Employment Contract: In-Depth Guide for 2024
An employment contract validates the relationship between an employer and an employee. It’s a commitment by both parties to uphold certain responsibilities and establish a mutually beneficial association.
HR departments should have a thorough knowledge of this type of employment offer and be able to guide the process. This article takes a closer look at what employment contracts are all about.
Contents:
What is an employment contract?
Do employers need to provide an employment contract?
Employment agreement vs. contract
Types of employment contracts
What to include in an employment contract
HR tips for supporting the employment contract process
What is an employment contract?
An employment contract is a legal agreement that defines an employment situation between an employee and an employer or labor union. The purpose is to stabilize the working relationship by clearly stipulating what is expected from both parties.
This type of arrangement lessens the probability of employment disputes. If they do occur, the contract serves to interpret responsibilities and hold everyone accountable for the established terms and conditions.
An employment contract is usually preceded by an offer letter, which is a document provided to a prospective employee that outlines the terms and conditions of their employment, including job responsibilities, compensation, benefits, and other important details. However, it doesn’t have the same legal weight as the employment contract.
Do employers need to provide an employment contract?
Because employment contracts hold the employment relationship to a higher standard and require negotiation for any changes to the situation, they are more restrictive than necessary for many positions.
However, there are certain circumstances where an employment contract can be required or prudent. These conditions include:
- When employees are represented by public or private sector unions.
- Professional or senior management positions that are difficult to fill because they require specialized skills or experience.
- A position that involves access to confidential information, sensitive materials, or trade secrets.
- The need to prevent an employee from going to work for a competitor.
In the example of hiring for an executive position, an employment contract can help land the right candidate and protect the business. Laying out the salary, benefits, protections, and incentives you have to offer, as well as assuring job security for a set amount of time, can entice a desirable candidate to come work for your organization over another.
Additionally, an employment contract can include covenants that guard the confidential and proprietary aspects of your business and prevent an executive from taking this knowledge to a competitor.
Employment agreement vs. contract
The terms “employment agreement” and “employment contract” are often used interchangeably, but there is a crucial distinction between the two:
- An employment agreement is an arrangement between two or more parties regarding certain rights and obligations that will be honored, but it can’t be legally enforced. This means that when one party fails to meet the obligations, the other party is not entitled to any form of resolution or compensation.
- An employment contract is a pledge among two or more parties to adhere to specific terms, and it is enforceable under the law. Therefore, when one party fails to uphold the stipulations of the contract, they can have a legal or financial responsibility to remedy the situation.
Types of employment contracts
Employment contracts come in various formats depending on different circumstances, needs, and employee status. Here’s an overview of customary types of employment contracts:
1. Written employment contract
Written employment contracts legally document the details of the employment agreement and are signed by the employer and employee. These are the most widely used format because they provide clarity of details and proof of what is being agreed upon.
Since both parties agree to the terms of the contract by signing it, it can help prevent disputes. When a discrepancy over the terms of an employment relationship does arise, the parties involved or a neutral third party can navigate a resolution by referring to the written contract.
2. Oral employment contract
An oral employment contract takes place during a discussion and is not put in writing. For example, a hiring manager can make a verbal employment offer to a candidate by stating specific salary information, benefits, etc. If the candidate verbally agrees to the terms, this situation can be considered an oral employment contract. It can be further authenticated if another person witnesses the discussion and can testify that an agreement was made.
An oral employment agreement is just as legally binding as a written one. However, it is much more challenging to prove and uphold because it relies on one person’s word against another.
3. Implied employment contract
Implied employment contracts are neither written nor oral agreements. Instead, they are inferred based on employer statements, actions, or history. Obligations can be created when employees assume they will receive the same general rights, protections, and benefits that the employer states, documents, or has previously granted.
Certain factors may establish an implied contract. For instance, employee handbook policies that outline specific employment terms and conditions. Also, the collective belief that good performance or long-term employment implies job security,
With policies, actions, or documentation to refer to, implied employment contracts can be proven to exist and be legally binding.
4. Temporary employment contract
Temporary employment contracts are used for short-term employment relationships with established start and end dates. Contracting with temporary employees is a staffing option that offers flexibility. They can fill in for someone on leave, assist with a project, handle seasonal work, or try out a position before being hired as a regular employee.
Temporary employment contracts can be directly between an employer and an individual or between an employer and a staffing company that pays the worker.
5. At-will employment contract
At-will employment means that both the employee and the employer engage in the employment relationship by choice and can leave it at any time. At-will employment contracts may contain many of the same stipulations as regular employment contracts, but they don’t specify any guaranteed rights or length of employment.
Employees under at-will contracts can leave their position for any reason at any time. They can also be terminated for any reason at any time, providing that it’s not for something discriminatory that violates labor law. Although they can be fired, these employees can still expect the employer to enforce the contract’s terms.
6. Fixed-term employment contract
A fixed-term employment contract is extended in situations where someone works for a specified period of time or until an assignment is completed. Fixed-term contracts often provide the same protections and benefits that regular employees receive.
