An employment contract is a legal requirement for organizations in various sectors. It is signed when an employee is hired, and henceforth, specific standards are expected of them while working for the organization. Employment contracts also assist employers by reducing employment liability concerns.
This article aims to guide an employer on how to draft a standard contract when hiring someone. It also discusses their types and answers common questions. Free downloadable employment contract templates are also provided. These can be easily customized, which helps save time when drafting one.
What is an Employment Contract?
An employment contract, sometimes referred to as an employment agreement or contract of employment, is a legally binding agreement signed between an employer and a newly hired employee outlining the terms and conditions of the employee’s tenure.
Both parties sign the contract once the job offer is accepted. This is usually done before the employee’s first day of work or within the first few weeks of their employment. It details the duties and responsibilities of the employee, the duration of employment, the rate of pay, and any benefits or perks to which the employee is entitled. An employment contract may also incorporate clauses on confidentiality, non-competition, and intellectual property. Both parties must thoroughly review and understand these legal terms before signing.
Employment Contract Templates
Benefits of an Employment Contract
Besides being a legal requirement, there are several benefits to having a properly written contract. It defines the duties and responsibilities of the employee and the pay rate, which can help avoid misunderstandings and disputes and protect both the employer and employee from legal repercussions. It can protect the employer against employee lawsuits or claims of unfair treatment. The contract can be tailored to the specific needs and circumstances of the organization and the job requirements. If either party breaches the contract terms, the other party may have legal recourse to seek damages or other remedies.
What Should Be Included in an Employment Contract?
For a contract to be legally valid, it must contain all the necessary information regarding the job, and all terms and conditions mentioned in it should comply with local labor laws. It should provide all information with absolute clarity and be exhaustive to avoid any uncertainty.
The following elements are contained in a contract when hiring someone:
Both parties’ information
State the names of the parties entering the contract. This information will include the name of your organization and the employee being hired.
This clause may be presented as shown below:
Parties to the Contract: The Employee [Employee Name] and [Company Name] (hereinafter collectively referred to as the “Parties”).
Job title and description
Specify the exact job description and list the responsibilities and tasks required while employed. This ensures the candidate is aware of what is expected of them. If you are hiring multiple candidates for one position, you can reuse the same contract since the title and description are similar.
This description may be presented in the following manner:
Position and Duties: The Employee shall be employed as [Job Title] and perform the duties and responsibilities described in the attached job description.
You can allocate percentages to each task to accurately illustrate the workload, for instance:
Position and Duties: The employee shall be employed as [Job Title] for:
–60% auditing of company books
–40% sales tracking
Pay compensation
Specify how much the employee will be compensated hourly, monthly, or annually. Also, indicate how often the employee will be paid. This amount should be the one you and your employee agreed upon when they accepted the job offer. You may also include any overtime allowances the employee qualifies for.
You can present the compensation as shown:
Compensation: The Employee shall be paid a salary of $[Pay Amount] per [Pay Period], payable on the [Day] of each [Pay Period].
Date of commencement
The start date means the first business day on which a participant is an active, regular employee of any company. For all new employees, the date of the contract and the date of commencement will be the same.
You can include the commencement date in the format shown below:
Start Date: The employee shall commence employment on [Start Date] and will continue until [End Date] or until terminated by either party with [Notice Period] written notice.
Termination
Labor agreements also specify the circumstances that warrant the termination of the contract and the notice period required for ending the contract prematurely.
For example:
Termination: Either party may terminate this contract at any time with [Notice Period] written notice. The employer may terminate the agreement immediately for cause, such as theft, fraud, or violation of company policies.
Benefits
List all the benefits your employee is eligible for, such as health insurance, paid time off, and retirement benefits. The benefits are usually discussed before accepting the job offer. These benefits should be presented in a detailed manner without any ambiguity.
These benefits may be presented as follows:
Benefits: The Employee shall be eligible for the following benefits as described in the attached policy:
–Health Insurance of up to $[Dollar Amount] per year.
