Employment contracts are a crucial aspect of the hiring process that protects the interests of both employers and employees. They set out the terms and conditions of employment, outlining important details like job responsibilities, salary, benefits, and termination procedures.
But despite their importance, many organizations create employment contracts using boilerplate language that isn’t specific to the role they’re for. And many people will sign on the dotted line without fully understanding the contract of employment they agree to. In this article, we’ll help you understand the main elements of an employment contract and why they are important.
Whether you’re an employer looking to hire or an employee starting a new job, understanding employment contracts is key to protecting your interests and ensuring a successful working relationship.
What is an employment contract?
An employment contract is a legally binding agreement between an employer and an employee that outlines the rules and expectations of the employment relationship. It establishes the rights and responsibilities of both parties, including job requirements, compensation, termination procedures, benefits, and other important details.
Put another way, an employment contract formalizes the relationship between an employer and an employee. It lays down the rules of the game, so to speak, and helps ensure both parties are on the same page.
The contract typically includes basic information, such as the employee’s job title, start date, and work schedule. It also outlines the employee’s compensation—including salary, bonuses, and leave—and employee benefits like health insurance and retirement.
The contract may sometimes include specific clauses regarding intellectual property, noncompete agreements, and nondisclosure agreements.
Who benefits from employment contracts?
Employment contracts benefit employers and employees because they provide a clear understanding of the terms guiding an employment relationship.
A written employment agreement provides legal protection for employers in case of disputes or misunderstandings.
It establishes the scope of the employee’s duties, outlines expectations, and delineates procedures for handling issues like termination or discipline. This can help avoid conflict and protect the employer in case of arbitration.
For employees, an employment agreement can provide a sense of security. The contract sets out important terms, including compensation, benefits, and working conditions, which helps employees understand what they can expect from their job.
It can also help prevent problems and conflicts by clarifying expectations from the outset.
Types of employment contracts
Employers and employees may enter various types of employment contracts, depending on the nature of the work and the expectations of both parties.
Types of employment contracts include:
- Full-time contracts. These contracts are for permanent employees. How many hours constitutes full time varies by jurisdiction. In the US, anything over 30 hours per week is considered full-time by the IRS. These employees may receive benefits like paid time off, health insurance, and retirement options.
- Part-time contracts. Part-time contracts are for permanent employees working less than full-time hours. In the US, that’s anything less than 30 hours per week, but the hours vary by country. These employees are often not entitled to all the benefits extended to full-time employees.
- Fixed-term contracts. These contracts are for a specific period, often a project or set term. They specify the start and end dates of the employment relationship. These contracts are for temporary or contract workers.
- Open-ended contracts. Open-ended contracts—also known as at-will employment—don’t have a fixed period of time and continue until either party terminates the relationship. The parties can negotiate payment, benefits, and work hours. However, the duration of the employment remains open-ended.
- Freelance contracts. Freelance contracts are for self-employed professionals who provide services to a company for a specific project or period. These contracts are often used for creative services, consulting, or IT.
Key components of an employment contract
Let’s look at some key components of an employment contract and their significance.
- Job title and description. The job title and description specify the position and the responsibilities that come with it. This section of the contract outlines the duties and expectations of the employee. If it’s a temporary role, the job description may include the duration of employment.
- Salary and benefits. This section outlines the employee’s compensation, including salary, bonuses, and employment rights, such as sick leave, health insurance, and retirement options. The contract specifies how often the new employee receives pay and provides a breakdown of compensation.
- Working hours and overtime. The contract specifies the expected working hours and overtime policies, with information about breaks and rest periods.
- Probationary period. Many employment contracts include a probationary period during which the employer can assess the employee’s performance. This period can be a few weeks or months and may include a shorter notice period for termination of employment.
- Termination and notice period. The contract should outline the process for terminating the employment relationship and the notice period required by either party. This section also includes any severance pay or other benefits the employee is entitled to upon termination.
- Confidentiality and noncompete clauses. This section outlines the employee’s obligations regarding confidentiality and noncompete agreements. Confidentiality agreements prohibit the employee from disclosing company information, while noncompete agreements limit the employee’s ability to work for a competitor after leaving the company.
- Intellectual property ownership. This section specifies who owns any intellectual property the employee creates. This includes inventions, patents, designs, and trade secrets. The contract may also include a clause requiring the employee to assign intellectual property rights to the employer.
Negotiating employment contracts
Negotiating better terms in an employment contract is important for employers and employees. It allows both parties to reach an agreement that meets their needs and expectations.
Some key terms to negotiate in an employment contract are:
- Compensation. As an employee, there are a few things to consider in the compensation structure of the contract offered. Check to see if the base salary is subject to yearly incremental increases. It would also be beneficial to ask about annual bonuses. During discussions with employers, candidates can negotiate for stock options (if available), overtime pay, moving expenses, and a travel stipend. Employers can also use these items as ways to seal the deal with top talent.
- Scope of employment. Next, consider the expected job duties. It’s important to flesh out these responsibilities so the employer and employee are on the same page. If not, there’s scope to negotiate better compensation or a reduced workload.
