Navigating contracts may seem daunting, but with a little help deciphering the legalese, you’ll be well on your way to signing top talent. We’re here to make sure your t’s are crossed and i’s dotted.
Below, you will find the ultimate guide to employment contracts in the United States. We’ll cover the various types of employment contracts, discuss which contract best suits each type of employee, and point out some key considerations for employers. We have even included a step-by-step how-to guide complete with a downloadable employment agreement template.
Everything you need to seal the deal with new employees is right here.
- What is an Employment Contract?
- Most Common Types of Employee Contracts
- Contracts Which Apply to Various Types of Employment
- Employment Contract Considerations
- Ensuring Legal Validity
- Employment Contract Writing Guidelines
- FAQs: Employment Contracts in the USA
An employment contract is an agreement between an employer and employee regarding the terms of employment. Contracts can take different forms, ranging from a handshake agreement to a lengthy legal document signed by both parties. A contract will set hours, compensation and may also address duration of employment and benefits such as healthcare or paid time off accrual.
Technically speaking, an employment contract exists as soon as an employer and employee reach an agreement even without documentation (this might constitute a verbal or implied contract —more on that later). Nowadays, most employers prefer written contracts to set clear expectations and limit liability. While there are no federal laws governing minimum requirements for contracts, state, city and regional governments may have their own regulations or guidelines, so businesses should be sure to check in with local authorities. In whichever HR onboarding software you use, it’s crucial to ensure that you collect the correct information from every new hire so you can accurately draft their contract.
Workers in the US (except those in Montana) default to an “at-will” agreement unless explicitly stated otherwise. This means that employees can leave their position at any time without penalty and can be let go at any time without reason (as long as it isn’t discriminatory). Some companies ask employees to sign a separate “at-will” agreement to further guard against wrongful termination suits.
It is important employers get familiar with the most common types of employee contracts so they can decide the best agreement for the position at hand.
The most common contract agreement is a permanent contract meaning that the employee will work indefinitely— until either employee or employer wishes to sever the agreement. Permanent employees may be full or part time, and are usually entitled to benefits such as sick days, bonuses and health care. These contracts are often preferred by employees who enjoy the security and perks. Growing businesses can use permanent contracts to entice and retain high-quality workers.
Fixed term employment entails a contract that terminates either by a specific date (three months from the signing of the contract, for example) or when a specific task has been completed. Fixed-term employees may include seasonal workers hired to help out in busy periods, an employee providing maternity cover or a team member hired to work on a particular project.
While fixed-term workers are sometimes entitled to the same benefits that permanent workers enjoy, they miss out on one of the most important perks: job security. Fixed-term contracts can be renewed and may serve as a bridge, eventually leading to more open-ended contracts at the same company
Casual employment contracts are applicable when an employer cannot guarantee an employee regular hours. A casual contract will usually specify a minimum number of hours the employee will work with the understanding that there may sometimes be more hours available, but never fewer. The exception is a 0 hour contracts, which do not set hour minimums. Employers use temporary contracts, such as a 1-year employment contract for casual employees. These short-term contracts may be applicable for freelancers or for trial or probationary periods for potential contract full-time workers.
Zero Hour Contract
Although definitely not a common type of contract that employers offer, it is one that exists. It may seem as if this type of contract only benefits the employer, but in many ways, it also provides the employee with benefits too. Curious to know more?
Who do these types of employment contracts best fit? Let’s consider which contracts work for different workers.
A full time employee working at least 35 hours a week is best suited to a permanent full time contract. The agreement should specify benefits such as paid vacation, overtime rates, health insurance and pension contributions. Those working regularly but with fewer hours may be better served by a part time permanent contract. These contracts may entitle workers to a less substantial benefits package while still offering them peace of mind and job security.
Casual employees, including seasonal workers or those hired to complete a specific project might require a fixed term contract meaning a temporary contract with a pre-arranged end date. Unlike other countries, US employment law does not regulate the duration of a fixed-term employment contract or the circumstances in which an employer can offer this contact. Contracts for casual employees will outline start and end dates and include any relevant confidentiality or copyright agreements.
Apprentice contracts are used for those who are learning a trade or skill. Contracts for apprentices will specify hours, salary and a plan for training. In the US, apprenticeships may be part of a union contract.
Independent contractors and piece-rate employees are those who are compensated not via hours of work, but by items sold or created. Freelancers may work piece-rate, which is to say they may charge a flat fee to complete a certain project such as taking photos at an event, writing an article, or designing a logo. Workers such as these can be considered fixed term employees. Their contracts should specify project details and deadlines, as well as pay per unit. This compensation structure may also be applicable for a domestic worker contract, if the domestic worker will be paid by service (a fixed rate for cleaning the house once a week) rather than hourly.
When creating a contract, employers and employees must agree on the terms and conditions of employment. As we will discuss here, terms of employment aren’t necessarily dependent on what is written on the contract, but a confluence of factors. There are three types of contracts of employment: Written, Verbal and Implied Contracts
A written contract is a standard practice because it offers the fullest protection to both parties. If either employee or employer violates the terms of the agreement, a written contract is the best way to prove it in court. You’ll find an employment contract template below to help you get on your way.
