Implied terms in the employment contract

The possibility of “implied” terms, which are not set out in a written (or even oral) contract but which are still contractually binding on the parties, is one that can cause concern to employers and HR professionals. In this article, I set out in overview the law on implied terms, followed by a discussion of some key implied terms in the employment contract.

What is an implied term?

An implied term is one which is not set out expressly in the contract, but which arises because of the circumstances in which the contract is entered into. In practice, all employment contracts — however comprehensively drafted — will have some implied terms, and I set out below some key common implied terms in employment contracts. Typically, implied terms are relied upon by the employee rather than the employer, but they can also be helpful to employers in some circumstances.

The legal tests for implied terms A term will only be implied into an employment contract if a court decides that the intention of the parties at the time the contract was entered into must have been that the clause be included. In order to do so, one of the following tests must be satisfied.

• Business efficacy: where a term is necessary to give a contract business efficacy (eg a term requiring an area sales manager supplied with a company car to hold a valid driver's licence).
• Custom and practice: where it is the normal custom and practice to include a particular term in such contracts such that it is “reasonable, notorious and certain” that it will be followed — the phrase comes from case law and “notorious” is used neutrally, as in “well known” — and there is a sense of legal obligation to do so (eg a term entitling employees to payment of a bonus which has been paid every year for many years and which is well known to employees).
• Officious bystander: the proposed term is so obvious that it goes without saying such that, had an officious bystander suggested to the parties that it be included in the contract, they would have said “Oh of course” (eg a term that an employer will not, without good reason, dismiss an employee if this would prevent him or her from benefiting from a permanent health insurance scheme).
• Conduct after the contract is made: the way in which the contract has been performed demonstrates an intention to include the term (eg a term allowing an employer to demote an employee, where that employee has been demoted in similar circumstances on previous occasions and has not suggested that the employer had no right to do so).
• Characteristic terms: these are implied by law because they are a necessary part of a particular type of contract (eg a term that an employee will service his employer with good faith and fidelity).
• Terms implied by statute: (eg a term setting out a minimum notice period on termination of employment).

The relationship between express and implied terms Generally, an implied term cannot override an express contractual term. However, in some cases the courts have implied a term which does so, eg:

• an implied term that restricts or qualifies an express term giving an employer a particular discretion (eg a discretion to award a bonus based on individual performance must not be exercised perversely or irrationally)
• an implied term that relates to something that the parties must have overlooked when drafting the contract (eg the implied clause mentioned above which prevents dismissal without cause of an employee benefiting under a permanent health insurance scheme).

An express “entire agreement” clause (stating that the express contract sets out all the terms agreed between the parties) may stop other terms being implied into the contract. However, it has been suggested that this will only apply to terms that would otherwise be implied by custom and practice.

Where a term is implied by statute, the statute will usually state explicitly that the prescribed term will override any conflicting express term. For example, even if an employment contract states that an employee will be entitled to one month's notice regardless of his or her length of employment, s.86 of the Employment Rights Act 1996 provides that this contract will be varied once he or she has five years' service, to give him or her a week's notice per year of service (capped at 12 weeks).

Some important implied terms   The duty to maintain mutual trust and confidence The duty to maintain mutual trust and confidence is probably the most commonly relied upon implied term, and is often cited by employees who claim to have been constructively dismissed. It implies a duty on the part of an employer not, “without reasonable and proper cause”, to “conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between the parties” (Courtaulds Northern Textiles Limited v Andrew [1979] IRLR 84, EAT).

It is important to note that the duty to maintain mutual trust and confidence is not a duty to act reasonably. Rather, it is a duty to act rationally and not so perversely as to constitute a manner in which no reasonable employer would act. No malice is necessary (although this may well be helpful in showing that the implied duty has been breached), and an honest mistake can result in the duty being breached.

The duty to maintain trust and confidence is often relied upon in the context of bonus disputes. In such disputes, the wording of the express bonus clause (if there is one) is key as this forms a “contractual straitjacket” in which an employer must exercise its discretion in a way which does not destroy mutual trust and confidence by being irrational or perverse. For example, in Clark v Nomura International plc [2000] IRLR 766, the relevant express clause stated that there was a “discretionary bonus scheme which is not guaranteed in any way and is dependent upon individual performance”. The court found that this meant that the employer was required to base the bonus on individual performance and not on other factors such as the overall performance of the business. However, there was a further implied requirement that it exercise discretion in a way that was rational. In Midland Bank plc v McCann EAT/1041/97 the bonus clause stated that the bonus was intended to attract, motivate and retain managers, and the EAT found that the employer was not acting irrationally in not awarding a bonus to a manager who was shortly to leave its employment.

While the duty to maintain mutual trust and confidence is, in theory, binding on both employer and employee, it has typically been relied upon by employees, as an employer who is trying to identify a contractual term that has been breached is more likely to be in a position to rely upon an express term (as employers typically dictate the content of the employment contract) or another implied obligation on the employee such as the duty of fidelity. However, there are cases in which the employee's breach of the implied duty to maintain mutual trust and confidence has been found to justify dismissal, eg in the case of an employee who provided a reference for a former colleague on a false basis. However, employers should be fairly cautious in seeking to rely on a breach of this implied duty in seeking to terminate an employee's employment, and should ensure that the employee's misconduct is serious enough to be held to have undermined trust and confidence.

The duty of fidelity A term requiring the employee faithfully to serve the employer is implied into all employment contracts and means that an employee may not act against the interests of the employer. It is particularly relevant if the employee is contemplating leaving the employer and working for a competitor, or setting up a competing business.

The duty may also be breached in circumstances where an employee derives undisclosed profits from the employer's business or misuses the employer's property (eg by borrowing money without permission).

The duty to provide work While there is generally no duty for an employer to provide work for its employees, such an obligation does arise if the employee must be allowed to work to maintain his or her skills or public profile. Traditionally, this was found to apply predominantly in the field of the performing arts, but more recently it has been identified in other, highly-skilled sectors, eg in William Hill Ltd v Tucker [1998] IRLR 313 where, in the absence of an express garden leave clause, the employer was in found to be in breach of the duty to provide work by placing a senior dealer working in spread betting on garden leave, even though he suffered no financial loss as a result.

The duty may also arise if the employee is deprived the opportunity to earn if he or she is not provided with work, eg if his or her pay includes commission.

Giving references There is no general implied duty for an employer to provide a reference for either a current or a former employee. However, if an employer does decide to provide a reference, it must exercise reasonable care and skill in doing so to ensure the accuracy of any facts that are contained in it. This implied duty exists even if the employment has ended. An individual who loses out on a job because of a careless reference from a current or ex employer can recover damages for a breach of this implied term if he or she can show that he or she has lost a reasonable chance of employment and therefore sustained financial loss.

This article was first published in Croner in July 2014