Employment Contract: Definition, Key Considerations

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What Is an Employment Contract?

An employment contract is an agreement between an employer and employee regarding the employee's term of employment. It can be implied, oral, or written, involving a lengthy physical contract that the employee signs. The terms laid out in the contract depend on what was agreed upon when the employee confirmed that they would take a position.

What Are At-Will Employment Contracts?

Most U.S. employees work at will. That means that they can quit or be terminated for any reason, if the termination is legal and isn't because of retaliation or discrimination. Almost every state follows the at-will employment rule with the single exception of Montana.

In Montana, after an employee has completed the employer's probationary period or has worked for the employer for six months if no probationary period is in place, the employee can only be fired with good cause. Outside of Montana, at-will employment is assumed unless the employer and employee agree on a different relationship.

It is also worth noting that even in at-will states, there can be other exceptions (i.e., public policy, implied contract, etc.) which can limit an employer’s ability to terminate without cause. If you have questions about this, we recommend seeking advice from an employment lawyer in your jurisdiction.

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Advantages and Drawbacks of Employment Contracts

There are some clear advantages as well as a few drawbacks to having an employment contract in place.

Advantages of Employment Contracts

• Clearly defined duties and benefits: The employment contract defines the responsibilities for the job and benefits that are included as part of the employment. Employers can use it to specify standards for the employee's performance and reasons where termination would be justified.
• Protects both employers and employees: The employment contract protects the rights of both parties. The employer can include a noncompete or nondisclosure clause into the employment contract to prevent the employee from sharing confidential information for personal gain. Likewise, it can prevent them from leaving their jobs and competing against you at another company.
• Stability: Both the employee and employer know what to expect from their relationship.
• Legally binding: The employment contract is legally binding, and there are consequences if the employee breaks the contract.
• Attract employees: An employment contract can be used to attract candidates to work for you rather than the competition, as you can promise job security or other beneficial terms in the employment contract.

Drawback of Employment Contracts

The primary drawback of an employment contract is that it limits the employer's flexibility. Both the employer and employee are legally bound to the terms of the contract, and it cannot be changed without renegotiating the terms. That can be problematic if the employer later decides they need to change the terms. There is no guarantee the employee will agree to the new terms when renegotiating.

• Limits employers flexibility: Both the employer and employee are legally bound by the terms of the contract. Employers will need to abide by these terms and have less freedom in what they choose to do when managing their employees if the business changes over time.
• Limits the employers ability to fire an employee: There may be instances where an employee does not work out and need to be terminated. By using an employment contract, it may limit an employers ability to terminate an employee.
• Costs and administrative burden: Drafting and managing employment contracts creates administrative burden and legal fees for employers. It can also create fees for employees since they will likely want to get their employment contract reviewed before signing.

What Is Included in an Employment Contract?

• Wages or salary: Contracts will itemize the wage, salary, or commission that the employer and employee agree upon.
• General responsibilities: An employment contract can list the different responsibilities and tasks that an employee is required to complete while employed.
• Schedule: The contract may include the days and hours that the employee is expected to be at work.
• Employment duration: The contract may specify the length of time that the employee agrees that they will work for the company. The agreement could be set for a specific period or could state that employment is ongoing.
• Confidentiality: Employers sometimes include a statement about confidentiality in the employment contract, although many also require employees to sign a separate confidentiality agreement.
• Benefits: The employment contract should lay out all of the benefits that are promised to the employee, including health insurance, paid time off, retirement plans, and other perks.
• Noncompete agreement : An employer may include a noncompete agreement or clause that prohibits the employee from leaving their job and taking a position that would put them in competition with the current employer.

What Is a Trial Period?

A trial period is when a new employee is hired on the basis that there are no commitments yet between the employee and employer. This period is also sometimes referred to as a probation or probationary period.

Full Time vs. Part Time

There are no federal laws in place that define what full-time work is and each employer might have their own definition. However, an employee who works between 30 and 40 hours per week is considered to be a full-time employee. The Affordable Care Act (ACA) generally considers an average of 30 hours per week (or 130 hours per month) as full-time employment. As a general standard, under § 778.101, 40 hours is the maximum number that an employee can work for an employer without additional compensation unless they're exempt from overtime pay.

