What to Include in an Employment Contract?

An employment contract is a quintessential tool when establishing a professional work relationship. It’s a documented agreement between an employer and an employee outlining the terms and conditions of employment. This guide aims to provide a comprehensive understanding of the various types of employment contracts, their essentials, the importance of updating them, and much more.

Is an employment contract a written contract?

An employment contract is typically a written agreement between an employer and an employee that outlines the terms and conditions of the employment relationship. The contract may include the job title, duties and responsibilities, compensation, benefits, working hours, and other terms both parties agree to. 

While some employment contracts may be verbal, it is generally recommended to have written contracts to avoid misunderstandings and to ensure that both parties are clear on their rights and obligations.

Why an employment background check is crucial before offering a contract?

An employment background check is crucial before offering a contract for several reasons:

Verify Information: 

A background check helps verify the candidate’s information, such as their education, work experience, and professional licenses, ensuring they meet the qualifications required for the position.

Ensure Safety and Security: 

Background checks can help ensure the safety and security of the workplace by identifying any criminal history or other red flags that may pose a risk to the employer, employees, or clients.

Protect Company Reputation: 

Hiring employees without conducting background checks can lead to potential legal issues or damage to the company’s reputation if the employee engages in misconduct or illegal activities.

Compliance: 

Some industries or positions require background checks as part of regulatory or legal requirements to ensure compliance with relevant laws and regulations.

Reduce Turnover: 

By conducting thorough background checks, employers can make more informed hiring decisions, reducing the likelihood of hiring individuals who are not a good fit for the organization, which can help reduce turnover rates.

Overall, conducting an employment background check before offering a contract is essential for mitigating risks, ensuring a safe and secure workplace, and making informed hiring decisions.

What is an Employment Contract?

An employment contract is a legally binding agreement explicitly defining the terms, conditions, rights, and obligations of both the employer and the employee. This agreement can be either verbal or written. However, a written employment contract is preferable as it provides clarity, legal coverage, and a tangible reference point for both parties involved. An implied contract can occur from various scenarios, such as discussions during interviews or historical company actions like promotions or merit increases.

Will employment vs. at-will employment Contracts

Employment contracts and at-will employment represent two approaches to the employment relationship, with varying levels of job security and flexibility for employers and employees.

1. Employment Contracts: 

These are formal agreements between an employer and an employee that outline the terms and conditions of employment. Contracts vary widely in scope and detail but typically include job responsibilities, compensation, benefits, termination clauses, and other relevant terms. Employment contracts are legally binding documents and provide both parties with certain rights and obligations. They can offer job security for employees, as they outline the conditions under which employment can be terminated. However, they also limit both parties’ flexibility to change employment terms without mutual agreement.

2. At-Will Employment: 

At-will employment is a default employment arrangement in the United States, where the employer or the employee can terminate the employment relationship at any time, for any reason, with or without cause. This means that an employer can fire an employee for any reason that is not illegal (such as discrimination), and an employee can quit their job at any time. At-will employment offers flexibility for both parties, as a formal contract does not bind them. However, it also means that employees have a different level of job security than those with employment contracts.

In summary, employment contracts offer more job security but less flexibility, while at-will employment provides more flexibility but less job security. The choice between the two depends on the employer’s and employee’s needs and preferences.

An implied employment contract versus a proposed employment contract

An implied employment contract and a proposed employment contract are two different concepts related to the formation of employment agreements:

1. Implied Employment Contract: 

An implied employment contract is not explicitly stated in writing but inferred from the employer and employee’s actions, behavior, or circumstances. It arises when there is no explicit agreement, but the conduct of both parties suggests that an employment relationship exists. For example, if an employer promises job security to an employee verbally or through actions, an implied contract may be formed even if there is no written agreement.

2. Proposed Employment Contract:

 A proposed employment contract is a written document that outlines the terms and conditions of employment that an employer offers to an employee. It is a formal employment offer specifying details such as job responsibilities, compensation, benefits, and other relevant terms. The proposed contract becomes legally binding once the employee accepts the offer.

