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When a job applicant accepts a position, they may create either an at-will employment relationship or they may enter into a written employment contract. An employment contract is an agreement that creates an employment relationship for a specific amount of time listed in the contract. The purpose of the employment contract is to outline every aspect of a job, such as salary or hourly wage, holidays, sick leave, paid vacation, health benefits, and the duties of the employee. This written agreement helps protect the rights of the employee by the obligations of the employer.
If a contract is offered, it should be signed by both the employer and the employee before the new employee begins work. The contract should be carefully read so that the employee understands their obligations and their rights before starting work.
Written employment contracts can be beneficial whether you are a business owner or an employee. Having a contract in place before hiring can help businesses avoid legal issues down the road by ensuring everyone understands workplace policies, duties and expected behavior of the employee, pay, and benefits. A contract provides each party with a certain level of protection because its terms may limit the ability of either to terminate the employment relationship. ven if contracts are put in writing, their terms do not necessarily override an employee’s rights.
Additionally, an employer cannot change an executed contract without the permission of the employee. Employees must be informed of any changes to the contract in writing within a month of the proposed change.
Here’s how this differs from at-will employment. With at-will employment, both the employee and employer may end the relationship at any time for almost any reason. At- will jobs are generally offered on the spot or an offer letter may be drafted by human resources. The letter will specify that the relationship is at-will.
An employment contract may also be called a(n):
While contracts and handbooks have a lot in common, they are separate documents. Company handbooks, also known as an employee handbook, provide more detail about company policies than an employment contract. It explains information such as meal and rest periods, break periods, drug and alcohol use, dress code, and other policies related to the company. Employment contracts are written to specifically cover the job duties, salary information, benefits provided, and term of employment for a single employee.
Arbitration clauses are common inclusions in an employment contract. It prevents employees from suing their employers. This issue recently made national headlines with the reporting of numerous allegations of sexual harassment and gender discrimination claims. By signing arbitration clauses, employees forfeit their right to sue their employer, waive their right to appeal, and often forfeit the right to participate in a class action lawsuit. However, arbitration clauses aren’t always upheld. So, talk with a lawyer if you have questions about how to either word an arbitration clause or to have one interpreted to determine whether you should sign the contract.
Essentially, the clause says that when there is a dispute related to the contract, both parties agree to have a third party, known as an arbiter or arbitrator, listen to both sides and make a decision. Both parties agree to be bound by the decision made by the third party. Generally, both parties are also allowed to have their own attorney present. Yet, some agreements will demand that the losing party pay the attorney fees for the winning party. So, pay close attention and understand what you’re signing.
Arbiters are less expensive (generally!) than hiring a lawyer and going to trial. Using an arbitrator is often less time-consuming, too. How the arbitrator is chosen is generally explained in the arbitration clause. It usually also states who will pay for arbitration.
An employment contract has the potential to link an employee’s responsibilities to the greater mission of the company. However, employers often fail to highlight this link.
For example, a survey by Robert Half Management Resources found that less than half of employees indicated they always understand the role of their work in their company’s mission. Additionally, 64% of respondents aged 18-34 indicated they wanted clarification regarding how their daily responsibilities impact the company.
Similarly, an extensive study by Stanford University found that contracts contained language explaining the connection spent more time on tasks and generated more original ideas: https://www.gsb.stanford.edu/insights/beware-workplace-policies-kill-motivation
Employment contracts are an essential element of the hiring process. This guide covers everything you need to know about drafting one (as an employer) and signing one (as an employee). While it may seem straightforward, if not properly written, many legal issues can arise. This guide covers how to write the contract, amending it (if necessary), the difference between an contract and a company handbook, the legality of verbal contracts, the various terms included (explicit and implied), and much more.
Employment contracts may be needed by companies or new hires depending on the specifics related to the open position. The most common individuals who need an employment contract to modify for an open position include:
There are various types of employment offered to job seekers. An employment contract may list a specific type of employment offered by the employer. Here are a few of the most common types.
Permanent Full Time
With permanent full time employment, you are required to meet the hours considered full time by the company. Because the position is permanent, there is no pre-set date when the position or the employment contract will end. It is essentially continuous.
Permanent Part Time
With permanent part time employment, you are required to meet a certain number of hours that culminate to less than full time. The position is permanent. This means that there is no predetermined date set for the position to end.
Fixed Period or Term
If you accept a position that is noted as “fixed period” or “term,” this means that there is an already-determined date that the position will no longer exist. That is the date that the employment contract and job position will expire.
Temporary vs Permanent Contracts
It’s also common to see either the term “temporary contract” or “permanent contract.” When a contract is temporary, it means essentially the same thing as what you learned above about fixed terms. There is a specific time period that the employer needs the employee for. There is a date where the contract and relationship will end. For example, if a business needs someone to handle the workflow of an employee leaving for maternity or paternity leave and they will be gone from the company for six months, the person coming in to handle the position will receive a temporary contract for six months.