–401 (k) pension plan deductible from your pay at a monthly rate of $[Dollar Amount].
Confidentiality clause
Include a confidentiality clause, also known as a non-disclosure agreement (NDA), in the employment contract. The protected information under this clause can include trade secrets, business plans, financial information, and other sensitive information. Additionally, you may ask the candidate to sign an NDA during the interview to prevent them from sharing any information they acquire during the hiring process.
The confidentiality clause may be presented as follows:
Confidentiality: The Employee shall keep confidential and not disclose to any third party any proprietary or confidential information of [Company Name] without the prior written consent of [Company Name].
Non-compete clause
Include a non-compete clause, also known as a restrictive covenant, to prohibit your employee from working for a competing organization or starting their own competing business for a certain period of time after leaving employment. This clause protects your legitimate business interests, especially customer relationships and other confidential information. It is important to note that a non-compete clause must be reasonable regarding duration, scope, and location. Otherwise, it may not be enforced by the courts.
Non-Compete: During the term of this contract and for a period of [Duration] years thereafter, the Employee shall not, directly or indirectly, engage in any business that competes with the business of [Company Name].
Non-solicitation clause
Include a non-solicitation clause, a subset of a non-compete clause that forbids your employee from hiring coworkers after they leave your company or working with your clients and suppliers without your permission. Non-solicitation clauses are generally enforceable in most states, but their enforceability depends on factors such as the clause’s duration, scope, and location. Like non-compete clauses, non-solicitation clauses must be reasonable to be enforceable.
This clause may be presented as follows:
Non-Solicitation: During the term of this contract and the restricted period [ mention the duration], the Employee shall not solicit any client or supplier of [Company Name] to provide goods or services that compete with the business of [Company Name].
Probation period
Specify a period during which your employee’s performance is evaluated to determine whether they are suitable for the role. Mention that during the probation period, you may terminate employment without notice or pay.
This period may be presented as shown:
Probation Period: This contract will include a probation period of [Length of Probation Period] months. During the probation period, the Employee’s performance will be evaluated by the organization to determine whether they are suitable for the role. At the end of the probation period, the Employer will review the Employee’s performance and decide whether to confirm their employment or terminate it.
Work-for-hire clause
If needed, include a provision that specifies that any work prepared by the employee during their employment belongs to the company. This clause gives you the right to use, reproduce, and distribute the work as the sole owner of the work.
For example:
Work-For-Hire: Any work prepared by the Employee during the course of their employment with the Employer, including but not limited to written materials, designs, artwork, and other creative works (the “Work”), shall be appraised as “work made for hire” as defined by the Copyright Act of 1976.
The Employer will be the sole and exclusive owner of all copyrights and other intellectual property rights in the work and will have the right to use, reproduce, and distribute the work as they see fit.
Agency provision
Specify the circumstances under which your employee may act as your agent or representative if the employee is interacting with clients or customers as part of their duties. This provision clarifies your employee’s authority to make decisions or act on your behalf.
What Should be Included in an Employment Contract?
Agency Provision: The Employee is authorized to act as an agent or representative of the employer during their employment period. The Employee is authorized to make decisions and take actions on behalf of the employer, subject to the following conditions:
i. The Employee must act in good faith and in the employer’s best interests.
ii. The Employee must adhere to the policies and procedures of the employer.
Other terms and conditions
Include any other terms and conditions you and your employee agreed to before accepting the job offer. For example, you may specify that either party cannot amend the contract after signing, as shown:
Terms and Conditions: This contract represents the parties’ entire agreement and replaces all earlier agreements or understandings, whether oral or written. This contract may not be amended or modified except in writing, signed by both parties.
Types of Employment Contracts
Different types of employment agreements exist to serve different purposes. The differences in state laws and job requirements are the main causes of the contracts’ variations.