An implied employment contract is an informal agreement inferred from the parties’ behavior. In contrast, a proposed employment contract is a formal written offer of employment that becomes binding upon acceptance.

How to outline employment contract terms for legal protection

Outlining employment contract terms for legal protection involves several vital steps to ensure the contract is clear, comprehensive, and legally enforceable. Here are some guidelines to follow:

1. Parties Involved: Identify the parties involved in the contract, including the employer’s legal name and the employee’s full name.
2. Job Title and Description: Specify the employee’s job title and describe their duties, responsibilities, and reporting relationships.
3. Compensation and Benefits: Outline the employee’s salary or hourly rate, payment schedule, and any additional compensation or benefits, such as bonuses, commissions, health insurance, and retirement plans.
4. Work Schedule: Define the employee’s work schedule, including regular hours, overtime requirements, and any flexibility or remote work options.
5. Termination and Resignation: Describe the conditions under which the employment relationship can be terminated, including notice periods, severance pay, and post-employment obligations.
6. Confidentiality and Non-Disclosure: Include provisions to protect confidential information and trade secrets and specify that the employee cannot disclose such information during or after employment.
7. Non-Compete and Non-Solicitation: If applicable, include clauses prohibiting the employee from competing with the employer or soliciting clients or employees after leaving the company.
8. Intellectual Property: Clarify ownership of any intellectual property created by the employee during their employment, ensuring it belongs to the employer.
9. Dispute Resolution: Specify the process for resolving disputes, such as through arbitration or mediation, and the governing law in case of legal action.
10. Compliance with Laws: State that the employment relationship is subject to applicable federal, state, and local laws, including labor and employment laws.
11. Signatures: Require both parties to sign and date the contract to indicate their agreement to its terms.
12. Review by Legal Counsel: It’s advisable to have the contract reviewed by legal counsel to ensure it complies with all relevant laws and provides adequate protection for both parties.

By outlining employment contract terms clearly and comprehensively, employers can help protect themselves from potential legal disputes and ensure that the employment relationship is based on mutual understanding and agreement.

What are implied contracts versus fixed-term employment contracts?

Implied contracts and fixed-term employment contracts are two different types of employment arrangements:

1. Implied Contracts: 

An implied contract is not explicitly stated in writing but is inferred from the actions, conduct, or circumstances of the parties involved. In an employment context, an implied contract may arise when an employer’s actions or statements suggest that an employee has job security or certain rights beyond what is stated in a formal written agreement. For example, if an employer consistently gives positive performance reviews and assurances of continued employment, an implied contract for job security may be created, even if there is no written agreement to that effect.

2. Fixed-Term Employment Contracts: 

A fixed-term employment contract is a written agreement between an employer and an employee that specifies a definite period of employment, typically for a specific project or for a predetermined duration (e.g., one year). Unlike an implied contract, the terms of a fixed-term contract are explicitly stated in writing, including the start and end dates of employment. These contracts may be renewed or extended based on mutual agreement between the employer and employee.

In summary, implied contracts are based on implied promises or understandings between the parties, while fixed-term contracts are formal written agreements with specific terms regarding the duration of employment. Both types of contracts can have legal implications and should be carefully drafted and understood by all parties involved.