A permanent contract, as you learned above in both permanent full-time and permanent part-time, means that there is no defined date that causes the contract to end. So, the contract is on-going. If you want to terminate the contract, you would need to do so by abiding by the terms of the contract.
Contact employees are becoming increasingly popular in many industries. There are important distinctions between contract and permanent employees. They include:
Employment contracts and compensation agreements can be structured in many ways. Additionally, they can include stand-alone pages that act as additional agreements. Sometimes, instead of additional agreements, you can see the following as clauses within the contracts. Below, you’ll learn about the most common agreements that are included inside of or additional requirements of employment contracts and compensation agreements.
A confidentiality agreement is often included in an employment contract or compensation agreements. It could be an additional document that requires your signature or it could be worked into the language of the existing contract.
When you sign a confidentiality agreement, you’re promising that you will not divulge secrets or business information about processes, plans, data, or other company information. A confidentiality agreement generally lasts throughout the life of the contract. Read it carefully, though, because sometimes they will last for a certain amount of time after the contract ends. How long it may last at the end of the contract depends on applicable state law.
A non-competition agreement is also referred to as a non-compete. It can stand alone as part of the contract package or it can be included as a clause within the master employment contract. When you sign this document or a contract with this clause, you promise that you will not take part in certain jobs, take an additional job, or start your own business (or take on additional contracts) that are similar to what you’re doing for your employer. You’re also promising to not try and steal the employer’s clients or customers. Generally, a non-compete is limited in geographical scope and in the amount of time that it can be enforced after the employment contract is terminated.
Ownership of inventions
Before you sign an employment contract, make sure that you understand what happens to your rights if you invent something that is useful to the employer. Many employment contracts state that if the employee invents something, the employer gets the right to the invention. This means that the employer has the legal right to get the invention patented and use it for their own benefit. You may or or may not receive any sort of compensation for the invention. You will also be required to promise that you will keep the information related to the invention confidential.
Most employment contracts include a clause that is entitled “Best Efforts.” By signing the contract, you promise to work to the best of your ability and to be loyal to the company. The clause may include additional requirements such as a duty to provide the company with suggestions or recommendations, as you develop them.
If you sign an employment contract with a provision for exclusive employment, you’re promising that you won’t work for anyone else in the business or in a similar type of business for as long as your contract is valid. You may also be forbidden by this clause to engage in volunteer work if it is in a related field. If volunteer work is important to you, make sure that you understand the limitations of this provision.
No additional compensation
This clause means that if you become an officer of the company or if you become an elected director, you will not receive any additional compensation outside of what is listed in your contract. Understanding this clause is important because you want to weigh your ability to climb the corporate ladder with your need to financially improve your life.
No authority to contract
When you sign an employment contract with this clause, you’re agreeing that you have no ability to enter into a contract on behalf of the company without written consent of the company.
Practically every employment contract includes a termination clause. It explains how the contract may be ended. It could be as simple as either the employer or the employee providing a certain amount of written notice. It almost always includes a provision that if the employee violates the terms of the contract, the employer will terminate the agreement. Sudden disabilities, meaning physical or mental limitations that the employee did not have when they signed the contract, may also be covered, particularly if the disability will hinder the successful completion of the job.
Arbitration, as we briefly discussed, is a clause that is found in many employment contracts. It means that instead of going to court, the employer and employee agree to have a third party, an arbiter or arbitrator, handle the dispute. It often states how the arbitrator will be chosen, who is responsible for paying the arbiter, and whether the losing party will pay for the attorney fees of the winner. Generally, the clause also states that what the arbitrator decides is binding. This means that neither party may appeal the decision or sue in court.
Choice of law
Choice of law is an important clause in employment contracts. It lists the state where the employment and contract laws will take precedence. If an employee lives in the same state where the business is located, choice of law can be relatively simple. However, corporate headquarters of a business may be in another state. That state may have more business-friendly judges, courts, and laws than the state where the employee works. If an employee works from a remote location, choice of law becomes even more important because it highlights the state (and the laws!) that should be used if there is a contract dispute. Even if the lawsuit is filed in a separate state, the laws that will be used to interpret the contract will be found under this clause. This, too, is important because it enables employees to file the lawsuit in one location. If the court agrees to hear the claim, it will look at the state laws mentioned in this section.
An employment contract consists of several main components:
There are a few ways you can develop an employment contract. You can find a free sample employment contract for your industry or one that is based on your state laws. You could write one from scratch. You could hire a lawyer to write a basic employment contract template that you can continue to use.
