What Is an Employment Contract?

An employment contract is an agreement that outlines the working relationship between a company and an employee, similar to an offer letter. Details should be included so that both parties understand their obligations and the terms of employment.

Written Versus Implied Employment Contracts

A written employment contract is an actual document that clearly defines the roles, responsibilities and benefits of the relationship between the employer and employee.

An implied employment contract can arise out of various scenarios, such as discussions during the interview process that involve permanency of position or length of employment or even historical company actions like promotions, yearly appraisals, merit increases, etc.

Advantages and Disadvantages of Employment Contracts

Although it seems like employment contracts are an absolute advantage, there are some disadvantages that you should be aware of and take into consideration.

Employment Contract Advantages

Employment contracts can be advantageous by providing additional control over the employment relationship.

  • Defined responsibilities and benefits. An employment contract should spell out the job responsibilities, pay and benefits to avoid any confusion later on.
  • Legal coverage. An employee contract provides protection for all parties outlined in the agreement.
  • Clarity of expectations. An employment contract provides visibility of the expectations of each party during the employment relationship.

Employment Contract Disadvantages

Because an employment contract is legally binding for both parties, problems can arise when changes need to be made regarding the employment relationship.

  • Legally binding. There is exposure to risk if any parts of the agreement are broken.
  • Lack of flexibility. If your contract outlines a specific duration of employment, termination could be a bit more difficult.
  • Could be hard to make changes Once the employment contract is signed by both parties, any changes that need to be made will result in renegotiation and any subsequent changes would require signatures again by both parties, assuming both parties are willing to sign.

What To Include in Your Employment Contracts

This is your opportunity as the employer to outline the obligations and terms of employment so they can be clearly understood by both parties.

1. Compensation

List the hourly wages or salary and any commission or bonuses that have been agreed on.

2. Schedule

You can add the schedule the employee will be working, i.e. days and time of their shift.

3. Job Responsibilities

Here you can list out the various tasks and responsibilities that the employee will be expected to do.

4. Employment Duration

This can be a specific length of time or an ongoing period of time. It could also include a minimum duration with the possibility of extension.

5. Ownership of Employee’s Work Products

If your employee is responsible for content, communications and/or inventions, you may want to add a section outlining ownership.

6. Benefits

Lay out all agreed upon benefits in this section, such as medical, dental, vacation, 401K and other perks.

7. Confidentiality

You can include nondisclosure language here and have a separate nondisclosure agreement as well.

How To Write an Employment Contract

Here are some steps you can take to guide you as you write an employment contract. Once you draft it, you’ll want to have it reviewed by a legal professional.

1. Name it

Make sure when you send for a signature, the receiving party knows exactly what it is. For example, label it: (Company Name) Employment Contract

2. Name the Parties

Identify who will be entering into the contract. Clearly spell out the name of the employer and employee.

3. Compensation Details

Provide as much detail as possible surrounding the agreed upon compensation. Be sure to list out items such as hourly wages, salary, commission structure and schedule, bonus plans, etc. You can also choose to list details such as overtime calculation, paid holidays and how paychecks are delivered (i.e. direct deposit).

4. Terms and Conditions

There may be minimum terms and conditions or labor laws set by your respective federal and state governments that will need to be outlined in your employment contract. This might include items such as working hours and severance details. You may also include information regarding benefits, sick pay, dress code, attendance policy, etc.

5. Job Responsibilities

Outline the expectations of the job. You will not need to cover every responsibility or task that the employee will be doing, but you can do a general bulleted list or even break the responsibilities into percentages.