Best practices of an employment agreement for a positive working relationship

Creating an employment agreement that fosters a positive working relationship requires careful consideration of the terms and conditions governing the employment relationship. Here are some best practices for drafting an employment agreement:

1. Clear and Concise Language: Use clear and straightforward language to ensure that both parties easily understand the terms of the agreement.
2. Detailed Job Description: Provide a detailed description of the employee’s duties, responsibilities, and reporting relationships to avoid misunderstandings.
3. Compensation and Benefits: Clearly outline the employee’s compensation, including salary, bonuses, and any other benefits they are entitled to receive. Specify the frequency of payment and any conditions or criteria for receiving bonuses or other incentives.
4. Work Schedule and Hours: Clearly define the employee’s work schedule, including start and end times and any overtime or weekend work expectations.
5. Probationary Period: If applicable, specify any probationary period during which the employee’s performance will be evaluated before full employment status is granted.
6. Termination Clause: Include a termination clause that outlines the circumstances under which either party can terminate the employment relationship and any notice requirements.
7. Confidentiality and Non-Disclosure: Include provisions regarding protecting confidential information and trade secrets and any restrictions on the employee’s ability to disclose or use such information.
8. Non-Compete and Non-Solicitation: If applicable, include provisions prohibiting the employee from competing with the employer or soliciting clients or employees for a specified period after the termination of employment.
9. Dispute Resolution: Specify the process for resolving disputes that may arise between the employer and employee, such as through mediation or arbitration.
10. Compliance with Laws: Ensure the employment agreement complies with all relevant federal, state, and local laws and regulations governing employment relationships.

By following these best practices, employers can create an employment agreement that sets clear expectations for both parties and helps to establish a positive and productive working relationship.

Employment Contracts for Independent Contractors

Employment contracts for independent contractors, often referred to as contractor agreements, are crucial documents that outline the terms of the working relationship between a business or individual hiring a contractor and the contractor providing services. While not an employer-employee relationship, these agreements clarify the scope of work, payment terms, and other essential aspects of the arrangement. Here are crucial elements to include:

1. Scope of Work: Clearly define the services the contractor will provide, including specific deliverables, deadlines, and any limitations on the work.
2. Payment Terms: Outline how and when the contractor will be paid, including rates, invoicing procedures, and applicable taxes or fees.
3. Relationship: Specify that the contractor is an independent contractor and not an employee, clarifying the nature of the relationship for legal and tax purposes.
4. Confidentiality: Include provisions to protect confidential information and trade secrets that the contractor may have access to during their work.
5. Intellectual Property: Specify who will own the intellectual property rights to any work created by the contractor during the engagement.
6. Term and Termination: Define the duration of the agreement and the conditions under which either party can terminate the contract.
7. Insurance and Indemnification: Address whether the contractor must carry insurance and who is responsible for any liabilities arising from the work.
8. Dispute Resolution: Specify how disputes will be resolved, such as through mediation, arbitration, or litigation.
9. Non-Compete and Non-Solicitation: Include any restrictions on the contractor’s ability to compete with the business or solicit its clients or employees.
10. Governing Law: Specify the jurisdiction whose laws govern the agreement in case of legal disputes.
11. Miscellaneous Provisions: Include other relevant provisions, such as confidentiality, assignment, or severability clauses.

Employers should consult legal counsel to ensure their contractor agreements comply with relevant laws and regulations and adequately protect their interests.

How long must a business wait until an employee agrees to a typical employment contract?

No specific waiting period is required for an employee to agree to a typical employment contract. Once an employer presents an employment contract to an employee, the employee can review the terms and either accept the agreement, negotiate its terms, or reject the offer. The timing of this process can vary depending on both parties’ circumstances and preferences.

Sometimes, an employer may set a deadline for the employee to accept or reject the offer, especially if there is a need to fill the position quickly. However, it is generally advisable for both parties to take the time needed to carefully review the terms of the contract and negotiate any unclear or unacceptable terms.

Types of Employment Contracts Based on Duration

Employment contracts can fall into different categories, primarily based on the duration of the employment. Here are the main types:

1. Permanent Full-Time Employment Contract

A permanent full-time employment contract is a conventional type of agreement. It outlines a long-term, ongoing relationship between an employer and an employee, with the employee working full-time hours.

2. Limited-Term Employment Contract

Conversely, a limited-term or fixed-term employment contract outlines an employment relationship for a specific period. This type of contract is generally used for temporary roles, such as covering maternity leave or completing a particular project.

