Everything You Need To Know About Employment Contracts

What Is a Contract of Employment?

The contract of employment (or employment contract) refers to an agreement or term of work that is extended from an employer to an employee to define the terms and conditions of their employment. Although usually a written document, they can also be verbal. The terms of an employment contract could include the following:

Commencement date
Title and Description of the job
Employment duration
Benefits and compensation for employees
Employer’s rules, regulations, policies, and procedures
Confidentiality agreement
Non-compete clause
Dispute resolvement
Termination of Employment
Other general rules

Why Is an Employment Contract Important?

A well-written employment contract can be beneficial for both an employer and an employee. It’s a good idea to:

Clarify the job’s responsibilities.
Outline the rights of each party.
Ensuring the employee better job security.
Secure company information, such as trade secrets and special techniques.

When Should You Ask for an Employment Contract?

Most jobs don’t need a person to sign a contract before employment. The existence of a contract typically means that there are some unusual circumstances involved in the employment, such as:

When an employee would be hard to replace because of their experience.
When an employee is aware of confidential information.
When you don’t want an employee to start working for a competitor.

How Do You Write Up a Contract of Employment?

The employment contract should address every aspect of an employer-employee relationship. Once you have determined the position you’re hiring for and the specific requirements you will need to meet for the company, an employment contract must contain the following sections.

Job Description

Usually brief, the job description will include the title of the job the employee is being hired for and a description of the employee’s duties. This will allow both employers and employees to understand and negotiate on responsibilities.

Salary/Wage

Decide if the employee will be paid a salary or based on an hourly wage. It is also essential to determine the time frame for when they’ll be paid.

The relationship between parties

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

At-Will Employment. Both parties can terminate the employment relationship at any time, with or without prior notice and for any reason.
Binding Authority. Employees cannot bind employers to agreements or commitments without their written consent.
No Exclusivity. The agreement made in the contract isn’t exclusive, which means that the employer and employee are free to sign similar agreements.

Duration of Employment

The starting date and time should be listed on the contract, and the type of employment (permanent, contract full-time, part-time, etc.). The workplace location must also be stated, along with a contingency for an emergency arising and the employee not being able to work from that location.

If there’s an end date to the employment, it should be stated in the contract and any opportunities for extension.

Benefits

All benefits, including holidays, vacation days, and insurance plans, must be clearly stated in the employment contract. If there is a chance for advancement and salary raises, that should also be stated clearly.

Grounds for Early Termination

Even if a contract does not contain a fixed term of employment, an employee can still be terminated at any time at the employer’s discretion or end the employment themselves. The financial implications of early termination must be discussed, including any qualification for severance payments. There are five types of terminations that have different procedures.

Resignation

When an employee leaves the company, they usually agree to receive their wages through the last day they work. They may also receive guaranteed bonuses or commissions that would come after their date of termination.

“Good Reason” Resignation

If the employer is unable to pay an employee’s compensation or there is any change in company structure, employees can be at risk of “good reason” termination. The majority of times, this type of resignation implies that the employer will have to pay some kind of compensation to the employee.

Termination “For Cause”

“For cause” termination occurs when an employer terminates the contract prematurely because of the actions performed by the employee. These reasons for termination should be stated in the contract and may include situations such as intentional misconduct, breach of contract, job abandonment, or a felony charge. The employee is likely to only receive their wages until the date they were fired and receive no additional compensation.

Termination “Without Cause”

If an employer can dismiss an employee for any reason that’s not listed under the “for cause” section, it is considered termination “without cause.” As with termination “for cause,” this kind will result in receiving their wages until the day of their termination.

Death and Disability

If the employee passes away or becomes disabled during employment, the employer will outline what amount of compensation will fall to the employee’s estate.

Confidentiality

There are many contracts that define what can and can’t be said about the company’s practices in order to safeguard business information, trade secrets, and intellectual property.

Dispute Resolution

If there is any dispute over a contract, the contract will explain the procedure for the parties to come to an agreement. This will outline the arbitration process and how an attorney will be paid.

Who Needs an Employment Contract?

An employer, human resource manager, and recruitment officer must use an employment contract for new hires, recruits, and current employees who are changing job positions. The employment contract defines the obligations of and gives legal protection to both parties.

Does an Employment Contract Need to Be in Writing?

Generally, an employment contract should be in writing, but there are different types of employment contracts. For an employer, written contracts provide organization and structure in the hiring process and the work environment. For employees, a written contract gives them a sense of security and stability.

There are a few disadvantages of a written contract. For either party, it can limit flexibility, hinder negotiations, and imply an assurance of fairness and honesty that may or may not be actually present.

Types of Employment Contracts

Employment contracts are classified according to different contract arrangements an employer can make when hiring an employee. There are four major kinds of employment contracts that employers can use while hiring and establishing the terms of employment with a new employee:

At-Will Employment Contracts
Written Employment Contracts
Oral Employment Contracts
Implied Oral Contracts

The kind of contract an employer picks depends on what is most beneficial for the employer and their employment situation.

At-Will Employment Contracts

The most common type of employment contract in the U.S.
At-will contracts allow employees to be terminated or fired at any point, with or without prior notice.
Employers cannot dismiss employees for protected reasons, such as protected classes, discrimination, or retaliation.
The at-will arrangement does not stop employees from enforcing the terms of their contract.

Written Employment Contracts

More precise than at-will contracts.
Details specific employer and employee obligations
Written employment contracts generally last for a specific period of time set by an employer.
Written employment contracts define the termination conditions, and employees can’t be terminated unless they violate the terms of their employment contract.

Oral Employment Contracts

Employment may either be at-will or upon specific conditions.
The contracts are legally binding, but they pose difficulties if there is a breach of contract because they are not easy to prove.
If the contract is violated, the employment contract is enforced based on any available documentation, surrounding situations, evidence of the agreement, and the reliance of the employer and employee.

Implied Oral Contracts

They do not require formal documentation and may combine both written and oral 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 contract, they are still subject to the conditions of an at-will employee.
When considering implied oral contracts, courts will consider employee performance within the company and how long the employee has worked for the company.