Types of Employment Contracts Explained: A Guide for SME Employers
Introduction
For Employers Ready to Get it Right: types of employment contracts explained a guide for SME employers.
Building a team is one of the most rewarding and complex parts of running a small business. Whether you’re hiring your first employee or scaling to a full team, one thing remains true: employment contracts are at the heart of every successful employment relationship, and understanding the legal requirements is crucial . But understanding how they work (and what can go wrong) is often where many small business owners get tripped up.
This blog unpacks everything you need to know from employment statuses and legal frameworks to contract types and dispute management so you can confidently manage your people and stay on the right side of the law and fulfil your legal obligations .
Understanding the Employer–Employee Relationship
Before diving into contract types, it’s important to define what kind of working relationship you’re entering into. In the UK, employment status broadly falls into three categories:
Employee: Someone who works under a formal contract of employment, receives full rights like statutory sick pay, paid annual leave, and protection against unfair dismissal.
Worker: Has a looser relationship with the business. They’re entitled to national minimum wage, holiday pay, and rest breaks, but have fewer employment protections.
Self-Employed/Freelancer: Operates their own business, invoices for services, and manages their own pension contributions and national insurance contributions.
Getting this classification right is essential, not just for legal reasons, but for tax purposes too. Misclassifying someone could lead to unexpected statutory deductions and even financial penalties.
Also, don't underestimate the importance of clarity. While verbal agreements can hold some weight, a written contract is what truly defines the contractual obligations between both parties. It protects both you and your employees and sets clear expectations from day one, including confidentiality agreements .
The Legal Framework Every Employer Should Know
UK employment law and legal requirements are designed to protect both the employer and the employee—and it’s comprehensive. There are several pieces of legislation you need to be familiar with, depending on the contract you offer:
Employment Rights Act 1996: The backbone of employee rights, covering everything from notice periods to redundancy pay.
Equality Act 2010: Ensures employees are not discriminated against based on protected characteristics.
Working Time Regulations: Covers limits on working hours, breaks, and paid holiday.
As a business owner, you have a duty to meet these legal requirements. This includes issuing a written statement of employment, paying the national minimum wage, and following legally acceptable disciplinary and grievance procedures.
Failing to do so can open the door to serious legal protections and consequences, including being taken to an employment tribunal, facing unfair dismissal claims, or incurring legal disputes that cost time, money, and reputation.
When in doubt, seek legal advice. It’s far more cost-effective than resolving disputes after the fact.
Types of Employment Contracts
Let’s break down the most common types of employment contracts, particularly relevant for SME hiring:
Permanent Contracts
These offer long-term stability and are ideal when hiring for core business roles. Permanent employees permanent employees benefit from full employment rights job security, statutory sick pay, and employee benefits like pension schemes and healthcare.
Use Case: Hiring an operations manager or team lead.
Fixed-Term Contracts
Useful for specific projects or covering temporary absences like maternity leave. These should clearly state start and end dates and can convert to permanent if extended.
Use Case: A 6-month digital marketing project.
Zero Hours Contracts
Provide maximum flexibility and are great for seasonal work. However, you’re still responsible for adhering to minimum wage, paid holiday, and notice periods, even with zero hours contracts .
Use Case: Event staff for occasional product launches.
Agency & Casual Workers
These are typically brought in through third parties or ad hoc hiring. They may not qualify for full employment rights but still deserve fair treatment under law.
Self-Employed Contractors & Freelancers
They operate independently and usually provide their own tools. While they’re not covered by standard employment protections, your contract of employment should still outline key deliverables, payment terms, and confidentiality expectations.
Key Components of a Well-Drafted Employment Contract
A well drafted employment contract is not just good practice,it’s a safeguard for your business. At a minimum, it should include:
Job title and clearly defined job duties
Working hours, including shifts, breaks, and overtime expectations
Pay terms: employee’s salary, national minimum wage, statutory sick pay
Leave entitlements: holiday entitlement, sick pay, family leave
Clauses around confidentiality, intellectual property, and trade secrets
Notice periods, exit procedures, and disciplinary and grievance procedures
A signed written statement and reference to any wider written statement (e.g. employee handbook)
Consider including a checklist or template in your onboarding toolkit to ensure nothing gets missed. This adds an extra layer of legal compliance and sets expectations from the outset.
Managing Employment Contracts in Practice
It’s one thing to draft a contract it’s another to manage it effectively. Here’s how to make sure your contracts stay up to date and legally sound:
Review existing contracts annually or when employment law changes.
Clearly communicate any contract changes and gain the employee’s consent in writing.
Use contract management tools to track renewal dates, role changes, or amendments.
Ensure your onboarding process includes issuing a written statement, collecting signatures, and documenting the agreement properly.
Creating a legally robust system now prevents costly mistakes later and helps your team feel secure in their roles.
Disputes, Dismissals & Employment Tribunals
No one likes to think about things going wrong but in business, you have to plan for it.
Disputes can arise over contractual obligations, notice periods, or employee breaches. Sometimes, things escalate to an employment tribunal, especially if an employee claims unfair dismissal, discrimination, or unlawful deductions.
To protect yourself:
Follow your disciplinary and grievance procedures closely
Document everything—from conversations to warnings
Stick to your contracts, especially during termination processes
Always offer employees a right to appeal
If in doubt, don’t hesitate to seek legal advice. It can mean the difference between a smooth resolution and a drawn-out legal battle with serious financial penalties.
Resources and Tools for SMEs
As a small business owner, you don’t need to tackle employment contracts alone. There’s a growing ecosystem of resources, both free and paid, designed to help you stay compliant, confident, and clear in how you manage your team. Below is a breakdown of the most useful tools and services you can lean on—so you can spend less time Googling legal jargon and more time growing your business.
