Notice Clauses in Employment Contracts - how long should they be?

Notice clauses in employment contracts are easy to brush over.  Junior to mid-level employment contracts are rarely negotiated at length and the focus of any negotiation that does take place is more likely to be on pay, holiday and the duties of the job.  Many employers just have a “standard” notice clause which become part of the norm.

BUT - employers - brush over notice periods at your peril!  

It may not be your focus when you are recruiting your next new employee, but if you make a poor choice over the length of notice each party is required to give at the end of the employment, it could cause your business a number of difficult issues.

Statutory Notice

Once an employment contract has been agreed, it becomes automatically subject to minimum notice periods. This is known as statutory notice.

Under statutory notice, once an employee has worked for you for a month, they become entitled to receive one week's notice from you and, after that, are entitled to one week's notice for each complete year they have worked for you, up to a maximum of 12 weeks’ notice.  In contrast, after one month, employees are only ever legally required to give their employer one week’s notice to end their employment, even if they have worked for you for years and years.

This imbalance, and the ever changing length of notice to which employees are entitled, makes agreeing a contractual notice period an appealing prospect.

Contractual Notice

The rule with contractual notice is that if is for a shorter period than statutory notice would be, then statutory notice will prevail.

For example, if you agree a contractual notice period of a month with your employee it will only be effective for the first four years of their employment.  Once they have completed five years’ employment with you they would become entitled to a minimum of five weeks’ statutory notice from you to terminate their contract. 

However, there are benefits to having a contractual notice of one month.  A) during the first four years of employment it keeps things pretty straightforward, both sides should give the other one month’s notice to end the employment.  B) after completing five years’ employment, the employee’s entitlement to notice would revert to the longer statutory length of notice, but the employer’s entitlement to notice would not change, it would remain at the contractually agreed one month, which is better for the employer.

Choosing the length of contractual notice

There is no way around statutory notice.  Employees are entitled to their statutory notice as a minimum and this is highly likely to be relevant for long term employees.  

However, many employees don’t stay with one employer on a long term basis.  It’s common for employees to move on after a few years - the once ubiquitous career-long dedicated service to one employer is in the distant past.

With a free flowing work-force in mind, as an employer it’s worth giving serious thought to what your business needs from its employees in terms of a notice period and what your business stands to lose by getting it wrong.

There tend to be two particularly popular lengths of contractual notice.  One month and three months (for some reason the option to have two months tends to get overlooked - it comes up a lot less often).

So, why choose one length of notice over the other?  And is it sensible to have a standard notice period for everyone in your organisation?  (Spoiler alert - no it’s not.  Why would you have the same length of notice for e.g. a junior member of admin staff and a senior manager of the company?  Written down this clearly seems like a bad idea, but in reality this set up comes around remarkably often).

To help decide on the right notice period for your new employee you need to consider a few factors:

1. How long would it take to recruit a replacement for the employee when they leave?

If your employee is in a role where it is difficult to recruit (perhaps they have a very specific skill set), you may want to tie them in for a longer period, so that your business isn’t left high and dry as a result of having too short a notice period.  

In this situation, it would make sense to think in terms of a three month notice period, possibly longer, if you feel your business could be damaged if they were to leave before you found a replacement.

2. How senior is the member of staff?

If you were to put a very junior member of staff on a three month notice period, how would this benefit the business?  Is this individual really going to remain productive if they feel frustrated by the length of time they are tied to your company after they have decided to leave?  

If the person leaving is in a junior position and does not have an overly specific skill set, the chances are you may be able to recruit someone within a relatively short length of time who will feel excited about starting their new job and who will be more productive as a result, rather than retaining someone who is watching the clock tick by.

(It may also turn out to be considerably cheaper to the business to put all junior employees on shorter notice periods - please see “how much could the notice clause cost the business” below)

On the other hand, if you are considering a notice period for a senior member of staff, three months might not be anywhere near long enough.  

Depending on how integral the senior staff member is to your business, how much damage they could cause if they went to work for a competitor straight after working for you and how difficult they would be to replace, you might want to consider a notice period of between six and twelve months.  These sorts of issues are most likely to be factors where the person leaving is at director level.  However, a lengthy notice period can come at considerable cost.

