What is an employment contract?

Understand the essential components and legal significance of employment contracts, including what they should contain and how they protect both employer and employee. Learn how these agreements outline responsibilities, benefits, and terms of employment.

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By Brad Nakase, Attorney

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Table of Contents

1. What Is an Employment Contract?

2. Benefits of Employment Contracts

3. When Should You Ask for an Employment Contract?

4. Who Needs an Employment Contract?

5. Do Verbal Agreements Count as Employment Contracts?

6. Types of Employment Contracts

7. At-Will Employment Contracts

8. Written Employment Contracts

9. Oral Employment Contracts

10. Implied Oral Employment Contracts

11. What Clauses Are in an Employment Contract?

What Is an Employment Contract?

Employment contracts dictate the terms of the employment relationship. It allows the employer and employees to understand their responsibilities and expectations. Employment contracts are usually written contracts that both parties sign, but verbal agreements are also considered employment contracts.

An employment contract will include the following information:

Start date
Job title and description
Employment term
Compensation and benefits the employee will be paid
Employer’s rules, regulations, policies, and practices
Non-compete clauses and confidentiality agreements
How disputes will be resolved
What will happen when the employment is terminated

Employers can add extra clauses to the employment contract. For example, clauses may be added to match the industry, type of business, or company culture.

Employment contracts are considered legally binding, but employment contracts do not supersede the law.

Benefits of Employment Contracts

When done right, the employment contract will protect both parties. There will be clauses in the employment contract that protect the employee and ensure they understand the benefits and perks available to them.

The employer will also be protected because the employee will understand the duties of their role. The employment contract will also spell out how the employee is expected to protect trade secrets and the employer’s reputation.

When Should You Ask for an Employment Contract?

Your employer will usually provide an employment contract after they have formally offered you the job. However, not all jobs will necessarily have a formal employment contract. Jobs will have an employment contract when the employee will have access to confidential information or trade secrets. Employment contracts are also common in jobs where the employee joining a competitor would create risk for the employer.

Who Needs an Employment Contract?

An employment contract is beneficial for all types of jobs and seniority levels. It removes any ambiguity from the employment relationship by clarifying the roles and responsibilities of each party. In companies that have a HR representative, an employment contract is standard practice.

Unions may require employment contracts to ensure the employees they represent are better protected.

Employment contracts are particularly beneficial for senior positions where the employees will have access to the inner workings of the company. Their knowledge of trade secrets means that an employment contract is beneficial to dictate what will happen when they leave the company. The employment contract may dictate confidentiality or non-compete clauses. For some roles, the employment contract may even dictate a period of paid leave to protect the company.

Do Verbal Agreements Count as Employment Contracts?

Yes, if an employer and employee come to a verbal agreement about compensation, hours or any other aspect of the employment relationship, then that constitutes an employment contract. Verbal agreements count as an employment contract.

However, it is standard practice for employment contracts to be written down because of the amount of information that will be in an employment contract. This way, both the employer and employees can refer back to the contract at any time.

An employee can negotiate the employment contract before signing it. Once both parties sign, the employment contract is binding for both parties.

Types of Employment Contracts

Employers create employment contracts, and therefore, they will look different across employers. However, they can be broadly categorized into 4 types of employment contracts: at-will employment contracts, written employment contracts, oral employment contracts, and verbal employment contracts.

An employer will choose the type of employment contract that fits their company culture and their needs. At times, state laws may also dictate the types of employment contracts that can be in place. For example, some states are known as at-will employment states.

At-Will Employment Contracts

In the US, at-will employment is the most commonly used employment contract. This type of employment contract offers a lot of flexibility for both sides. An employee can quit their job at any time without giving notice. However, on the other side of the coin, an employer can fire an employee at any time without notice. The exception to this is discrimination. While an employer does not have to give a reason to fire an employee, an employee could sue if the firing can be linked to a protected reason.

An employee and an employer can enforce the rules of their employment contract, even though it is an at-will contract.