A standard employment contract contains the components described above. Although the details will differ from company to company, the basic outline is the same. Let’s look at some of the finer details, known as contractual terms, that you’ll also need to include.
The following list includes the essential contractual components of this sort of contract:
There are several implied terms involved in the contract, regardless of whether the terms are put in writing. Those include:
Creating a remote work policy
Many employers permit, or even encourage, their employees to work remotely. However, if you plan to offer that option to your workers, it is important to have a clear policy in place to ensure that the expectations and guidelines are clear to any employee who utilizes he policy.
Your remote work policy should be an addition to the standard employment contract. However, due to the nature of remote work, or for entirely remote positions, the remote work contract may contradict elements of the employee contract. Be sure to address which document supersedes the other in the event of a contradiction. Areas with likely contradiction include hours of work, where to report to work, confidentiality, conduct, etc.
What are non-compete, non-solicitation, and confidentiality clauses?
Non-compete, non-solicitation, and confidentiality clauses are important components of employment contracts. It’s important that you read and understand these clauses (and how they affect you) before you sign the document. This is important because once you sign, you’re legally bound to the contract, including these clauses.
Like any contract, there are advantages and disadvantages associated with an employee contract. Businesses and new hires should weigh this information before entering into the contract. Once it is signed by both parties, it is legally binding.
The most common advantages of entering into an employee contract include:
The disadvantages of using an employee contract include:
There are several common issues with these contracts you want to avoid. Those include:
What happens if an employer doesn’t provide new hires with a contract?
There is no legal requirement for an employer to use a contract for any new hire. However, employers must furnish an employee with a written statement (generally referred to as a job offer) within two months of their start date. Failure to do so opens up employers to potential legal repercussion. If the job in question is short-term, spanning less than 2 months, employers must give an employee an agreement that explains the term before it ends.
At Will Employment Concerns
As you read at the beginning of this guide, there is a difference between employment contracts and at will employment. If there is no contract, an employee is generally considered an at will employee.
There are two main concerns associated with at will employment. For employees, the concern is that their employer can terminate their employment for close to any reason at any time. The termination may not be considered “wrongful.” Wrongful termination means that there was an illegal reason, such as discrimination or retaliation, for firing the employee. For employers, the concern is that even their best employees can simply quit and walk away from the job without notice.
We do not recommend verbal agreements; all contracts should be put in writing. Putting contracts in writing protects you if you're sued for breach of contract or for other reasons related to the contract. A written contract reduces the likelihood of misunderstandings and a “he said / she said” situation.
With that in mind, an oral contract is legally binding, if you can prove one was made.
As an employee, if you are given a verbal contract, you are still entitled to a written statement of employment, generally referred to as an offer letter or a written job offer. It should include the same details and terms as any other employment offer. At the very least, the existence of the statement can prove that you were offered a position with the company. Whether oral or in writing, you shouldn't enter into a contract unless you can do so in good faith.
Legal ways to negotiate employee contracts (employers)
Here are some important tips for negotiating contracts with your new employees.
What is a probationary period?
A probationary period is like a test period. The employee works for a certain amount of time, generally 90 days, and is paid for their work. During the probationary period, the employer evaluates whether the employee has the skills and abilities to successfully perform the job. The employer has the right to end the relationship between themselves and the employee during the probationary period without notice and without the obligation to provide severance pay.
Amending an employment contract
If you need to change the terms of an employment contract, we recommend you speak to the employee. Explain the reasons you need to change the contract and see if you can come to an agreement. This encourages goodwill and allows employees to express their ideas related to the amendment.
If you can agree to changes, be sure to document the new terms of the contract. Both parties should date and sign the new contract or amended sections.
If employees do not agree to amend their contract, you have the following options:
Employee contracts are the first, and one of the most important, agreements your business will enter into with an employee. They establish a relationship with employers and their workers and set a tone for the nature of that relationship moving forward. It’s imperative that you handle the contract process and negotiations with thought, specificity, and care. It is also important you avoid mishandling the contract process in a manner that could lead to legal action. We hope provides you with the tools you need to do so.
Forced Arbitration by State
Our team created a ranking of US states with the greatest number of businesses who have forced arbitration agreements and class action waivers included in their employment contracts. Based on research that determined the percentage of small and large private sector firms with these clauses in the US, we calculated totals by state and ranked them from most to least.
How Forced Arbitration Loses to Litigation in America
Our team wanted to see how difficult it was for an employee to win a claim against an employer in forced arbitration versus litigation. We determined a final percentage for the level of ease for each by weighting the following factors evenly into a total score: acceptance rate for case, employee win rate, % of claim awarded to employee if ruled in favor of, # of small settlements won, # of large settlements won, and employee win rates for claims based on sex, disability, race, and sexual orientation.
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