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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Employment Contract

What Is a Contract of Employment?

A contract of employment (or employment contract) is an agreement or term of hire that is extended from an employer to an employee to set the terms and conditions of their employment. While usually a written document, these agreements can also be verbal. The terms of the employment contract may include the following:

  • Commencement date

  • Job title and description

  • Duration of employment

  • Employee compensation and benefits

  • Employer’s rules, regulations, policies, and practices

  • Confidentiality agreement

  • Non-compete clause

  • Dispute resolvement

  • Termination of Employment

  • Any other general provisions

Why Is an Employment Contract Important?

A well-written employment contract can be beneficial for both an employer and employee. It will:

  • Clarify job duties.

  • Spell out the rights of each party.

  • Give the employee better job security. 

  • Protect company information, like special techniques and trade secrets.

When Should You Ask for an Employment Contract?

Many jobs will not require a candidate to sign an employment contract before employment. The presence of a contract usually means there are unusual circumstances involved in the employment, such as:

  • When an employee would be difficult to replace due to their experience.

  • When an employee knows confidential information.

  • When you don’t want an employee to start working for a competitor.

How Do You Write Up a Contract of Employment?

Employment contracts should cover all aspects of an employee-employer relationship. After determining the position you are hiring for and the needs you have to meet for the company, an employment contract should include the following sections. 

Job Description

Usually brief, this job description will give the job title the employee is being hired for and a description of their duties. This provides an opportunity for both the employee and employer to clarify and negotiate on responsibilities.

Salary/Wage

Determine whether the employee will be salaried or on an hourly wage. You’ll also want to establish the frequency of when they will be paid.

The Relationship between Parties

There are three kinds of employee-employer relationships that can be made in an employment contract.

  • At-Will Employment. Either party can end the employment relationship with or without notice at any time and for any reason.

  • Binding Authority. The employee cannot bind the employer to contracts or commitments without their written consent.

  • No Exclusivity. The agreement made in the contract is not exclusive, meaning the employee and employer are free to enter into similar agreements.

Duration of Employment

The starting day and time should be on the contract, as well as the type of employment (permanent, contract full-time, part-time, etc.). The location of employment should also be listed, as well as a contingency for an emergency arising and the employee being unable to work from that location.

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

Benefits

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

Grounds for Early Termination

Even if a contract includes a fixed term of employment, the employee can still be terminated at the will of the employer or terminate the employment themselves. In this section, the financial consequences for early termination should be discussed, including any qualification for severance pay. There are five types of termination that involve different protocols.

Resignation

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

“Good Reason” Resignation

In the case that an employer is not able to pay an employee’s compensation or there is 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 contract, job abandonment, or a felony charge. The employee will usually only get their salary through the day they were terminated 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, it’s considered termination “without cause.” As with termination “for cause,” this type will result in receiving their wages up to the day of their termination.

Death and Disability

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

Confidentiality

Many contracts will outline what can and can’t be said about the company’s practices as a way to protect trade secrets, business information, and intellectual property. 

Dispute Resolution

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

Who Needs an Employment Contract?

Any employer, human resource manager, and recruitment officer should use an employment contract with new hires, recruits, and current employees who are changing job positions. An employment contract clarifies the expectations of and gives legal protection to both parties.

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

  • Senior positions where the contracts are generally reviewed and negotiated by an employer-side attorney and an employee-side attorney.

  • Union-represented employees for both public sector unions (teachers’ unions, etc.) and the private sector unions (manufacturing, etc.).

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 creates organization and structure in the hiring process and working environment. For employees, a written contract provides a sense of stability and security.

There are some disadvantages to a written contract. For either party, it may limit flexibility, affect negotiations, and implies a promise of honesty and fairness that may or may not actually be present.

Types of Employment Contracts

Types of employment contracts refer to the different contract arrangements an employer can establish when hiring an employee. There are four main types of employment contracts employers use when hiring and setting the terms of employment with a new employee:

  1. At-Will Employment Contracts

  2. Written Employment Contracts

  3. Oral Employment Contracts

  4. Implied Oral Contracts

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

At-Will Employment Contracts

  • Most common type of employment contract in the U.S.

  • At-will contracts mean employees can be fired or quit at any time, without notice.

  • Employers cannot fire employees for protected reasons such as protected classes, discrimination, or retaliation.

  • At-will employment does not prevent employees from enforcing the terms of their contract.

Written Employment Contracts

  • More detailed than at-will contracts.

  • Details specific employee and employer obligations

  • Written employment contracts generally run for a specified time decided upon by the employer.

  • Written employment contracts outline the terms of termination, and employees cannot be terminated unless they violate their employment contract terms.

Oral Employment Contracts

  • Employment can either be at-will or based on specified terms.

  • These contracts are legally binding but present difficulties if there is 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, surrounding circumstances, evidence of the agreement, and the reliance of the employee and employer.

Implied Oral Contracts

  • These contracts have no formal documentation and can combine both oral and written statements.

  • Even if an employee believes they were not an at-will employee because of an implied oral contract if they have signed an at-will agreement they are under the conditions of an at-will employee.

  • When considering implied oral contracts, courts take into consideration employee performance within the company and how long the employee worked for the company in question.

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

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