Written Employment Contracts

Written employment contracts allow for a lot of detail around the responsibilities of each party. The contract may detail an employment term, after which the employer and employee will decide whether to renew the contract. The employment contract may be negotiated at the end of the term.

The employment contract will dictate the circumstances which may lead to termination and what the responsibilities and rights of each party are in the event the employee decides to leave or is terminated.

Oral Employment Contracts

An oral employment contract is one that is discussed between the employer and employee. Oral employment contracts are as legally binding as written employment contracts; however, it can be difficult to prove what was discussed.

Implied Oral Employment Contracts

An implied oral employment contract has no documentation and may not have explicit terms. Instead, the employer or employee may have led the other to believe certain things based on what they said. For example, the employer may not have told the employee that they are employed on an at-will basis, but they may have said that they could fire the employee at any time without giving a reason. This would lead the employee to believe that they are employed on an at-will basis, therefore, an implied oral employment contract.

What Clauses Are in an Employment Contract?

Employers are able to write whatever clauses they wish into their employment contracts, as long as those clauses don’t contradict the law. Here are some standard information and clauses you can expect to see in an employment contract.

Job Title and Job Description

The employment contract will state the job title of the employee’s role and give a brief description of the responsibilities and duties of the role. This is usually brief, and the employer will be able to furnish the employee with a full job description if necessary. The job description in the employment contract only serves to highlight the main parts of the role and information like the working hours.

Compensation

A key aspect of the employment contract is clear information about the compensation the employee will receive. For salaried employees, this includes the total salary. Otherwise, it may state the wage and pay frequency.

Benefits

The employment contract will state the benefits the employees will receive, not including perks. Benefits may include vacation time, paid leave, insurance, etc. This section of the employment contract will also provide information about any raises or bonuses available.

Employment Relationship

There are a number of employment relationships that are possible depending on the state and industry of the employer. The employment contract will dictate what the employment relationship is.

At will employment
Binding authority
Non exclusivity

Each type of employment relationship will have different conditions, so it is worth researching the employment relationship stated in your employment contract.

Employment Term

The employment contract will usually have the following information about the employment term:

The date and time of the employee’s first day
Location of employment (including alternative or secondary employment locations)
Whether the role is permanent, full-time, part-time, contract, etc.
End date of employment if applicable, plus the procedure for extending the employment term

Termination

The employment contract will also provide detailed information about the various ways that employment may be terminated and the rights and responsibilities of each party in each case. Some of the following methods of termination may apply:

Early termination – Employees may still resign or be terminated even when the employment contract is a fixed term. There might be financial consequences or special procedures, and if that is the case, the employment contract will provide that information.
Resignation – The employment contract will tell the employee how to go about resigning, including the notice period. It might even state how the employee will receive their final wage and any bonuses.
“Good reason” resignation or termination – A “good reason” resignation means that the employee leaves for a good reason like the employer failing to uphold their responsibilities. A “good reason” termination means that the employer terminates the employment contract for a good reason, like they can no longer afford to pay the employee.
Termination for cause – This is when the employer terminates the employee due to the employees actions. This might be job abandonment, misconduct, or repeated poor performance. The employment contract will include information about how the employer will handle this and when the employee will receive their final wage and any bonuses.
Termination without cause – Without cause includes both termination without a reason and termination for a reason that is not included in what the employment contract defines as a “for cause” termination.

Death and Disability

The employment contract will state what the employer’s responsibility is if the employee becomes disabled or passes away while they are employed. For example, the employee or their estate may be entitled to compensation depending on the circumstances of the death or disability.

Confidentiality

Most employment contracts will have a confidentiality clause that dictates what the employee can and cannot share. This clause is designed to protect the company’s competitive edge. It will dictate confidentiality responsibilities both during and after employment.

Dispute Process

The employment contract will outline the process for legal disputes that cannot be resolved by the employer and employee. This clause will include information about the avenues available for dispute resolution and legal assistance available.

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