The following are the different types of contracts:
Permanent employment contract
A permanent contract is one where an employee is hired to work on an ongoing basis. These contracts do not have a fixed end date. The employee is expected to continue working for the employer until either party decides to end the employment relationship. They are also called indefinite contracts.
Temporary or fixed-term employment contract
When the employee is hired to work for an employer for a specific period with a predetermined start and end date, then their contract is temporary or fixed-term. Temporary or fixed-term contracts are commonly used to fill short-term staffing needs or cover the temporary absences of permanent employees.
Executive employment contract
An executive employment contract is a legal agreement between an employer and a high-level manager or leader within a company, outlining the terms and conditions of their employment. These contracts are often more complex and detailed than standard ones, as they involve higher levels of responsibility and compensation.
At-will employment agreement
Under an at-will employment agreement, either party can terminate employment at any time, for any reason (with some exceptions like discrimination, whistleblower protection, etc.), or for no reason at all. This means that the employer does not have to present a cause for terminating an employee, and the employee does not have to provide a reason for leaving the organization.
Independent contractor agreement
An independent contractor agreement is a legal contract between a business and an independent contractor. Such contracts are usually used for a specific project. The agreement typically details the scope of the work, the contract’s length, payment terms, and any other requirements or deliverables related to the project.
Internship agreement
An internship agreement is a contract between an employer and an intern. Internships are usually unpaid work, and the intern offers their services in exchange for gaining practical experience or earning university credits. The contract for an internship includes the start and end dates, working hours, responsibilities, and termination conditions.
Subcontractor agreement
A subcontractor agreement is a legal contract between a company (the “contractor”) and an independent contractor (the “subcontractor”) that outlines the terms and conditions of a project the subcontractor is handling. A “subcontractor” is hired to perform a specific task or project as part of a larger project or contract, usually in the construction industry.
Labor union contract
Labor union contracts are agreements between the labor union and the employer. Union members refer to their union contracts when they have questions about their wages, benefits, or any disputes. These contracts outline job descriptions, duties, vacation time, PTO, benefits, and pension details.
Zero hour contracts
These contracts are generally for irregular work like babysitting or daily labor. These contracts specify that the employee will be contacted when work will be available and the minimum number of work hours. These contracts do not offer any employee benefits.
Frequently Asked Questions
When should an employment contract be issued?
A contract should be issued before an employee begins working for the organization. Each state has its own laws and regulations regarding the employment of labor. These laws may include additional employee protections and minimum wage laws that are more favorable than federal laws. Some states have specific requirements that must be included in employment contracts, while others may have regulations prohibiting certain clauses. Consult with a legal professional familiar with state laws to ensure compliance with the relevant regulations when drafting them.
How can an employment contract be updated?
Either party can amend an employment contract by making changes to the original document and having both parties sign the revised version. If the parties want to make significant changes to the terms of the contract, they may have to draw a new one. Alternatively, both parties may sign an addendum, a separate document attached to the original contract that outlines any changes or additions to the terms of the agreement.
What happens if any of the parties breaches the contract?
If any party breaches the contract, the other party may seek legal action to enforce the terms of the agreement or to seek damages. The specific legal remedies will depend on the terms and the nature of the breach. A contract may sometimes include alternative dispute resolution methods such as arbitration or mediation.
What is the difference between an employee and an independent contractor?
The primary distinction between an employee and an independent contractor is the structure of the employee’s working relationship with the organization. Employees are paid by the company, receive benefits, and only work for that particular business. In contrast, independent contractors are considered self-employed and do not receive any mandatory employment benefits. Employees are typically paid a salary or an hourly or weekly wage, while independent contractors are paid a flat fee for their services. Moreover, independent contractors can work for multiple companies at the same time.
Can employment contract templates be edited?
Yes, a hiring manager can edit the templates according to the company’s specific needs. Employment contract templates are frequently used to create a custom employment contract. A hiring manager can modify them to include the particular terms and conditions relevant to a specific employment relationship.