Everything You Need To Know About A Permanent Contract

Have you heard the phrase, “if it’s not written down, it didn’t happen”? Though some people work without written contracts in the US, it is safer for employees and employers to have the terms of their agreement down on paper.

As we’ve discussed when reviewing contract types, there are three types of contracts: fixed-term contracts for temporary workers who are working a set amount of time usually to complete a specific project; casual contracts, for employees who don’t have a set number of hours; and permanent contracts, for long-term employees filling necessary positions.

A permanent contract is the most common type of contract in the US, and for good reason: the help employers hold on to skilled workers. Permanent employees do their jobs effectively knowing they have job security and opportunities for career growth.

Here we’ll cover everything you need to know about permanent contracts.

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What is a permanent contract?

Unliked fixed-term or casual contracts, the permanent contract definition is a contract that will not expire, but remain valid until either employer or employee chooses to end the relationship. These are often called indefinite contracts as well. Some permanent staff may receive contracts valid for one, three, or five years but with the expectation that they will be renewed. Employers tend to invest their resources in their permanent employees by actively recruiting top talent, training and integrating them into the community and offering substantial benefits.

Full time permanent employees work between 35 and 40 hours a week, while part time employees with a permanent part time contract work under 35 hours.

What are the disadvantages & advantages of a permanent contract?

There are many permanent contract advantages which will appeal to employees and help employers hoping to attract and retain talent. We’ll also touch on some of the disadvantages below.

Advantages

Job security

The stability of having a permanent job is very appealing to employees. It eases their mind and allows them to invest themselves emotionally in the business, improving morale and boosting employee engagement.

Benefits

Offering benefits like health insurance, paid time off, and 401(k) contribution matching is a key opportunity for employers to entice talented workers to join the team. Helping employees to strike a work-life balance will ensure employee satisfaction and effectiveness.

Career development opportunities

Being offered a permanent contract shows employees that this isn’t just a job, but a career. Instead of burning cash by recruiting and training staff that doesn’t stick around, it is better for businesses to invest in people who can build toward the company’s future. Permanent contracts keep top talent around long-term while helping employees to develop new skills and grow their careers. It’s a win-win!

Disadvantages

Greater liability

While a permanent contract of employment will provide the clarity by outlining unilaterally the terms of the agreement, it may make employers liable for greater damages if they should violate the contract. Employers must be careful not to agree to terms they cannot meet.

More administrative work

While someone working as a contractor organizes their own health insurance, retirement savings plans and savings for time off, permanent employees are supplied these through their employer. Growing businesses need to make sure their Human Resources department grow commensurately.

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What is usually in a permanent employment contract?

A permanent work contract is meant to lay the groundwork for a long and fruitful relationship. This means that these contracts have a lot to cover! Here, we’ll discuss eight key ingredients of a permanent contract.

1) Job Title

It is conventional though not legally necessary to specify a job title which reflects the work the employee will be doing. This will determine how employees represent themselves and the company to others..

2) Job Description

While not all contracts contain job descriptions, including one can help to clarify expectations. Job descriptions should be neither too specific (to allow for changes) nor too broad (so that an employee doesn’t end up with more responsibility than they can handle). Stick to the basics such as to whom the new hire will report and how performance will be evaluated.

This is also an useful moment to “classify” new hires as permanent employees rather than contract workers to ensure tax and insurance compliance. This may seem obvious, but Uber has faced many lawsuits due to employment misclassification!

It may be worth spelling out that the position is full time or part time and making clear if employee can or cannot engage in other business activities on the side.

3) The Term

How long will employment last? If a contract specifies a limited period of time, employers need to clarify if and when the contract can be renewed. Renewals can be automatic, one-way, or joint. Those negotiating salary from contract to contract must be sure to begin the discussion well before the term of the contract expires.

It’s important to note that although an agreement may provide a term of employment, neither party is obligated to adhere to it. As we’ll discuss below, most states in the U.S. are “at-will.” If an employee quits before the end of the contract, no court will order the employee to keep working or allow the employer to collect damages.

Other permanent agreements have no fixed term but provide provisions for payments in the case of notice or severance.

4) Base Compensation and Bonuses

A permanent contract should include the annual salary or hourly rate of the employee, as well as information about raises, bonuses, or incentives.

There are usually two types of bonuses– guaranteed and discretionary. A discretionary bonus usually an indicator of employer satisfaction and may be based on performance. The contract should contain information on the criteria for receiving discretionary bonuses and specify what will determine if targets have been met.

5) Benefits

Explain what benefits the plan include such as medical, dental and eye care, as well as information about the 401(k) plan, stock options and any fringe benefits.

Employers should be sure to thoroughly explain the time off policy. How are paid vacation days allotted or accrued? Can employees make up hours? How will overtime renumerated? Minimum leave requirements vary by state so businesses should make sure their policies are compliant with local regulations.

Perks ranging from travel expenses and reimbursements to club memberships and company cars will also need outlining.

