Decoding Employment Contracts: A Comprehensive Guide
Written by: Carin Vreede
Last updated: 27 November 2023
Table of contents
- What is an employment contract?
- Who needs an contract of employment?
- What should be included in an employment contract?
- What are the different types of employment contracts?
- What are the benefits of having an employment contract?
- How to write an employment contract?
- How do you update an employment contract?
What is an employment contract?
An employment contract is a legal agreement that recognizes that a business relationship exists between an employer and an employee. In an employment contract, both parties are outlined as far as their rights and responsibilities are concerned during the period of employment. A contract may describe, for example, what functions an employee would perform, and the salary an employer would pay.
In addition to employment agreements, work contracts, job contracts, contracts of employment, and contracts of service are also used as references. To verify the candidate's income and employment history, requesting an employment verification letter from them is a good idea before issuing an employment agreement.
Employment contract pros
Job duties and responsibilities are clearly defined
Protects both the employee and employer
Employment contract Cons
Costs and burdens of administration
Poor performance cannot be immediately terminated
Who needs an contract of employment?
The hiring process for a new employee is governed by an employment contract that can be created by employers or anyone managing employees on behalf of an employer. Small business owners, HR professionals, managers, and recruiters can be included.
Employees can also create a contract for both of them to sign if their employer does not present them with one. A service contract should not outline the terms of the arrangement between independent contractors and employees. Tax obligations are different for contractors than for employees. Independent contractor has a better choice when it comes to their contracts.
What should be included in an employment contract?
The typical employment contract should include the information needed based on the nature of employment. Even though some companies have all of the foregoing information in separate documents, here are a few standard provisions that should be outlined in an employment contract:
Wage information should include base salary, bonus amount, and other pay rates. If you offer stock options, you may need to provide the maximum number of shares that will vest upon your termination or resignation.
Benefits: Benefits are one of the most important parts of a contract because they define what you get from your employer when you leave. Your benefits may include health insurance premiums paid for by the company, vacation time accrued throughout employment, retirement plans, and more. If you are being hired temporarily and need specific terms regarding benefits during that period, this should also be included in the contract.
Good faith clause: This clause states that both parties must act in good faith during negotiations. Negotiations will only be void if one party works in good faith during negotiations or after signing a contract. For example, if one party promises to pay another party in full upon signing a contract but then tries to delay payment until after signing or fails to make promised payments, this is bad faith behavior.
Indemnification: Indemnification is a legal term that means one party will reimburse another party for any losses, damages, or expenses that may arise from their actions. This clause is often included in employment contracts to protect the employer from liability if an employee is injured on the job or causes damage to company property.
At-will employment: This clause states that either party can terminate the employment relationship at any time, for any reason, or no reason. This clause is important to have in a contract so that both parties know they are not obligated to continue working together if they are no longer satisfied with the arrangement.
Confidentiality: A confidentiality clause is often included in an employment contract. It protects the company's trade secrets and intellectual property and restricts you from sharing certain information about your work or clients with anyone outside the company.
What are the different types of employment contracts?
Many employment contracts depend on whether employees are employed permanently or temporarily. They often include very different terms and conditions if they are part-time or full-time.
Permanent full-time employment contract
Employees on a permanent contract should work full-time hours as determined by their employer, and their employment should not be predetermined.
Full-time employment does not have a standard hour requirement. Employers generally set the hours their full-time employees must work in compliance with local laws. The Bureau of Labor Statistics estimates that full-time employment involves performing at least 35 hours per week. According to the IRS, a full-time employee works an average of 30, or 130, hours per month.
Permanent part-time employment contract
Permanent part-time employees should not have predetermined job ending dates and should not have full-time hours as required by their jurisdictions.
Fixed-term employment contracts
A fixed-term employee should have a termination date for their employment. The agreement ends on the end date without notice, and neither party must give notice of termination. If an employee wishes to resign before the end of their contract without incurring any repercussions, they may provide a resignation letter to their employer.
At-will employment contract
In an at-will employment contract, employees may terminate their employment without warning or cause as long as there is no illegal reason for doing so.