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Minimum Wage

Minimum wage is the lowest amount that employers can legally pay their employees per hour. The federal minimum wage for nonexempt employees is $7.25 per hour. A nonexempt employee is one that is not exempt from overtime pay. These employees must be paid at a rate that is one-and-a-half times their usual pay rate for hours that they work beyond 40.

Types of Employment

• Employees: This can be a full- or part-time relationship where an individual is directly hired by a company.
• Independent contractors: This is when an employer hires an independent freelancer or business to provide goods or services according to the terms of a contract.
• Apprentices: In this arrangement, someone works under the direction of an experienced individual who teaches them the skills they need to learn to become licensed for a trade.
• Interns: This is an arrangement in which an individual works in a paid or unpaid position within a business for a short period of time to learn skills for white-collar careers.

Employee vs. Independent Contractor

The easiest difference to understand between an employee and an independent contractor is how their taxes are handled. An employer is responsible for withholding federal income tax, while the independent contractor is responsible for paying their own state and federal taxes. However, the IRS has a range of factors they use to determine an employee vs. independent contractor. Companies who misclassify can be subject to significant financial penalties.

Here is a more in-depth look at the primary differences:

Employee

• Paid hourly or salary
• Employer withholds tax payments
• Employer is responsible for obtaining unemployment insurance
• Employee completes IRS Form W-4
• Employee works directly for the employer's business

Independent Contractor

• Paid per project, task, or sometimes hourly
• Taxes not withheld from payments
• Employer doesn't obtain unemployment insurance for contractor
• Contractor fills out IRS Form W-9
• Works for their own business rather than the employer's
• Little day-to-day oversight of their working habits

How Employment Contracts Work

There are different kinds of employment agreements depending on the company and job:

Written Contracts

A written contract can be beneficial because it allows the employer to define the responsibilities, roles, and benefits to prevent any future confusion. Employees are required to fulfill the terms of the contract, including complying with any limits on where they can work if they leave the company.

Implied Contracts

An implied contract is where employment is inferred from information communication and comments made during an interview or promotion. An implied contract can also fall into place as a result of a handbook or training manual.

Employment Contract Sample

EMPLOYMENT CONTRACT

THIS AGREEMENT is made and entered into as of [DATE], by and between [EMPLOYEE NAME], hereinafter referred to as “Employee”, and [COMPANY NAME], which has its principal place of business at [ADDRESS], hereinafter referred to as “Employer”.

WHEREAS, Employer is engaged in the business of [INDUSTRY], maintaining its principal office at [ADDRESS]; and

WHEREAS, Employee and Employer wish for the Employee to accept the position of [POSITION]; and

WHEREAS, Employee and Employer now desire to enter into a written employment contract between the parties;

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained herein, the parties hereto agree as follows:

1. EMPLOYMENT. Employer hereby employs Employee as its [POSITION], to exercise all ordinary and necessary duties as defined by the [POSITION] of Employer, and Employee hereby accepts and agrees to such employment, subject to the general supervision of the Employer’s [POSITION]. Subject to the provisions of Section 9 of this Agreement, Employer reserves the right to change Employee’s duties from time to time as Employer deems necessary and appropriate as the business of Employer evolves. Employer may, in its discretion, increase Employee’s salary or other benefits without having to amend this Agreement and unless specified in writing such changes in salary or benefits will not modify the term or termination provisions of this Agreement. Employee recognizes that Employee’s employment is at will. During the course of employment, both Employee and Employer have the right to terminate Employee’s employment at any time, subject to the provisions of Section 9 of this Agreement.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees that Employee will at all times fully, industriously, and to the best of Employee’s ability, experience, and talent, perform all of the duties that may be required of and from Employee pursuant to the express and implicit terms hereof, to the satisfaction of Employer in the exercise of its sole discretion. Such duties shall be rendered at the business address of Employer and at such other place or places Employer and Employee shall, in good faith determine, as the interest, needs, business or opportunity of Employer may require. Employee shall comply with all current Employer policies, rules and regulations as adopted from time to time and all specific directions of Employer.
3. COMPENSATION OF EMPLOYEE. Employer shall pay Employee, and Employee shall accept from Employer, effective as of [EFFECTIVE DATE], as full compensation for Employee’s services hereunder, [AMOUNT] bi-weekly, paid in accordance with Employer’s regular payroll policies.
   1. Employee shall be eligible to participate in the benefits set forth below during the term of his employment pursuant to the terms of the respective benefit plans. Employee acknowledges that Employer may change its benefit plans in its sole discretion.
   2. Coverage for Employee and Employee’s dependents under Employer’s group medical and group dental plans to the extent the same are provided to other employees.
   3. Participation in bonus incentive plans as may be offered by Employer to its key employees from time to time.
   4. Other company provided benefits such as holidays, sick leave, and group insurance benefits as adopted by Employer and generally made available to employees of Employer.
   1. Employer’s Board of Directors, its [POSITION] or [POSITION] may, in their discretion, terminate Employee’s employment at any time for any reason or for no reason. After such termination, Employer shall pay Employee for Employee’s accumulated unused vacation and, subject to the provisions below, Employer shall continue to pay Employee’s base salary only in effect prior to termination for a period of twelve (12) months after termination. Also, for the period during which any salary payments are being made, Employer will provide, through COBRA, group medical and dental plan coverage for Employee and Employee’s dependents as such plans are then generally offered to employees of Employer. Employee may elect to continue group medical coverage at the termination of severance benefits, for the balance of any COBRA period, at Employee’s sole expense. Employee shall not be entitled to receive any payments under any bonus, profit sharing or other incentive compensation plan of Employer unless Employee is employed by Employer on the date such payments are due to be paid.
   2. No severance benefits will be provided if Employee elects to terminate his employment or is terminated for cause. For purposes of this Agreement, “Cause” means (i) conviction of a felony or misdemeanor involving moral turpitude; (ii) engaging in illegal business practices or other practices contrary to the written policies of the Company; (iii) misappropriation of assets of the Company; (iv) continual or repeated insobriety or drug use; (v) continual or repeated absence for reasons other than disability or sickness, (vi) fraud; (vii) embezzlement; (viii) violation of the Company’s written conflict of interest policies ; and (ix) material breach of this Agreement.
   3. All severance benefits including, but not limited to, the continuation of salary payments in whole or in part, and all other payments made on Employee’s behalf for group medical and dental coverage will terminate immediately upon Employee’s employment by a third party at a base salary equal to or greater than the base salary then being paid Employee by Employer. If Employee is paid a base salary by a third party lower than that being paid by Employer, Employer shall continue to pay the difference for the remainder of the period set forth in Section 9(a) above, but Employer’s obligation to continue payments for medical and dental coverage will terminate immediately upon employment by a third party.
   4. Any outstanding stock options held by Employee at termination of employment shall be treated as provided for under the company Stock Option Plan by which options were granted.
   5. The provisions of Sections 6, 7, 9, 10, 11, 12 and 16 shall survive the termination of this Agreement.

   IN WITNESS WHEREOF, the undersigned parties to this Agreement hereinabove expressed, have entered into this Agreement without reservation and have read the terms herein.

   EMPLOYEE :

   EMPLOYER :

   Should You Have an Employment Contract?

   In general, it's a good idea to have an employment contract in place if you're giving money for work that's completed for your company. The employment contract lays out the terms for employment and, because it's legally enforceable, protects both parties. You may want to use an employment contract if:

   • You're hiring a new employee, and you want them to understand their duties and responsibilities.
   • You want a new employee to sign a confidentiality agreement.
   • You want to clearly communicate to a new employee that they're being hired " at will."
   • You want a formal agreement in place when you've only had a verbal or implied agreement in the past.

   It is always our recommendation to seek professional help from a lawyer when dealing with employment contracts. These experienced professionals can help make sure your rights are best protected through their knowledge, training, and experience.

   ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.