3. Trial Period

Often, employment contracts may include a trial period or probationary period clause. This period allows both parties to assess the suitability of the role for the employee. The contract can be terminated with minimal notice if either party is unsatisfied during the trial period.

4. Full-Time vs. Part-Time

The contract should also specify whether the employee is employed full-time or part-time. Full-time employees typically work between 35 to 40 hours per week, while part-time employees work fewer hours.

Understanding the Essentials of Written Employment Contracts

A well-structured employment contract should include several key elements to ensure clarity and mutual understanding. Here are some of the essential components:

1. Job Description

The contract should clearly outline the job duties and responsibilities of the employee. This description clearly explains what is expected from the employee during their employment.

2. Compensation

The contract must detail the compensation structure for the employee. This includes the base salary or hourly wage and other components such as bonuses, commissions, and any applicable overtime pay.

3. Benefits

The benefits offered to the employee should also be outlined in the employment contract. These may include health and dental insurance, retirement plans, vacation time, and other perks.

4. Confidentiality Clause

Many employment contracts include a confidentiality clause, which prohibits employees from disclosing sensitive company information during and after employment.

5. Duration of Employment

The contract should state whether the employment is fixed or ongoing. The start and end dates should be specified if it’s a fixed-term contract.

6. Grounds for Early Termination

The contract should also outline the grounds for early termination of the employment relationship. This includes situations allowing the employer to terminate the contract “for cause.”

Importance of Updating Employment Contracts

Over time, as the business environment and employment laws evolve, it’s essential to update employment contracts to reflect these changes. Updates may be necessary due to changes in job roles, compensation structures, company policies, or regulatory requirements. Making sure contracts stay current can help avoid potential misunderstandings or legal issues down the line.

Critical Considerations with Employment Contracts

While employment contracts serve as a valuable tool, they also come with some potential challenges or pitfalls to be aware of:

1. Contract Breach

Since employment contracts are legally binding, there can be severe consequences if either party breaches the contract. This could result in legal action and potential damages.

2. Employee Classification

It’s crucial to classify employees in the contract correctly. Misclassifying an employee as an independent contractor, for example, can lead to legal issues and penalties.

3. Non-Compete Agreements

Many employment contracts include a non-compete clause, which restricts the employee from working for competitors or starting a competing business for a certain period after leaving the company. However, the enforceability of these clauses varies by jurisdiction, and in some places, they may be considered unenforceable.

How do you avoid a contract dispute?

To avoid contract disputes, consider the following strategies:

1. Clear and Precise Language: Use clear, concise language in your contracts to avoid ambiguity and misinterpretation.
2. Detailed Scope of Work: Clearly outline the scope of work, deliverables, and timelines to manage expectations.
3. Mutual Understanding: Ensure both parties clearly understand their obligations and responsibilities under the contract.
4. Define Key Terms: Clearly define critical terms such as “termination,” “breach,” and “default” to avoid misunderstandings.
5. Review and Negotiation: Carefully review contracts before signing and negotiate fair and reasonable terms with both parties.
6. Document Changes: If there are any changes to the contract, document them in writing and have both parties agree to the changes.
7. Compliance with Laws: Ensure the contract complies with relevant laws and regulations to avoid legal issues.
8. Keep Records: Maintain thorough records of all communications, agreements, and changes related to the contract.
9. Dispute Resolution Clause: Include a dispute resolution clause specifying how disputes will be resolved, such as through mediation or arbitration.
10. Legal Review: Seek legal advice when drafting or reviewing contracts to ensure they are legally enforceable and protect your interests.

Following these steps can reduce the likelihood of contract disputes and help ensure a successful business relationship.

Bottom Line

Employment contracts can be complex, and it’s often wise to seek legal advice when creating or reviewing these agreements. With careful consideration and proper legal guidance, these contracts can serve as an effective tool for managing employment relationships and protecting both employers and employees.

David Miller