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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? 

An employment contract is an agreement that creates an employment relationship. A contract of employment should cover every aspect of a job, such as wages, 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.

This document should be completed before the new employee begins work. The contract should be carefully read so that the employee understands their obligations 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 is on the same page when it comes to workplace policies, duties, pay, and benefits. A contract provides each party with a certain level of protection because its terms may limit the extent to which either may terminate employment.

This is different than the default alternative of at-will employment. Under this concept, both the employee and employer may end the employee's employment 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 consists of several main components: 

  • Responsibilities
    • This section details the responsibilities of the employee’s new job.
  • Benefits
    • This section describes the benefits given to the employee. Common benefits include retirement plan options, disability insurance, and health insurance.
  • Duration of Employment
    • Generally, this section can include a time span from one year to “indefinitely.”
  • 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 rules 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.
  • 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 protects any trade secrets the employee may know. 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.

How Do I Create an Employment Contract?

There are a few ways you can go about drawing up your contract. A standard one contains the components described above. Although the details will differ from company to company, the basic outline is the same. You can hire an employment law attorney to write one for your business. You can save yourself time and effort by downloading a free employment contract template from a reputable site and filling it in. Unless the tenets of your agreement are extraordinarily different, this should work just as well as writing the whole thing out yourself.

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.

What Is an Employment Contract?

When a job applicant accepts a position, they may enter into a contract with the employer. While contracts of this type usually include written documents, they do not necessarily require specific documentation. They are much easier to enforce or dispute in court if they are created in writing.

Sometimes, the relationship between two parties creates an implied contract. Their relationship essentially proves that an employer/employee relationship exists, even if there's nothing in writing. Even 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.

Employment Contract vs. Company Handbook

While contracts and handbooks have a lot in common, handbooks provide more detail about company policies than contracts. Contracts are written to specifically cover the job duties of a single employee.

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.

Amending an Employment Contract

If you need to change the terms of a contract related to a specific job, we recommend you speak to your employees. Explain the reasons you need to change the contract and see if you can reach an agreement with the employee. 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:

  1. Impose the changes anyway. This is risky because you risk legal action from your employee.
  2. Terminate the existing contract and write a new one. This comes with the same risk listed above.
  3. Continue negotiations. This is likely your best option. You should continue to negotiate with your employee in hopes of eventually reaching an agreement.

Contractual Terms: Writing Tips

The following list includes the essential contractual components of this sort of contract:

  1. Name of the employer and employee;
  2. Job title and description of work;
  3. Employee start date;
  4. Pay. This is sometimes referred to as a compensation agreement. This should include the starting salary or hourly wage as well as how the employee can earn any commissions, bonuses, or raises;
  5. Work hours (and overtime), vacation benefits, holiday entitlement (including public holidays), sick day procedures, etc.;
    • Note: if employees are expected to work specific hours, be sure to include this in the contract. If you fail to do so, it will be more difficult to fire an employee for absences or tardiness.
  6. Place of work. Be sure to specify where the employee will conduct their work. If your company has multiple offices, which site, or sites, will the employee be expected to report to?
    • Additionally, be sure to clarify any telecommuting policies or privileges.
  7. Disciplinary and grievance procedure. How does your company handle discipline? Who makes disciplinary decisions? To whom should employees report any grievances?
  8. Confidentiality agreement and a clause that limits their ability to compete with you. You'll learn more on this below;
  9. Control and coordination clauses. Control clauses outline permissible and impermissible behaviors and actions, while coordination clauses help to define employee expectations. In other words:
    • Coordination: What employers want;
    • Control: How to meet employer expectations and what to avoid.

Tips for Non-Contractual Terms

  • Job description. Try to draft this in a way that creates flexibility in the employee’s role and responsibilities. Also, include a statement that stipulates you can amend the job description, if necessary.
  • Place of work. Be sure to include language that reserves your right to change where the employee works should your office(s) relocate.
  • Benefits and bonuses. Benefits and bonuses are generally non-contractual items. This makes them much easier to modify. Benefit and bonus information should be included in the employee handbook (internal link to guide), not in the contract. However, if an employee has benefits (e.g. health insurance) that aren't included in their contract, this does not mean you can take them away without potential legal consequences.
  • Discipline. Be sure to include a statement that disciplinary matters are at the discretion of the company. This is imperative because it is not possible to prepare a singular disciplinary procedure that applies to all possible disciplinary scenarios.

Implied Terms

There are several implied terms involved in the contract, regardless of whether  they are put in writing. Those include:

  1. An employer should not do anything to damage the trust of the employee.
  2. Employers are required to provide safe, secure, and healthy work environments.  
    • This means providing health and safety training, and dealing quickly and thoroughly with grievances.
  3. Employers should be honest both in their own work and how they communicate with their employees.
    • This includes, for example, the protection of an employee’s confidential information.  
  4. Employees must comply with reasonable instructions and treat their employer and colleagues with respect.
  5. Employee statutory rights. All employees are entitled to non-discrimination in the workplace, the right to belong to a trade union, rights related to minimum notice periods, on-time payment, etc.

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

Published June 14, 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

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