What Is an Employment Contract and Why Do You Need to Sign One?

An employment contract is an agreement between an employer and an employee. It outlines the benefits, work conditions, and roles and responsibilities of a position. Employment contracts can be written or implied, but, in most situations, a written employment contract is the best option.

In this article, I am going to go over what is an employment contract, what an employment contract should include, and why it is better to sign one.

No matter the head count at your company, SignTime has you covered with this recent article detailing everything you need to know to draft employment contracts as well as links to helpful templates for use in every industry.

What is an employment contract?

An employment contract (sometimes called a “contract of employment” or an “employee contract”) is an agreement between a company and an employee. There are many different kinds of employment contracts, but, at a basic level, they detail the exchange being made between the company and the worker.

Other similar terms, such as letter of offer and appointment letter, can be confusing. We have an article comparing letter of offer vs. employment contract, highlighting their similarities and differences.

The roles and responsibilities of the worker are detailed in the employment contract, as is the compensation, from salary to benefits and holidays, that the company is paying for. The work is then outlined, along with any other specific obligations, which I go over below.

In some cases an employment contract must be written, while in others an “implied contract” will suffice. Even when an implied contract would be enough, it is generally recommended that a written contract be signed. This is because “a contract is only as good as the paper it is written on” and oral agreements have no paper! If there is just a verbal agreement, it becomes a lot harder for either party to defend their rights under the agreement.

What should be included in an employment contract?

Employment contracts should include as much detail as possible. Here’s a list of items that should be included in an employment contract:

• Length of employment: This can be a determined period of time or open-ended. Note that “contract workers” are only employed for a specified period and should always have a written employment contract.
• Employee roles and responsibilities: These are the basic tasks an employee will perform and how their results will be measured.
• Salary: This includes both the amount the employer will pay to start and whether there are any standard pay raises.
• Non-salary remuneration: This includes any commissions, bonuses, profit sharing, stock options, etc., that an employee may receive.
• Benefits: These are all the benefits other than salary and non-salary remuneration, for example, pension, health insurance, parental leave, or employee investment match schemes.
• Sick day and vacation policies: This is how many days off per year the employee can have due to illness or for vacation.
• Grounds for termination: This outlines under what conditions the employer can fire an employee. Often, this is an at-will clause, which stipulates the employer can fire someone without giving a reason.
• Noncompete agreements (NCAs): This states that an employee cannot work for specific companies or in the same role in a specific area.
• Nondisclosure agreements (NDAs): This states that the employee will not tell people about any secret information they learned while working for the company.
• Assignment clause: This clause states that patents claimed by the employee during his or her employment belong to the company.
• Methods of dispute resolution: Some companies will specify that disputes should go to arbitration.

The contract also clarifies if an employee will be paid as a W-2 or as a 1099. This is basically whether someone will be a full-time employee or working in a freelance capacity. Note that I go through everything you need to know about freelance work contracts in another article.

What should not be included in an employment contract?

When writing an employment contract, an employer should be careful about adding information about the duration of the job or specific grounds for termination. These can limit the company’s ability to end an employment contract in the future.

Why is an employment contract important?

Like all contracts, employment contracts are important because they make things clear. Both the employer and employee know what they should and should not do, so working together becomes easier. Employment contracts also help companies protect trade secrets with NCAs and NDAs.

Does an employment contract need to be in writing?

An employment contract does not need to be in writing. However, written contracts are always stronger, so an employer or employee may prefer the security of a written employment contract.

This security is especially important for key hires, such as highly skilled employees or hard-to-replace managers. Employers should always ask a new recruit to sign an employment contract when one of the following is true:

• An employee would be difficult to replace due to their experience.
• Confidential information will be shared with the employee.
• An employee working for a competitor in the future would be particularly damaging to the company.

Types of Employment Contracts

There are four main types of employment contracts that describe the work arrangements under which an employee will perform their duties. These are:

• At-will employment contracts
• Written employment contracts
• Oral employment contracts
• Implied oral contracts

At-will employment contracts

This is the most common type of employment contract in America. Employees can quit at any time and employers can terminate the contract at any time, without notice. Note that illegal firings due to retaliation, discrimination, etc., are still not permitted under an at-will contract.

Written employment contracts

These contracts provide more rights to the employees and are far more detailed than at-will contracts. However, they can have a specified duration in the case of contract workers, which means they might not offer long-term job security.

Oral employment contracts

These contracts are based on oral agreements, for example, during the job interview and onboarding process. They can be hard to enforce, but courts will look at the circumstances and any other documentation to understand the validity of the oral contract.

Implied oral contracts

These types of contracts are even less supported than a typical oral contract. When there is no contract available, employees are still operating under an “implied contract.” That means that a contract does exist even if it hasn’t been written or discussed.

Employment contracts protect employers and employees

Whether you sign a formal written employment contract or discuss terms during an interview, there is a contract in place. Therefore, it is always valuable to remove the ambiguity and use a proper written employment contract.

Whether you employ one person or a thousand, SignTime is here to help. With convenient e-signature capabilities, new recruits will be able to return employment contracts wherever they are in the world.

With an easy-to-access and organized online contract repository, never search for important paperwork again.