Contracts of Employment: A Comprehensive Guide

By Indeed Editorial Team

February 22, 2021

When you accept a job offer, your new manager may require you to sign a contract. This contract will likely outline the terms of the agreement between you and your employer, including information about your salary, job duties and more. It's important to read contracts thoroughly to understand exactly what your employer expects of you throughout your tenure at their organization. In this article, we outline what contracts of employment are, how they work and offer tips for navigating your signing period.

What is a contract of employment?

A contract of employment is a written document that establishes the terms of your work relationship as an employee at a new organization. Typically, both you and your employer sign a contract to signify your agreement. Contracts usually detail both parties' rights and responsibilities, and organizations will commonly use them to help all parties involved understand their obligations throughout the term of a new hire's employment.

In some situations, your new employer may not require you to sign a contract, especially if you are an at-will employee. Regardless of the situation, you will probably be presented with some sort of written record of your employment term. Written contracts are specific documents drafted by legal professionals to outline particulars of your employment arrangement—in many cases, these particulars include specific start dates and provisions for the end of your employment.

Related: What is "At-Will" Employment?

What does an employment contract include?

Almost all contracts detail what duties you will be responsible for as an employee, how much you will be paid for your work and other aspects of your employment. Here are a few common components included in employment contracts:

  • Duration of employment: Contracts often explain how long you will serve in your role. Sometimes, this can be a fixed length of time, or an ongoing period with the possibility for renewal.

  • Schedule: Your contract may include information about how many hours your employer expects you to work each week and what days you should be present at work.

  • Compensation: Your salary or hourly rate of pay will likely be stated clearly in your contract of employment. In addition, a contract can include information about salary schedules and the potential for pay raises.

  • Responsibilities: Your day-to-day duties and goals may be outlined in your contract to help you understand your employer's expectations of your work.

  • Benefits: In most cases, a contract details all the benefits you will receive as an employee, including health insurance, paid time off policies, retirement plans and more.

  • Limitations: A contract may present you with your employment limitations, including whether you will be allowed to work in another concurrent role.

  • Conflict resolution protocol: Some contracts outline a standard method used to resolve conflicts or disputes within the organization, such as contacting a designated mediator like a human resources employee.

  • Early conclusion details: Contracts often include information about resignation, termination protections and early conclusion protocols.

Related: 31 Employment Terms to Know During the Job Search Process

How does a contract of employment work?

Employment contracts usually follow a standard format prepared by the employer's legal counsel and often include conventional clauses that are modified to suit their specific needs and intent. Many new employees often take time to look over their contracts rather than signing them on-the-spot when they receive them. Some will even take contracts to their own lawyers for review.

If an employee disagrees with a portion of the contract or wants to clarify information, they can enter a negotiation phase. Here are a few reasons you may try to negotiate:

  • You believe you deserve more compensation

  • You don't think the duration of the contract or schedule will work for you

  • You would like to have fewer limitations on the supplemental or freelance work you can do

  • You're seeking more benefits than offered

  • You would like more or less responsibility than outlined

A contract can help you clearly understand your employer's expectations of you, in addition to the benefits and protections you are afforded as a part of the agreement. Because they're legally binding documents, it's a good idea to carefully review all information included. After you sign a contract, you typically yield your ability to negotiate or alter the contract until it expires.

Related: Permanent Employment: Definition, Advantages and Differences From Other Employment Types

Benefits of an employment contract

Employment contracts can be incredibly useful and beneficial for both employees and employers. Not only do contracts offer protection to both parties, but they conscientiously document all employment processes and expectations, meaning you can always return to a contract as a reference or to clarify information. Here are a few specific advantages of using a contract of employment:

  • Clear expectations: One of the most prominent benefits of an employment contract is that it clearly defines all the expectations of your new employment relationship. Not only will you have a written, legal agreement detailing your salary, benefits and any relevant workplace policies, but contracts will also usually list all the duties your employer will expect you to complete. This type of document can be helpful to return to if there is ever a discrepancy in your day-to-day responsibilities.

  • Guaranteed term of employment: Because contracts often specify your employment terms' exact duration, you often have a good idea of how long your position is guaranteed for as long as you meet your role's expectations. This type of stability can help you better plan for the future and focus on doing excellent work.

  • Increased job security: Contracts protect employees from challenges like instances of wrongful termination. This means that your employer must adhere to your contract's terms when ending your employment. Therefore, your job security often increases with an employment contract.

Related: What Is Wrongful Termination? (With Examples)

Are there any reasons not to use an employment contract?

Employment contracts can be challenging to navigate for new employees, especially if they've never signed one before. Here are a few reasons you may want to pause before signing your employment contract:

  • Limited flexibility: Once you and your employer sign a contract, you enter the agreement detailed within it. If you want to leave your job at any point, you have to return to your contract to see if the agreement allows you to do so without financial consequences.

  • Legal agreement: Employment contracts, as mentioned previously, are usually legally binding agreements. There may be ramifications to breaking your contract. This is why it's a great idea to have a lawyer on your side to review the contract prior to you signing it — they'll be familiar with contract language and can clearly explain each contract item to you with your interests in mind.

  • Renegotiation challenges: If you want to change a part of your contract after you sign it, you need to request a renegotiation of your terms. This can be challenging to do since your employer will have to agree to begin renegotiation, so it's a good idea to be sure you're comfortable with the original terms you sign onto.

Tips for navigating a contract of employment

If you accept a position and your new employer presents you with a contract of employment, try to navigate the review and negotiation processes as effectively as possible. You want to be cautious and attentive and make sure the contract protects you and your interests as an employee. Here are a few tips for expertly navigating your contract of employment:

Review your state's laws

While you can interface with a lawyer prior to signing an employment contract, sometimes that's not financially or situationally practical. Therefore, before signing a contract, review your particular state's employment contract laws to ensure your contract legally complies with your state's guidelines. This can help you avoid challenging situations from arising in the future.

Understand renewal procedures

Your contract should explain when your employment term ends and what renewal procedures are available to you. Some contracts have a one-way renewal, meaning only one party needs to agree to renewal for it to occur, and others have joint renewal, meaning both parties would need to agree. Further, some contracts have no renewal or automatic renewal. It's a good idea to review this part of your contract—especially if your agreement has automatic renewal since any renegotiation of terms should occur prior to a contract's expiration and renewal.

Research salary averages

It's always a good idea to research industry-specific salary averages so you can feel confident you're being compensated accordingly. Look up average salaries for similar positions in your area to get a feel for common compensation structures in your field. You can use these numbers as evidence for negotiation if you see fit. Also, you'll want to understand exactly what type of bonuses or commissions your contract entitles you to in addition to your base salary.

Look for outside work restrictions

If you're a freelancer or work as a part of the gig economy, you should inspect your contract for any outside work restrictions. Some organizations limit the amount of side work their employees can do during their term of employment. If your side hustle is important to you, make sure you can continue doing it while employed in your new role by reviewing your contract for any conflicting regulations.

Negotiate before you sign

If your contract doesn't address some of the needs you have as an employee, or you're unsure about a specific component of your contract, you can try to negotiate terms before you sign. Remember that negotiation of terms is a common practice and you're well within your rights to do so. It's important for you to be as comfortable as possible with the terms of your employment so you can excel in your new role.

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