What is an employment contract?
An employment contract is an agreement signed by the employee and employer (or labor union) regarding the rights, responsibilities and obligations of both parties during the period of employment. An employment contract typically includes the following elements:
- Duration of employment, if applicable
- Salary or wages
- General job responsibilities
- Work schedule
- Non-compete agreement
- Severance pay, if applicable
- Termination details
Employment contracts are typically signed by both parties after the job offer has been accepted and before the employee’s first day of work (or within the first few weeks on the job).
Which employees should sign an employment contract?
All employees should generally sign an employment agreement. However, terms and conditions in your agreement could differ based on the type of employee you’re hiring. Here’s a breakdown of the most common types of employees:
Full-time: Employees who meet the requirements for full-time hours (usually 40 hours per week) and are employed on a permanent basis with no predetermined end date.
Part-time: Employees who work fewer than 40 hours per week (typically 25-35 hours per week) and are employed on a permanent basis with no predetermined end date.
Fixed-term: Employees who are employed for a specific period of time with an agreed-upon end date. These employees are different from independent contractors, because they are treated as employees throughout the duration of employment.
Benefits of employment contracts
Creating an employment contract for each new hire has advantages for you and your employees. Here are a few of the key advantages of employment agreements:
- Employment contracts are legally binding documents that employers and employees agree to. This reduces the chances that one party will take legal action later on.
- Your employment contract lets employees know exactly what is expected of them and what actions will be taken if they don’t comply.
- The paid time off (PTO) portion of an employment contract helps to limit your employees’ overtime pay and holiday pay, which puts you in control and helps your employees understand how many holiday hours and overtime pay they are given upfront. This can help your business save time and money.
- If your business deals with confidential information, you may choose to add a confidentiality clause that prohibits your employees from disclosing sensitive information.
How to write an employment contract
Here are some steps you may use to guide you when you write an employment contract:
1. Title the employment contract
Give your employment contract a title so the person who reviews or signs the document understands what it is. For example, you could name the document “Employment Agreement” or “[Your Company Name] Employment Contract.”
2. Identify the parties
Employment agreements usually state which parties are entering into the contract. Consider clearly writing out your business name and the name of the person you’re hiring.
Example: ‘This employment agreement is between Atlas Corp. (‘the Employer’) and Samuel Johnson (‘the Employee’).’
3. List the term and conditions
Some of the minimum terms and conditions for employment contracts are set by federal and state governments. These terms and conditions involve things such as working hours and severance packages. Terms and conditions vary by jurisdiction so it’s important to check your state and local laws regarding employment.
Other terms and conditions beyond labor laws are up to you to decide. These things often include benefits, sick pay, dress code and other terms.
4. Outline the job responsibilities
Present a new hire with an outline of their job responsibilities to ensure they know what’s expected of them. If you want to present a more comprehensive outline of responsibilities, you could assign percentages to each responsibility. For example, let’s say your employment agreement is between you and a customer service representative. Responsibility percentages could look something like this:
- 70% responding to guest requests, complaints and concerns
- 20% collaborating with managers to improve customer experience
- 10% tidying up the sales floor
5. Include compensation details
Make sure you clearly state compensation details in your employment contract. This way, there’s no confusion regarding the new hire’s first or second paycheck. Here are the things you should consider including in the compensation portion of the contract:
- How the employee will be compensated
- How overtime is calculated
- Which holidays are paid and unpaid
- How the employee will be paid (e.g., direct deposit)
- If there are annual bonuses
6. Use specific contract terms
Employment contracts generally have specific contract terms such as effective date, type of employment, notice, termination, dispute process, applicable law and severability.
7. Consult with an employment lawyer
After you’ve completed the first draft of your employment contract, have an attorney or legal professional view the contract to make sure it’s in accordance with all applicable laws. This may help protect your business from future litigation regarding employment contracts.
Employment contract template
Here’s an employment contract sample you may use to write your own employment contracts:
This employment contract, dated on [date] in the year [year], is entered into by [Company Name] and [Employee Name] of [City, State]. This document constitutes an employment agreement between these parties and is governed by the laws of [state or district].
IN CONSIDERATION of this employment contract, the parties agree to the following terms and conditions:
The employee agrees to carry out the responsibilities and duties set out by this contract and their job description. The employee also agrees to comply with all company policies and procedures.
It is the duty of [position] to perform all essential job functions and duties. [Company Name] may add other duties as needed within the scope of the employee’s position.
The employee will be paid [dollar amount] [per hour/per year] before applicable taxes.
The employer offers the following benefits [list benefits, if any]. Access to these benefits occurs [immediately/after the probationary period].
5. Paid time off
[Employee name] is offered the following vacation time after the probationary period, [length of vacation time], [length of sick time], [bereavement time].
This working relationship may be terminated by either party for any reason with proper written notice.