Employment Agreement: Types, Components and Benefits
Updated July 21, 2022
An employment agreement is one of the many documents that a new employee might review and sign when hired for a new role. These contracts often include vital information about their employment and determine what a person might expect from a company. Reviewing and signing an employment agreement can help you establish terms with an employer that can protect you from unexpected changes at a new job. In this article, we discuss what an employment agreement is, what the different parts of one are, how they work and the pros and cons of having one.
What is an employment agreement?
An employment agreement, or employment contract, is a contract between an employee and employer that includes the terms and conditions of employment. This agreement may detail under what conditions the employee can expect to work. Employees and employers can negotiate the terms of the agreement prior to signing and hiring. There are several types of employment agreements, including:
At-will employment is the condition that an employer may fire an employee for any reason at any time. At-will contracts may detail the conditions that can lead to firing and employees agree to these with a written signature. Employers may detail the process for terminating employees along with performance improvement plans they follow if an employee underperforms.
Related: What Is 'At-Will' Employment?
Written contracts are more formal and common documents that detail many components of an employee's term, from compensation to stock information. You may receive a written contract along with an at-will contract upon hire. Employers might perform a legal review on written contracts to ensure all conditions are appropriate for their employees. Human resources departments file your written contracts along with other hiring paperwork like your application, resume and offer letter.
Related: 10 Types of Employment Contracts
Oral contracts are employee-employer agreements made verbally. Written contract details are easier to enforce since managers and human resources departments can reference a written document for evidence if either party breaks the contract. Sometimes employers include detailed agreements in a written agreement and you might agree to informal terms orally. For example, you might negotiate to work remotely once a week and your employer might agree that it's possible, but can't guarantee it every week.
Employers typically write permanent employment agreements for full- or part-time staff members. They often expect to pay their employees a certain salary or wage for ongoing work or a set amount of hours. Employers can write these contracts as written agreements and include at-will details.
Fixed-term agreements are for employees working for a designated time period. For example, if your colleague requires disability and cannot work for six weeks, your employer might write a fixed-term employment agreement with additional terms. Fixed-term employees typically have similar benefits and terms as permanent employees.
Casual agreements have flexible terms depending on business needs. An employer may provide a range of hours you can expect to work in a week because there may be some times when you may have more or less work. An agreement for this type of work is necessary so you can understand the risks and benefits of casual employment.
What is in an employment agreement?
Here are some of the common parts of an employment agreement:
Salary: Employers may include your salary and other compensation, like bonuses, in the employment agreement. You may already negotiate this prior to accepting a position, but the final amount often appears in this document.
Benefits: Employment agreements often include information about medical, vision and dental insurance coverage, along with any paid time off or holiday information. Employers may also show how much of the cost of benefits they plan to cover.
Job title and responsibilities: You can expect to see your agreed-upon job title and your standard job responsibilities in an employment agreement. This may or may not include specific tasks, depending on the flexibility required for the position.
Schedule: The schedule may include the standard hours or schedule type you can expect to work. This might specify time ranges if you work on a flexible schedule.
Protections: Protections are details that include the confidential information you and an employer agree you cannot share outside of work. Employers might include intellectual property protections, conflict of interest restrictions and restrictions on sharing company data.
Equity information: If you receive additional, non-monetary compensation, employers may include this in the equity section. For example, you may receive equity grants for company stocks.
Probationary period: Some employers may implement a probationary period to test your performance. These are often three to six months to gauge your skills and competencies for a position.
Performance reviews: This section describes when you can expect regular performance reviews. Employers may show that reviews occur annually to evaluate your achievements.
Termination terms: This section details an employer's termination terms, which can include what causes termination or what requirements you have to complete upon termination, like returning company equipment.
Liability protection: Some employers offer liability protection so you receive coverage for incidents like losing equipment.
Post-employment limitations: Employers may implement limitations in your contract for what you can do after employment. For example, if you start a new, related business after leaving, the contract may limit your ability to contact clients or hire employees from their company.
How do employment agreements work?
Employers write employment agreements for new employees to establish the terms and conditions of employment. Once written, an employee can review all the terms. Often, you can discuss these conditions with the hiring manager and you may know some details from other hiring documents like offer letters.
Once your employer writes the agreement, you can review each section of the document and confirm their expectations, often with a date and signature. If you have any additional terms or wish to negotiate terms, you may do this prior to signing. Often, employment agreements have a date to review the terms again. This might be at the end of your employment length or annually.
Pros of an employment agreement
There are several benefits of having an employment agreement, such as:
They can define expectations: Employment agreements provide specific details about the terms you can expect from employment. If you have questions about compensation, benefits or responsibilities, you can refer to the document for clear guidance.
They may encourage negotiation: When crafting an agreement, you can negotiate certain terms of your employment. The employer drafts the document first and you can suggest changes to wages or other terms before signing.
They can help resolve conflicts: If there are any misunderstandings or questions about employment terms, both parties can refer to the agreement for clarification, which may help quickly resolve conflicts or disputes.
They can increase stability: Once agreeing to the terms, you know exactly what your employment terms are. Some agreements include the length of employment, so you can feel stable knowing you have employment for a certain period.
Cons of an employment agreement
Here are some disadvantages to having one and how you might address them:
They may restrict term changes: Because these documents are final, it may take additional negotiations or conversations to change any employment terms. If you want to change conditions like wages or benefits, refer to the specific section of your agreement to start discussions with your manager.
They may limit the ability to leave: These agreements can specify the length of your employment, restricting your ability to leave. If you have specific reasons for leaving, discuss the options for changing the document type to a casual work agreement.
They may increase legal issues: If either party strays from the contract agreements, it may require legal action. Ensure you understand the conditions and if you feel that you or your employer might break terms, have a discussion with your manager before taking additional action.
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