1. The Definition: What is an Employment Contract?
An Employment Contract memorializes a legal business relationship between two parties — the employer and the employee. The employee is being hired to perform certain functions and responsibilities, and the employer often provides resources and training for the employee to succeed.
This agreement further confirms that the hired person is an employee for legal and tax purposes.
A simple contract will identify the following essential elements:
- Employee: Name of person being hired to work.
- Employer: Name of the company hiring the employee.
- Position: Title and description of the role and responsibilities of the employee.
- Compensation: Amount of money paid per hour, week, or monthly, overtime or commission, and the dates compensation will be paid.
- Hiring Date: When the employee will start working for the employer.
- Term: Indefinite (or at will) or fixed amount of time the employee is expected to work.
- Benefits: Details about disability protection, health insurance, vacation, sick days, paid time off (PTO), maternity leave, and other perks.
However, most contracts also include at least one of these additional clauses:
- Confidentiality: Trade secrets, client lists, and sensitive information cannot be shared while working for this employer or future employers. (See our Employee Confidentiality Agreement)
- Non-compete: Employees will not work for competing companies or compete with the employer if they leave, including misusing confidential information. Employers can include a non-compete provision in the contract.
- Non-solicitation: Employees may not recruit other co-workers to join them when they leave or ask a company’s clients or customers to follow them to their new company. However, if you live in California, Montana, North Dakota, and Oklahoma, restrictive covenants are not allowed, and employees are allowed to work for competitors.
- Reimbursements: The company will pay back employees for expenses related to the job, like a cell phone, business travel, or relocation.
- Probation Period: The employee is essentially “on trial” and may be terminated if deemed unsuitable.
- Termination: The reasons why the employee relationship may be ended.
- Work for Hire: Anything created by the employee at work belongs to the company.
A Contract of Employment may also include an “agency” provision, which clarifies that the employee does not have the authority to enter into a contract on behalf of the employer unless there is written consent.
As a reference, people refer to this document by other names:
- Employment Agreement
- Agreement of Service
- Contract of Employment
- Contract of Service
Hiring Employees vs. Hiring Contractors
Below is a table explaining the general differences between a hired employee and an independent contractor. Make sure you understand the differences before signing an employment contract.
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If you are unsure whether an employer-employee relationship exists, check out the 20 factor test identified by the IRS.
What is the difference between a “contract of services” and a “contract for services”?
How does a two or three letter word change the meaning of a document? A “contract of services” usually refers to a traditional employee agreement between an employee and an employer. In contrast, a “contract for services” is an independent contractor agreement.
Use an Independent Contractor Agreement if you hire a business or self-employed person to accomplish a short-term project or task.
The Consequences of Not Using An Employee Contract
Without a written contract, an at-will employment contract is usually implied. In other words, the employee is free to quit at any time, and the employer is free to fire the employee at any time.
Once a Contract of Employment is signed, the “covenant of good faith and fair dealing” kicks in, and employers must treat employees fairly.
Here is a partial list of the consequences that both employers and employees can prevent with a written contract:
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The Fair Labor Standards Act (FLSA) does not require employers to provide a minimum number of paid vacations, sick leave, or federal holidays. However, state labor laws may differ; generally, such benefits can help attract and retain employees.
On average, Americans have two weeks of paid vacation and 10 paid federal holidays during their first years of employment. The Family and Medical Leave Act (FMLA), however, does require employers to provide unpaid leave and protect jobs in certain situations like personal or family illness and pregnancy.
Laws protect employees from being fired without a good reason and ensure they are paid according to the terms of the Contract for Employment. If disagreements arise in the future, a written contract allows both parties to remember the details originally agreed to at the beginning of the working relationship.
Written Contracts of Employment also help employers by requiring employees to give a certain amount of notice before leaving so they can help hire or train their replacement.
In addition, by documenting clear expectations and job responsibilities, this document allows employers to discipline and fire employees who do not meet those work performance standards.