An employer must define clear termination policies, procedures, and employee handbooks in the employment contract, employee handbook, and employment policies and procedures.
What are the benefits of having an employment contract?
The primary benefit of having an employment contract is that it protects you and your company from legal disputes. The benefits of having an employment contract include the following:
Grounds for Early Termination:
Either party can terminate an employment contract in the event of "good cause." The most common grounds are that the employee's services are no longer required or they have committed a breach of trust or dishonesty.
If an employee wishes to resign, the employer must give them notice before the end of their current period of employment. This notice must be in writing and clearly state what terms will apply when their employment ends.
"Good Reason" Resignation:
The employee may resign for any reason that does not constitute a breach of trust or dishonesty, such as redundancy, relocation, or illness. The employer may also terminate an employee's employment if this is necessary to protect its interests and reputation. In these cases, it should ensure that it makes reasonable efforts to find alternative staff for key roles within its organization before terminating an employee's contract.
Termination "Without Cause"
An employment contract that includes "without cause" termination protection is a great way to protect your business from unexpected termination. This contract stipulates that either party can terminate the relationship without giving a reason. This type of contract is rare, but it is essential to have it in place if you want to provide employees with job security and peace of mind.
Death and Disability
An employment contract with death or disability coverage will help your employees if they get sick or injured on the job. This type of insurance protects you from paying money if one of your employees gets hurt or dies during their employment. It also provides additional benefits for the surviving spouse and family members who are left behind after the death of an employee.
An employment contract with confidentiality provisions protects both parties from revealing information about each other that could be considered confidential by their respective employers during their relationship (e.g., trade secrets). It also allows each party to share information with third parties without fear that it will be shared outside this agreement's scope.
If an employee reaches retirement age, their employer may terminate their employment. However, this must be done by the law and the employee's employment contract.
If an employee resigns because their employer has made a fundamental change to their job without their consent, this may be considered "constructive dismissal." It could include a significant change in job role, salary, or working hours. If an employee believes they have been constructively dismissed, they may be able to claim compensation from their employer.
How to write an employment contract?
Here's a step-by-step guide to writing an employment contract:
Step1 – Identify the Parties
It is necessary to state who enters the employment contract at the beginning of the document. Indicate the company's name and the employee's name.
Step 2 – Term and Probationary Period
Your employment contract should also say how long it will last. It will depend on whether employment is permanent, temporary, or at-will. Additionally, you will want to include how long the employee will need to complete a probationary period.
Step 3 – Employee's Compensation and Benefits
This should include the base salary and when they are paid, like once a week or once a month. In addition, you should tell the employee how much overtime pay the employee will get and what additional compensation they'll get, like commissions.
Step 4 – Non-Compete and Confidentiality
It's a good idea to tell your non-compete clause how many months after your employee leaves. They can't do certain things that might compromise your contract.
The employee will have access to confidential information. If the non-compete clause is in the contract, please let us know if the employee will have access to confidential information.
Step 5 – Employee's Termination and Severance pay
The notice period that the employer gets and the amount of notice the employee has to give should be included when terminating an employee's employment. The inclusion of severance entitlements is another good idea.
How do you update an employment contract?
Various reasons may make it necessary to update an employment contract. For instance, raise an employee's pay and revise their contract. With a compensation agreement, you can easily record a wage change. Using a contract addendum may be necessary for bigger changes.
You can add a supplement to an existing contract to make changes without invalidating it. Consider the case where you have to significantly change an employee's job description, job title, and duties. You will not need to create a new Employment Contract in such a situation if you use a Contract Addendum. The employment contract must be accompanied by a contract addendum, which both parties must sign.
With years of experience in the HR field, Carin has a lot of experience with HR processes. As a content marketer, she translates this knowledge into engaging and informative content that helps companies optimize their HR processes and motivate and develop their employees.
Please note that the information on our website is intended for general informational purposes and not as binding advice. The information on our website cannot be considered a substitute for legal and binding advice for any specific situation. While we strive to provide up-to-date and accurate information, we do not guarantee the accuracy, completeness and timeliness of the information on our website for any purpose. We are not liable for any damage or loss arising from the use of the information on our website.
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