3. How much could the notice clause cost the business?

When things are working out and any leavers tend to be employees who opt to resign there can be many benefits to them having longer notice periods, to enable hand-over, recruitment etc.  However, if things take a downward turn and you need to dismiss an employee or, worse, need to dismiss many employees in e.g. a redundancy situation, they will still be entitled to their notice pay.  (The only exception to this is if they are dismissed for gross misconduct or for some sort of breach of contract).  

In some cases dismissed employees may work their notice, but commonly, once an employee is dismissed, it makes business sense to pay them in lieu of their notice.  This means their employment is brought to an end without them working their notice and, instead, they are given a lump sum payment for the salary they would have earned during their notice period.  This has the potential to be very expensive, particularly for a company that may already be in financial difficulty, and is a clear example of where opting to have one standard notice period, on the lengthier end, for all staff can work against, not for, the employer.

4. What is motivating you to consider a longer notice period?

We’ve covered the possibility that it may be difficult to replace a member of staff or that a longer handover may be needed in certain roles, but if these are unlikely to cause concern after a certain length of time, is the reason you are considering a longer notice period actually because you want to prevent your, soon-to-be-ex, employee from going straight to work for a competitor?

If so, this is a perfectly legitimate concern, but there are other ways of dealing with it.  

You need to start by considering whether the employee in question could pose a genuine risk to your company.  It’s unlikely, for example, that a junior member of staff would be in this position, even if they did move to a competitor.

That said, if you have established that you would like to prevent the employee from working for a competitor for a set period of time, instead of having a lengthy notice period and risking the potential costs associated with that, you could include some restrictive covenants in their employment contract instead.  I’m going to caveat this by saying that restrictive covenants are a risky business.  Unless they are very specific and you are dealing with a member of staff who poses a very obvious and real threat to your business it is often difficult to see whether, if push came to shove, they would be enforced by a court (and finding out can be a very expensive exercise), but they might be just the deterrent you need to put an ex-employee off doing something they know they shouldn’t.   

The benefit of restrictive covenants is they survive termination of an employment contract, so you can hope to rely on them for a set period, without having to pay for an unnecessarily long notice period.

However, if you have considered the above and feel you simply need more protection in place than iffy restrictive covenants can provide, then you are probably in the territory where the benefit of having a lengthy notice period outweighs the potential expense.  

If your employee is something of a titan in their field, they know pretty much everything about your business, they are new best friends with the CEO of your competitor and other interested parties are circling like sharks, it may well be that having a six to twelve month notice period in their employment contract is absolutely necessary.  You can then use that long notice period (or part of it) to place them on Garden Leave.

What is Garden Leave and How Does It Relate To Notice Periods?

Garden Leave is where the employee remains employed throughout their notice period, but you can require them to stay at home (and presumably do the gardening!).  

This is expensive.  

It’s also a good way to make certain that your soon-to-be ex-employee is out of the workplace entirely for a set period, long enough for any relevant information they have about your business to become outdated and long enough to considerably reduce the chances that your clients will wait for your employee to return to work elsewhere and then follow them there.

If your employee is at the level where you decide you would prefer to pay them to sit at home and do nothing rather than work within your industry for several months, perhaps for up to a year, then it is highly likely they are on a high salary.  You would have to continue to pay this to them for the duration of their notice, they would still accrue their entitlement to holiday during this period (although, if handled correctly, they could be required to take this during their Garden Leave) and they would continue to hold on to all their rights in employment law and under their employment contract.  However, in some cases, it’s just worth it, to keep them out of the work place for as long as possible and to give you time to make whatever changes you feel you need in your business to make sure you are protected.  

It is also possible to tie Garden Leave in with restrictive covenants too, the two are not mutually exclusive, giving a double whammy of protection!

So, think about your notice periods - giving your junior staff base long notice periods, or your senior staff notice periods that are not long enough both have potential to cause major business headaches. The time to think about it is at the beginning of the employment relationship.

Let me know if I can help!