Government Websites
Start with trusted, up-to-date information:
ACAS (Advisory, Conciliation and Arbitration Service): ACAS provides impartial advice for employers on workplace rights, rules, and best practices. Their guides on types of employment, disciplinary and grievance procedures, and zero hours contracts are especially useful for SMEs.
GOV.UK: The government’s official portal includes statutory guidance on minimum notice periods, national minimum wage, statutory sick pay, and more. You’ll also find sample written statements and links to legislation that govern the employment relationship.
These resources are ideal for staying current with your legal obligations and can serve as a baseline when creating or updating your contracts.
Employment Contract Generators & Templates
Many platforms offer easy-to-use employment contract generators tailored for UK law, including fixed term contracts . Services like Rocket Lawyer, SimplyDocs, or Peninsula let you input details like job title, salary, and hours to produce basic contractual obligations in a ready-to-sign format.
Some include extra options to insert confidentiality clauses, flexible working terms, or probation periods—including zero hours contracts all of which are vital for today’s dynamic small business environment.
But remember: templates are only a starting point.
Legal Professionals & HR Consultants
Working with a qualified legal professional or outsourced HR consultant can give you peace of mind, especially if:
You’re unsure about complex contract terms
You’re drafting contracts for remote or hybrid teams
You want to customise contracts for senior roles or commission-based employees
These experts ensure your contracts are not only legally binding agreements, but also aligned with your industry, culture, and future plans, so do not hesitate to seek legal advice . As your business grows, so does the need for scalable and legally compliant documentation.
Ysobelle Edwards Ltd specialises in supporting small business owners with just this kind of back-office structure, so if you’re looking for a partner to take the pressure off, we’re here to help.
Frequently Asked Questions (FAQ) - Scenario Planning for Businesses
1. What is an employment contract, and is it legally required?
An employment contract is a legally binding agreement between an employer and an employee that outlines the terms of the employment relationship. While a contract of employment is not strictly required by law, all employees are entitled to a written statement of terms within two months of starting. It is strongly recommended that employers issue a well drafted employment contract to avoid legal disputes and ensure legal compliance.
2. What is the difference between a fixed-term contract and a permanent contract?
A fixed-term contract has a clear end date or finishes upon the completion of a specific project. A permanent contract is open-ended and offers job security, statutory benefits like paid annual leave, and statutory sick pay. Fixed-term employees are entitled to equal treatment under employment law, including access to the same employee benefits as permanent employees after 12 weeks.
3. Are zero-hours contracts legal in the UK?
Yes, zero hours contracts are legal and commonly used for flexible or casual work arrangements. However, employers must still meet certain legal obligations, such as paying the national minimum wage, providing holiday entitlement, and ensuring legal protections around unfair dismissal or unlawful deduction of wages.
4. Can I terminate an employee without a written contract?
You may be able to terminate an employee, but doing so without a written contract increases your risk of an unfair dismissal claim or a case going to an employment tribunal. A contract of employment with clear notice periods, disciplinary and grievance procedures, and employee contracts termination clauses is essential for protecting your small business.
5. How much notice do I need to give when ending a contract?
Minimum notice periods depend on the employee’s length of service. Statutory notice requires one week’s notice after one month of employment, increasing with tenure. Your written contract should include a clear notice period required clause. Both the employer and employee are bound by this term.
6. What’s the difference between an employee, a worker, and a self-employed contractor?
Employees: Full rights including; compassionate leave, statutory sick pay, holiday entitlement, and protection against unfair dismissal
Workers: Fewer rights but still entitled to national minimum wage, holiday pay, and rest breaks
Self-employed contractors: Responsible for their own national insurance contributions and taxes. They have more autonomy but less protection under employment law
Clarifying employment status is crucial for avoiding misclassification and potential financial penalties.
7. What should I include in a contract to avoid disputes?
Your contract should cover:
Job title and description of job duties
Working hours, holiday entitlement, and sick pay
Employee’s salary and any pension contributions
Clauses for confidentiality, intellectual property, and termination
Outline of disciplinary and grievance procedures
Reference to a wider written statement (for policies not detailed in the main contract)
8. Do I need to update contracts regularly?
Yes. Contracts should be reviewed annually or when:
Your business structure changes (e.g. new subsidiary)
You adjust roles, working hours, or benefits
Updating contracts ensures legal compliance and may require employee’s consent if changes are substantial.
9. Where can I get help writing or updating employment contracts?
You can:
Work with a legal professional to create legally compliant documents
Engage HR consultants for tailored SME solutions
Conclusion: Future-Proofing Your Business
If you’re running or managing a small business, I know how many hats you’re wearing. Navigating employment contracts might not be the most exciting task on your list, but it’s one of the most important. Getting this part right means protecting your business, treating your people fairly, and laying a solid foundation for the employment relationship and growth.
The truth is, employment contracts aren’t just about ticking legal boxes. They’re about building clear, respectful, and professional working relationships from day one. Whether you’re offering a permanent contracts, hiring someone on a fixed-term basis, or exploring zero-hours flexibility, having the right structure in place helps everyone feel confident, secure, and focused on what matters.
My goal with this guide is to simplify what can often feel overwhelming, so you can make smart, legally sound decisions that work for you and your team. Use it to review your current approach, tighten up your documentation, and ensure you're compliant with all your legal obligations.
How Ysobelle Edwards HR Services Can Help Your Business
If you’re not sure where to start or you’d like help drafting or reviewing your contracts, don’t hesitate to reach out. At Ysobelle Edwards Ltd, we work with ambitious SMEs to provide smart, practical back-office support that helps you run like a much bigger business with none of the fluff.
Your business deserves strong foundations. Let’s make sure your contracts are one of them.
Found this article interesting? Read our latest article on the employment rights bill updates and what employers need to know!