6) Termination

A permanent contract should contain stipulations for early termination of the contract. Depending on how the relationships ends, the employer might have different obligations to the employee. Explain what is required for either party to terminate the relationship, including the amount of notice required and if it should be written.

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7) Restrictive Covenants

In certain industries, like the financial, tech and pharmaceutical fields, employers may include clauses in employee agreements restricting the information an employee can share and what they can do during and after their contracts.

Confidentiality agreement

This clause will prevent the employee from sharing the employer’s trade secrets or intellectual property.

Non-compete clause

An employer may restrict an employee’s ability to work for a competitor with this clause. It cannot be open-ended and must state a limited period after which the employee can do what they like.

Non-solicitation clause

This clause will prevent an employee who has resigned from poaching customers or other employees from their previous employer.

Intellectual property

Employers may wish to specify that any intellectual property the employee creates during their tenure belongs to the company and not the individual.

8) Legal Boilerplate

Permanent employment contracts should include legal provisions which will ensure their validity. Some useful boilerplate might address the following:

Governing Law

Businesses headquartered in one state with offices in another should identify which of the states laws they will settle disputes in.

Arbitration

Parties can choose whether to arbitrate any future disputes. Employers often demand arbitration because it is cheaper and faster than courts, and is kept confidential.

Entire Agreement

Both parties can agree that the written contract constitutes the “entire agreement,” and will not be able to invoke previous implied or verbal contracts.

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From temporary to permanent contracts

Not all permanent employees start off with a permanent contract. What are the temporary to permanent employment rules?

Probation

To make sure a new hire is up to snuff, an employer might ask an employee to sign a fixed-term contract for a three-month probation period. The employer will use the probation period to determine if the employee is a good cultural fit for the company. The trial term can confirm whether the employee is able to perform their responsibilities.

Such a probation may be structured so that the employer can terminate the employee without providing reasonable notice or compensation. If the employer would like to hire the employee long-term at the end of the period, the employee will switch from a fixed term contract to a permanent contract.

Temp to perm jobs

Sometimes a worker placed through a temporary or permanent recruitment agency or hired as a contractor will impress their boss and win a permanent position. Even if management doesn’t offer a permanent contract themselves, temporary workers can send a contract to permanent position letter asking to change their contract to a permanent one.

Legal considerations for permanent contracts

As long as employees are receiving the federal minimum wage, there are few other federal laws governing employment agreements. There are still several legal factors to take into consideration.

At-will agreements

In most states, employment contracts are considered to be “at-will” agreements. This means that both employers and employees can sever the relationship at any time without legal repercussions. Discriminatory practices are not protected by this agreement. Public sector and union workers may have a negotiated contract which exempts them from “at-will” agreements. For more information on these types of agreements, you can refer to the article on USA contract types.

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State Laws

State laws governing contracts vary widely. In New York State, for example, an employer doesn’t need to pay an employee’s accrued vacation time if they leave before completing 12 months of work. However, this isn’t the case in Massachusetts. Non-compete provisions are legal in every state except California, while other states limit the restriction to varying degrees, accepting one, two, or three year maximums to a non-compete clause.

Businesses need to do their homework into order to understand how state law might dictate (or override) the terms of their contract.  They should also make sure to investigate state guidelines for paid time off, minimum wage and notice.

Breaking a Permanent Contract

Can you leave a permanent work contract? Yes! There are a number of ways a permanent contract can end. Remember that most employee agreement in the US are “at-will,” which means there are no legal penalties for ending a contract early although there may still be financial repercussions.

Resignation

It is standard that if an employee terminates the contract by resigning, they receive nothing other than their salary through the last day worked plus accrued vacation. The contract may or may not entitle resigning employees to full or prorated portions of their commissions, guaranteed bonus, or payment for completed work.

Termination

If an employer chooses to end the relationship, the termination will fall into two categories outlined in the contact: “for cause” or “without cause.” Termination can be considered “for cause” if the employee is accused of intentional misconduct, insubordination, job abandonment or breach of contract. “For cause” termination means employees get no additional remuneration

A “without cause” termination will offer employees a period of payment, often ranging from a few weeks to a year. In effect, the fixed term of the contract then converts into a severance agreement.

Managing permanent employees

Whew! It’s a long journey, but all the effort that goes into making a permanent contract finally paid off: A permanent position has been filled by a talented worker! The next step is to make sure that your business keeps up its end of the bargain. You can do this by providing the salary and benefits promised in the contract. This is not only vital to limit legal liability, but will have the added benefit of keeping works invested and engaged.

Human resources departments manage the employee life cycle from recruitment to exit interviews. HR will send out the permanent contract for an electronic signature and then be responsible for keeping its terms. They will track employee working hours, time off and absence requests as well as manage payslips and documents. It’s a lot of work! Factorial’s HR software can make sure your HR department has the resources it needs to keep everything in order– and adherent to the terms of the contracts signed.

A streamlined HR department will improve employee morale and retention, so you can hang on to those permanent employees you’ve worked so hard to sign.

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Written by Valerie Slaughter; Edited by Tanya Lesiuk

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