Employment Contract

What is a contract of employment?

A contract of employment (or employment contract) is an agreement of hire extended from an employer to an employee. It’s often a written document used to set the terms and conditions of their employment—but it can also be verbal.

An employment contract may include the following:

• Commencement date
• Duration of employment
• Employee compensation and benefits
• Employer’s rules, regulations, policies, and practices
• Non-Disclosure Agreement (NDA)
• Dispute resolution
• Termination of employment
• Any other general provisions

Why is an employment contract important?

A well-written employment contract can benefit both an employer and an employee. For example, it can:

• Clarify duties outlined in the job description
• Spell out the rights of each party
• Give the employee better job security
• Protect company information, like special techniques and trade secrets

How do you write up a contract of employment?

Each contract of employment should be flexible while reflecting the requirements of your business and the individual employee’s role. You should be prepared to negotiate salary and other terms and be well-equipped to handle employee disputes and the necessary documentation.

Employment contracts should cover all aspects of an employee-employer relationship. Here’s an example of the sections to include:

Job description

The job description is a brief outline of a given role. It includes the job title and a description of the duties expected of the position. It allows both the employee and employer to clarify and negotiate on responsibilities stated in the contract. Our job description templates can help you get started or be used for inspiration.

Compensation

This details whether the employee will be salaried or on an hourly wage and how much compensation has been agreed upon. You’ll also want to establish pay frequency—weekly, bi-weekly, or monthly, for example.

The relationship between parties

Three kinds of employee-employer relationships can feature in an employment contract.

• At-Will Employment.  At-will employment allows either party to end the employment relationship with or without notice at any time and for any reason.
• Binding Authority.  The employee can’t hold their employer to contracts or commitments unless there is written consent in place.
• No Exclusivity.  The agreement made in the contract isn’t exclusive, meaning the employee and employer are free to enter into similar agreements with other parties.

Duration of employment

The starting day and time should be noted on the work contract, as well as the employment status and type—such as permanent, temporary, full-time, or part-time. The location of employment should also be listed, as well as a contingency plan in case of an emergency that prevents the employee from working at that location.

If there’s an end date to the employment, that should also be shown in the contract, as well as any opportunities for extension.

Benefits

All benefits, including vacation days, paid holidays, and insurance plans should be outlined in the employee contract. If there’s an opportunity for advancement and salary raises, that should also be made clear.

Termination protocols

Even if a contract includes a fixed term of employment, the employee can still be terminated at the employer’s will or decide to terminate the employment themselves. The contract should also outline the offboarding process that occurs once termination is set in place and what the employee can and can’t do.

Resignation

If an employee resigns, they usually agree to receive their salary through the last day they worked. In their contract, they could also be entitled to a guaranteed bonus or commissions that may fall after their end date.

“Good reason” resignation

If an employer can't pay an employee or there's a change in corporate structure, employees may be subject to “good reason” termination. Most of the time, this form of resignation means the employer will have to give some form of compensation to the employee.

Termination “for cause”

“For cause” termination occurs when an employer ends the contract prematurely due to actions performed by the employee. These causes should be outlined in the contract and could include circumstances like intentional misconduct, breach of employment contract, job abandonment, or a felony charge. Employees usually receive their salary only through their termination date and receive no further compensation.

Termination “without cause”

If an employer terminates the employee for a reason that’s not included in the “for cause” section of the contract, it’s considered termination “without cause.” As with termination “for cause,” this type of termination results in the employee receiving wages only up to their termination date.

Death or disability

If the employee dies or becomes disabled while employed and is unable to work, the employer will outline what compensation will fall to the employee’s estate.

Confidentiality

Many employment contracts will outline what can and can’t be said about the company’s practices to protect trade secrets, business information, and intellectual property. Some companies may ask employees to sign a Non-Disclosure Agreement (NDA).

Dispute resolution

In the event of a contract dispute, a work contract will outline how the two parties can come to an agreement. This contract also explains the arbitration process and how an attorney will be paid.

Religious and educational needs

The contract should note that employees are allowed to participate in any religious or educational activities as needed and that their beliefs will be respected.

Who needs an employment contract?

Any employer, human resource manager, and recruitment officer should present an employment contract to new hires, recruits, and current employees who are changing job positions.

While not all jobs require a candidate to sign an employee contract before employment, it’s a good opportunity to clearly state your expectations. It also extends legal protections to both parties.

There are a few specific instances where employment contracts (and their negotiated terms) are especially important:

• Senior positions where job contracts are generally reviewed and negotiated by an employer-side attorney and an employee-side attorney.
• Union-represented employees for both public sector unions (like teachers) and private sector unions (like manufacturing).

You may also decide that a job contract is necessary if:

• The employee would be difficult to replace due to their experience
• The employee knows confidential information

Does an Employment Contract Need to Be in Writing?

Generally, an employment contract should be in writing, but there are other various types of employment contracts. For an employer, a written contract can provide organization and structure in the hiring process and working environment. For employees, a written contract offers a sense of stability and security.

However, there are some disadvantages to a written work contract agreement. For either party, it may limit flexibility and affect negotiations. Employment contracts are often legally binding, so there can be severe consequences for breaking them.

Types of employment contracts

There are a few different types of employment contracts an employer can establish when hiring and setting the terms of employment with a new employee.

The type of employment contract an employer chooses depends on what works best for the business and their employment situation.

At-will employment contracts

• All states, except for Montana, have some form of at-will employment contract in the US.
• At-will contracts mean employees can be fired or quit at any time, without notice.
• At-will employment is still bound to the employment contract and employers cannot violate laws enforced by the Equal Employment Opportunity Commission (EEOC).

Written employment contracts

• Details specific employee and employer obligations.
• The US Department of State recommends that written employment contracts note the start and length of employment.
• Written contracts of employment outline the terms of termination. Employees cannot be terminated unless they violate their employment contract terms.

Verbal employment contracts

• Employment can either be at-will or based on specified terms.
• These contracts are legally binding, but present difficulties if there’s a breach of contract as they are difficult to prove.
• If the contract is breached, the oral employment contract is enforced based on any available documentation—such as emails—surrounding circumstances, evidence of the agreement, and the reliance of the employee and employer.

The type of employment contract you need depends on the type of work and how you want to structure your employee contracts. Ensure you take the necessary steps to hire employees and understand the implications of each type of employment contract.