- Benefits. Employees should thoroughly review the contract to ensure it offers ample benefits—such as health and medical coverage, a 401(k) plan, retirement options, dental coverage, and life insurance. Additionally, employers should openly clarify the company’s policy on vacation time and whether accrued leave carries over to the next year. Being transparent about what is offered and what can be flexible is beneficial for both parties.
- Reimbursement of expenses. Employees and employers should reach a consensus about which expenses the company will reimburse. These could include travel, business expenses, transport allowance, relocation expenses, and phone bills.
- Noncompete clause. Finally, employees should go through the noncompete clause properly. Some companies, for example, have restrictive noncompete rules that make it difficult for employees to work in the same industry after termination. If this is the case, you may want to renegotiate the terms of this clause. Employers should keep in mind that restrictions like that have pros and cons when it comes to landing top talent.
Tips for effective negotiation
We provide some useful tips to keep in mind when negotiating an employment contract.
- Prioritize your interests. Consider what’s most important in the employment relationship. For example, an employee may prioritize salary and benefits, while an employer may prioritize noncompete clauses or intellectual property ownership.
- Identify areas of flexibility. Look for room for negotiation. For example, a candidate may ask for a more competitive wage than the employer can offer. But they may be willing to negotiate other benefits instead, such as more flexible scheduling, hybrid work, or increased vacation time.
- Research industry standards. Research industry standards to ensure the terms being negotiated are reasonable and competitive. This can help both parties come to a fair agreement.
What to do before signing an employment contract
Consider these key points before signing an employment contract:
- Review the contract thoroughly. Both parties should review the contract thoroughly to ensure they understand all its terms in detail. The contract should be clear and concise and cover all aspects of the employment relationship.
- Seek legal advice. Both parties should seek legal advice before signing an employment contract, especially if complex legal issues are involved. A lawyer can help identify potential issues and provide corrective advice.
- Negotiate changes to the contract. If either party needs to alter the terms of the agreement, it needs to be done before signing the contract.
- Understand the consequences of signing the contract. Employment contracts are legally binding. So, both parties should understand what they’re committing to. For employees, this may include understanding the terms of any noncompete or confidentiality clauses. For employers, this may include understanding the legal implications of violating the terms of the contract.
- Keep a copy of the contract. Both parties should keep a copy of the signed employment contract for their records.
How to handle a breach of contract
Breaching the terms of an employment contract can have serious consequences for both parties. Some types of breaches that can occur with an employment contract are:
- Nonpayment of wages. If an employer fails to pay an employee’s wages, this breaches the employment contract. Employees should seek payment of the wages owed through negotiation, or even contact legal counsel.
- Violation of noncompete clauses. Noncompete clauses prevent an employee from working for a competitor. If an employee violates a noncompete clause, the employer may seek legal recourse to prevent the employee from continuing to work for a competitor.
- Breach of confidentiality. Confidentiality clauses protect an employer’s confidential information. An employer may seek legal action in response to a breach of confidentiality clauses.
- Failure to provide notice. Many employment contracts include notice requirements for terminating the employment relationship. If an employer fails to provide the required notice, the employee may seek damages for any harm caused by the lack of notice.
It’s wise to seek legal advice in the event of a breach of an employee contract. An employment lawyer can help assess the situation and identify appropriate legal remedies.
Employment contract FAQ
Let’s take a look at some commonly asked questions about employment contracts.
Does an employment contract have to be in writing?
In some cases, employment contracts might be verbal or implied. A verbal contract is an agreement made through spoken words. An implied employment contract isn’t explicitly stated in writing but is inferred from the actions and conduct of both parties.
However, verbal or implied contracts can be difficult to enforce in court. So, employment contracts should be put down in writing.
As a business owner, should I offer an employment contract?
A contract can prevent employers from altering the terms of an employment relationship. Both parties would need to sit down and renegotiate their terms to make changes to the contract.
For a number of reasons—such as lack of legal counsel, a misperception of the value of contracts, or a preference for a more casual working relationship—many employers don’t offer contracts. However, employment contracts offer both parties legal protections, rights, and stability.
Similarly, if you’re hiring a senior executive with access to confidential information, it’s important to have a written employment contract that includes clauses about nondisclosure and intellectual property.
What should I do if I wasn’t offered a contract as an employee?
As an employee, having an employment contract with your employer can provide clarity, protection, and job security. Ask for a written employment contract that outlines the terms of employment before starting work.
If you weren’t offered a contract at the time of employment, you could ask for one during performance reviews or after a significant change in your job responsibilities.
For instance, if your employer expects you to work more hours with the potential for a later promotion, request an employment contract that reflects this new arrangement.
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If you’re a business looking to hire a legal writing professional, browse the Project CatalogTM for a list of ready-made projects of predefined scope that offer high-quality contracts. Similarly, if you’re an employee looking for a legal adviser to review your employment contract, you can find and hire excellent legal advisers on Upwork.
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This article is intended for educational purposes and should not be viewed as legal advice. Please consult a professional to find the solution that best fits your situation.
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