;
- if the employee’s conduct amounts to gross misconduct or is in breach of post-termination restrictions from previous employment that the employee is still bound by, again there is a breach of contract by the employee and the employer could sue for breach of contract; and
- 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. If the employer discovers this and withdraws the job offer, again technically there has been a breach by the employee and so it is possible for an employer to sue an employee for damages suffered as a result of fraudulent or negligent misrepresentation.
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 the employer would concentrate their time, costs and efforts in securing a replacement recruit instead of looking to sue the prospective employee for a breach of contract such as the above.
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 the employee has signed agreement to the start date, if the employee cannot start on that date they will usually be in repudiatory breach of the contract of employment, unless this is only for a very short period of time or it is because of sickness or incapacity or falls within one of the statutory time off rights. If the employee cannot start for a long period of time after the contracted start date and/or there is no reasonable excuse as set out above, provided that the employer has pre-warned the employee that failure to start as agreed will result in the job offer being withdrawn, the employer can lawfully terminate the contract by withdrawing the offer of employment. If there was not a date specifically agreed by the employer and employee and this was just a proposal, then the employee may be persuasive in stating that they have not breached a term of the employment contract by not starting on the proposed start date and the employer may find it difficult to lawfully terminate the contract on that basis.
If the employer seeks to withdraw the offer of employment and the employee has not breached the employment contract, the employee may have a claim for breach of contract, but damages are likely to be limited.
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, and means that the contract can be lawfully ended by the other party on the basis of that breach. For example, if an employer does 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 the employer breaches this fundamental term then the employee has the right to treat the contract as if the employer has 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 civil courts.
If an employee fundamentally breaches the employment contract, for example by committing gross misconduct (such as theft from the employer) if the employer is sufficiently certain of this and has thoroughly investigated the matter, the employer can dismiss the employee summarily, with no requirement to make a payment in respect of notice, as the employee has broken the contract with their course of conduct.
Does withholding wages count as a breach of 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 so an unlawful deduction from wages. However, a single breach does not normally justify resignation and a claim for constructive dismissal, 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 the employer.
If there is a term in the employee’s contract of employment stating that an employer can in certain circumstances withhold wages, provided that the circumstances fit with those stated in the employment contract then the employer 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), deductions under those circumstances would not be a breach of contract. Finally, if an employee has consented to wages being withheld, again this 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, 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.
The difficulty with implied terms is proving that they are terms which have been agreed and incorporated into the contract at the time of the initial employment contract or subsequently by agreement between the parties, as they can be less clear than express written terms. If an implied term in an employment contract is breached, this is the same 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 the employer can do what is reasonably necessary to protect its legitimate business interest without unlawfully restraining trade. Once the employee leaves an employer it may be that they remain bound by a number of clauses relating to: confidentiality, IP, non-dealing, non-compete, non-solicitation and non-poaching.
Provided that the restrictive covenant is valid and enforceable, if an employee is in breach of a restrictive covenant and the employer has not already breached the employment contract (during the employment or when terminating the employee’s employment) an employer can enforce restrictive covenants against a former employee for a reasonable period of time over a reasonable geographical area, dependent on the role of the employee.
Where there is a breach of a valid restrictive covenant, should the employer think it is commercially worth pursuing a former employee and/or their new employer, a recipient of company confidential information or funder of a former employee’s new business breaching restrictive covenants, the employer is able to consider the following:
- applying for an interim injunction – if there is a serious issue to be tried, damages would not be a sufficient remedy and if on the ‘balance of convenience’ granting the injunction would not prejudice the employee more than the employer in all the circumstances, then an interim injunction may be granted. A final injunction may also be required and granted after a full trial.
- seeking damages from the employee – in this case the court would assess whether a restrictive covenant is enforceable, has been breached, whether this had caused the employer loss and then 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 though a solicitor or by way of court order to observe the contractual restrictions pending a speedy trial. This option saves both parties time and money and gives employers short term 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 contract claims go to an employment tribunal?
If an employee no longer works for an employer, they should bring a claim in the Employment Tribunal within three months of the breach of contract. If an employee is still in employment, they should 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 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 up to 5 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.
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.
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 employer 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 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.