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An employment contract is used in the workplace as an agreement between an employee and an employer.

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What is an Employment Contract? 

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.

Other Names

An employment contract may also be called a(n):

  • Job Contract
  • Contract of Employment
  • Employment Agreement
  • Employee Contract

Employment Contract vs Company Handbook

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.

Employment Contracts and Arbitration Agreements

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.

Employment Contracts as Social Agreements

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

A Detailed Guide to Employment Contracts

By FormSwift Editorial Team
June 14, 2018

Introduction

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.

Who Needs an Employment Contract?

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:

  • Employers (this includes small business owners and large corporations)
  • Human Resource representatives who prepare offers for potential employees
  • Recruitment Officers of an organization
  • Hiring Managers for departments responsible for their own hiring
  • New hires or recruits who are considering a position that could benefit from having an employment contract in place

What are the different types of employment?

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:

  • Job security. Contractors works on a project-by-project basis. A permanent employee works full or part time for a specific employer regardless of project.
    • Employees are subject to federal and state employment laws.
    • Work. Contractors typically have more freedom than an employee. In fact, if an employer places extensive restrictions on a contractor, they may be legally required to reclassify them as an employee.
    • Contracts. After signing an initial contract, contractors generally work on commitment. Employees, on the other hand, usually sign a contract when they start work and are entitled to benefits unavailable to contractors.

Common Inclusions to Employment Contracts and Compensation Agreements

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.

Confidentiality agreement

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.

Noncompetition agreement

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.

Best efforts

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.

Exclusive employment

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.

Termination

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

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.

Components of an Employment Contract

An employment contract consists of several main components:

  • Responsibilities
    • This section details the responsibilities of the employee’s new job. This could be called the duties or obligations of the employee. It could also be referred to as terms of employment.
  • Benefits
    • This section describes the benefits given to the employee. Common benefits include retirement plan options, disability insurance, and health insurance. It also includes vacation and sick leave. It may also include information about bonuses and raises.
  • Duration of Employment
    • Generally, this section can include a time span from one year to “indefinitely.” This is often referred to as the term of employment.
  • Reasonable Reasons for Termination
    • This outlines the basis on which the employer or employee may terminate the employment agreement. Common examples are violation of the terms listed in the agreement or the employee handbook. This is commonly referred to as just cause.
  • Work Product
    • This clause explains who has legal ownership of the work completed by the employee. In this case, “work” means “products.” Examples include written work or inventions. This clause may be called an ownership agreement clause or provision. There may also be an assignment clause. With this clause, the company may take ownership of (be assigned) any patents received by the employee.
  • Non-Disclosure Agreement
    • An NDA can often be inserted into this contract through a clause. It outlines company information an employee may not reveal during or for a period following their employment. This generally includes trade secrets, classified methods, and client lists.  Sometimes, this agreement is referred to as confidentiality clause.
  • Non-Compete Clause
    • This clause may be referred to as a non-competition clause or as a non-compete agreement. This is another advantage this contract grants an employer. Along with the non-disclosure clause, it prevents the employee from terminating employment and taking on an identical job straight immediately with a competitor. This clause usually has a time limit and a geographical limit.
  • Dispute Resolution
    • This clause explains the procedures for resolving any disputes between the parties or between the employee and another member of the company.

Forced Arbitration by State, Arbitration vs Litigation in America: Study

Published June 14, 2018

Study on forced arbitration and litigation in US States in 2018.

Methodology

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.

Editorial Note

If you are looking for the Lonzo Ball Shoe Contract Study, please visit its new home here, https://medium.com/@mayawald12/lonzo-ball-shoe-contract-study-big-baller-brands-annual-pay-vs-10a729eba2a1.

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