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The employment contract is the foundation of your relationship with your employees.

The relationship between employee and employer is determined by the employment contract, with many employment law issues revolving around this. It is therefore vital to understand precisely what the contract is, and how it is formed.

An employment contract is legally binding between both parties and like any other contract, must in law have three elements; an offer, an acceptance and consideration.

Both arrangements constitute a legal contract since all three elements exist. If any element is missing, the arrangement is not a legally enforceable contract.

Contracts need not be in writing – an oral agreement is perfectly valid in law. However, it is useful to have witnesses, and of course, much better still to have the arrangement in writing.

The importance of contract law fundamentals becomes obvious in two situations. First, when you or an employee need to discuss rights, duties, promises and agreements – look at what the employment contract says and work forward from that. You may well want to keep it simple and unambiguous because in law the contract means what it says and not what you think it ought to mean or say.

Secondly if a dispute arises over some arrangement – e.g. extra duties in return for an upgrade at the next pay review – consider whether the three elements exist. If they do, you have a legally binding agreement, and a plea that you cannot afford the upgrade lays you open to legal action for breach of contract.

The law requires you to provide each employee who has worked for you for a month with a Statement of Main Terms.