What Is an Employment Contract?

Definition and Examples of an Employment Contract

Businessmen reviewing a contract
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An employment contract is a signed agreement between an individual employee and an employer or a labor union. It establishes both the rights and responsibilities of the two parties: the worker and the company.

Review information on what to expect when you're asked to sign a contract, types of agreements that cover employees in the workplace, and the pros and cons of employment contracts.

What Is an Employment Contract?

An employment contract is an agreement that covers the working relationship of a company and an employee. It allows both parties to clearly understand their obligations and the terms of employment.

More specifically, an employment contract can include: 

  • Salary or wages: Contracts will itemize the salary, wage, or commission that has been agreed upon.
  • Schedule: In some cases, an employment contract will include the days and hours an employee is expected to work. 
  • Duration of employment: An employment contract will specify the length of time the employee agrees to work for the company. In some cases, this might be an ongoing period of time. In other cases, it might be an agreement set for a specific duration. At other times a minimum duration is laid out, with the possibility of extending that period.
  • General responsibilities: Contracts can list the various duties and tasks a worker will be expected to fulfill while employed.
  • Confidentiality: Although you may have to sign a separate non-disclosure agreement, some contracts include a statement about confidentiality. 
  • Communications: If an employee's role involves handling social media, websites, or email, a contract might state that the company retains ownership and control of all communications. 
  • Benefits: A contract should lay out all promised benefits, including (but not limited to): health insurance, 401k, vacation time, and any other perks that are part of the employment.
  • Future competition: Sometimes, a contract will include a noncompete agreement or noncompete clause (NCC). This is an agreement stating that, upon leaving the company, the employee will not enter into jobs that will put them in competition with the company. Often, an employee will have to sign a separate NCC, but it might also be included in the employment contract.

Other possible terms of the agreement could include an ownership agreement (which states that the employer owns any work-related materials produced by the employee) as well as information on settling disputes at work. The contract may even qualify where the employee can work after leaving the company, as a way to limit competition between related companies.

  • Alternate names: Contract of employment, employment agreement

How Does an Employment Contract Work?

You may encounter different kinds of agreements depending on the job and the company.

Written Employment Contracts

A written contract is a great way to clearly define the role, the responsibilities, and the benefits and to prevent any confusion.

Carefully read all elements of an employment contract before signing it. Make sure that you are comfortable with every part of the agreement. If you break the contract, there might be legal consequences.

If you're uncertain about any of the contract details, get advice from an attorney before you sign it so you don't bind yourself to an unfavorable agreement.

It's important to make sure you are able to uphold every part of the written agreement. For example, if the contract requires you to stay at the job for a minimum period of time, make sure you will be able to comply with the requirement. 

Also, if the contract places limits on where you can work upon leaving the company, consider whether or not you are comfortable with this limitation.

Implied Employment Contract

An implied employment contract is one that is inferred from comments made during an interview or job promotion, or from something said in a training manual or handbook.

For example:

  • Implied contracts can be inferred from actions, statements, or past employment history of the employer. 
  • An employee may have seen or recorded a history of promotions, raises, and annual reviews for themselves and their coworkers.
  • During an interview, a potential employee may be told that the employee's job is a long-term or permanent position unless the employee is fired for a good reason. 

While implied contracts are difficult to prove, they are binding.

Employees can prove that an implied contract was established by pointing out actions, statements, policies, and practices of the company that led them to believe with reasonable cause that the promise would come to fruition.

Union Labor Agreements

Members of labor unions are covered by group employment contracts that stipulate wages, benefits, scheduling issues, and other working conditions for covered employees.

Union contracts will outline processes for addressing grievances if workers believe that elements of the contract have been violated.

Pros and Cons of an Employment Contract

Pros
  • Clearly defines duties and benefits

  • Protects each party

  • Provides stability

Cons
  • Limits flexibility

  • Legally binding

  • Can only be changed through renegotiation

Pros Explained

  • Clearly defines duties and benefits: There's no wondering what responsibilities are included in the job, or what the pay or benefits are, because they are spelled out in the contract.
  • Protects each party: Both employer and employee are covered under the agreement.
  • Provides stability: With a contract in place, both the worker and the company know what to expect for the foreseeable future.

Cons Explained

  • Limits flexibility: Once the employee is hired under the contract, they can't just leave if they feel like it, and the employer can't just let them go if they decide they don't need them anymore.
  • Legally binding: There are consequences for breaking the terms of the agreement.
  • Can only be changed through renegotiation: Both sides must agree to any changes to the original agreement.

Key Takeaways

  • An employment contract is an agreement between a company and a worker.
  • It describes the role, responsibilities, and payment and benefits.
  • Employment contracts should be reviewed before signing, because there may be consequences if you don't hold up your end of the bargain.

Article Sources

  1. FindLaw. "Pros and Cons of Written Employee Contracts." Accessed July 10, 2020.

  2. HG.org. "Implied Contract in Employment Law." Accessed July 10, 2020.

  3. National Labor Relations Board. "Employer/Union Rights and Obligations." Accessed July 10, 2020.