Once this type of employment contract has expired, it can be extended, renewed, or terminated. It may even lead to a more long-term employment agreement. Depending on the organization’s location and relevant regulations, there may be a limit to how many times a fixed-term employment contract can be renewed to protect workers from being taken advantage of.
Generally, fixed-term employment contracts cannot be ended early by either party except in the case of termination for cause.
7. Union contract
Union contracts pertain to workers within a trade or vocation group who unite to advance their common interests. Union members can be employees of the union itself or a private or governmental organization. Their employment is always secured by a contract.
The conditions of union contracts are determined through a process called collective bargaining. The terms are initiated by workers and negotiated by union leaders. Members then vote to accept or reject the contract. Once it’s in place, the terms must be followed by both parties, except in extraordinary circumstances.
What to include in an employment contract
Employment contracts detail the terms and conditions of the employment relationship. Contract provisions can be customized to suit an organization’s business needs as long as they aren’t fraudulent or illegal. Because employment contracts have legal ramifications, a qualified legal professional must ensure they will withstand a judicial review.
The features of a standard employment contract typically include the following:
Job information
Employment contracts must describe what the position entails by stating the job title, the general duties, and the responsibilities and performance expectations the employee must fulfill. It may also include a team or department assignment and either the work schedule or how many hours are required.
Technical details
An employment contract must include the effective and termination dates and should clarify what type of contract it is (temporary, at-will, fixed-term, etc.) It may also explain the process for resolving any employment disputes and which legal entities have the authority to interpret the contract to resolve the disagreement.
Compensation and benefits
Total compensation is one of the most significant aspects of an employment relationship, so wages and benefits are crucial components of employment contracts.
They should include a description of all forms of compensation and benefits, namely:
- Employee classification (exempt/non-exempt status)
- Salary or hourly wages and payday schedule
- Performance or signing bonuses, commissions, and incentive opportunities
- Health or other insurance benefits
- Stock options or profit-sharing plan eligibility
- Investment/retirement plan participation
Policies on vacation, sick days, time off, etc.
Employment contracts should explain the organization’s time off policies and how they are accrued or become available. This includes vacation, sick leave, vacation days, holidays, family and disability leave, etc., as well as unpaid leave situations.
Agreements
In many cases, the main reason for an employment contract is to ensure employees agree to certain limitations that protect the organization’s business interests.
This is accomplished with contract clauses such as the following:
- Non-disclosure: This concerns privacy expectations. It prevents an employee from disclosing proprietary or confidential information to competitors during and post-employment.
- Non-compete: This concerns future competition. It prohibits employees from working for a competitor or starting a competitive business within a specified post-employment time period. This may also include a non-solicitation clause that prevents them from soliciting the employer’s customers or other employees upon leaving.
- Ownership/Intellectual property: This concerns the control over work-related enterprises. It makes clear that any materials, designs, or communications produced by the employee while carrying out their duties are owned and controlled by the employer.
Employment period
An employment contract will specify the duration of employment. It may be a time set by specific dates or the length of a project. It could also be classified as ongoing employment. In some cases, there is a minimum duration with the option of an extension or renewal.
Termination
An employment contract can state how much notice must be given to put an early end to the contract. It can also outline which employee actions would be grounds for termination of the employment contract.
There could also be certain requirements for both parties upon the contract’s conclusion. For example, the employer may provide a severance package, and the employee may need to return company property/equipment. Additionally, in instances where the employee holds a high-profile role, garden leave policies may apply.
HR tips for supporting the employment contract process
Inefficiencies in the employment contract process can leave employees with a negative perception of the organization. HR departments play a crucial role in making sure this doesn’t happen.
With fair and transparent practices, HR can foster confidence in the employment contract experience. HR can also prevent future misunderstandings surrounding employment contracts by confirming that certain details are correct and making sure that employees understand their rights and responsibilities.
Tips for how HR can add value to the employment contract process:
- Verify that contract details and wording match the applicable job description and are current on the latest benefit information.
- Ensure there is ample time allowed for the employee to review the contract before signing.
- Encourage the employee to read everything thoroughly and ask any questions needed for clarification.
- Provide prompt answers to their questions or seek out someone who can.
- See to it that employee contractual obligations are incorporated into performance reviews.
- Stay on top of contract deadlines with a tracking system. Communicate with employees well in advance to ensure they understand upcoming deadlines, triggering events, and changes.
- Be an advocate for the employee and point out when the contract appears unfair or is not being upheld on the employer’s end.
Key takeaways
- Employment contract: An employment contract is a legal agreement that defines and describes an employer-employee relationship.
- Use of employment contracts: Employment contracts are not necessary for most positions but can be required or beneficial in certain employment situations.
- Types of employment contracts: Employment contracts come in many formats, including written, oral, implied, fixed-term, etc.
- Employment contract contents: Employment contracts explain the terms and conditions of the employment relationship with particulars such as job information, compensation and benefits, employment duration, and restrictive clauses.
- HR’s role: HR’s ability to guide the employment contract process contributes to its success and employees’ satisfaction.
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