Verbal agreements, such as a handshake accompanied by a promise of a certain salary or bonus, also constitute a contract. If violated, a verbal contract is grounds for a wrongful termination lawsuit as long as reliable witnesses can corroborate the story. Managers must be sure not to make any promises they cannot keep.
Implied contracts are a little tricky. They are contracts that have not been made explicit through a written or verbal agreement but are implicit in the habits of management. For example, if there are well-established tendencies such as only firing workers who have been reprimanded three times, an employee let go after one infraction can claim the implied contract has been violated. So too, if a casual employee worked regular hours with a regular workload, they may argue that they are in essence a permanent employee, regardless of what the contract says.
Having a written contract is one way to limit liability to claimed implied contracts. Using a work contract template is a helpful management tool because they clarify expectations from the get-go to avoid misunderstandings down the road. They can also protect company information with non-compete clauses which prevent employees from taking trade secrets to a competing company.
While there are some disadvantages, such as increased paperwork or greater liability in the case of a breach, the advantages speak for themselves. Before entering a contract, both parties must be sure they are able to meet the requirements they are agreeing to. A contract done right means continuous employment for employees and a certain labor supply for employers.
An employment agreement may contain a confidentiality clause that prevents employees from disclosing sensitive information about their employer. These agreements are increasingly common especially in the finance, tech, and pharmaceutical industries. Employers in these sectors may also specify that any “intellectual property” created during an employee’s tenure belongs to the company instead of the individual. It’s important to note that these agreements do not expire when the employee leaves the company— they last forever.
A legally binding contract needs to be signed by both employer and employee. To make sure that in-demand workers join the business without any time to get poached and to limit any legal liability, it is important that contracts are signed as quickly as possible.
An electronic signature, such as Factorial’s e-signature capability, allows employers to send contracts electronically and get them signed efficiently. E-signatures are easy to use and are even more secure than traditional signatures because they contain traceable information on who signed the document as well as where and when. Most importantly, using an e-signature ensures faster turn-around, allowing companies to move quickly to secure talented workers.
Businesses working with remote employees may particularly benefit from remote authentication capabilities. An employee can sign a contract online from anywhere in the world with just the click of a button, which is a vast improvement on the antiquated printing-mailing-scanning process. An e-signature also means that a copy of the contract is always available online for perusal and cannot be lost or forgotten.
Employers creating a new employment contract have a lot to think about. Here’s a breakdown for every step of contact creation, with an employment contract doc included below to get you on the right track.
Step 1: Identify your needs
Think seriously about the position and its requirements. What type of contract do you need? Are you looking for a permanent employee or is a fixed-term contract what the situation calls for? What are your expectations for the new employee’s day-to-day responsibilities and what compensation and benefits are you able to offer?
Step 2: Settle on the terms of the employment contract
A standard employment agreement will generally address the following:
- A minimum number of hours
- Salary or compensation, including stipulations for how overtime will be addressed
- The duration of the contract (if applicable)
- General responsibilities
- Benefits such as health care, paid time off or 401k contributions
- Any confidentiality of intellectual property agreements
Make sure to take into account regional legal regulations as well as company policy when addressing these questions. You might also wish to clarify performance review processes and termination procedures.
Step 3: Follow a template
Writing a contract can be difficult but, fortunately, you can find free printable employment contracts and further support online. We’ve included a free employment contract template here not only to save you the trouble of writing a new one but to help make sure you hit the most important points and use the clearest language possible.
Step 4: Include legal boilerplate
A contract needs language stating that the contract is complete and that it supersedes prior discussions between parties. This will prevent employers from being held responsible for any implied contracts they may have inadvertently offered while discussing the job and benefits before the contract was signed.
Step 5: Discuss with the employee and sign
Make sure to review the contract with your soon-to-be employee so they understand what is expected of them. Encourage them to bring up any questions and concerns. Then get that e-signature as soon as possible!
Why won’t an oral contract be sufficient for me?
The problem with oral contracts is that they are difficult to prove. If you want to make sure your contract is ironclad and upheld in the case of dispute, you’ll need it in written form.
Do you need a lawyer to write a contract?
You do not! It’s easier than ever to write your own contract, especially with all the resources and employment contract template word docs available online. You always have the option of asking an attorney to review a contract that you write yourself.
Do contracts have to use legal terms?
Not necessarily. Some legal terms may help give your contract clarity but it’s better if the contract is written not in jargon, but in language that is easy to understand.
What is the difference between an employee and an independent contractor?
Independent contractors are usually “self-employed,” which means that they are usually not entitled to the same rights as employees. While the company withholds taxes, social security, and medicare for employees, independent contractors are responsible for their own taxes.
What is a probationary period?
A probationary period provides a window of time after the employee starts work in which either party has the ability to terminate the agreement. Some employers may require new employees to finish the probationary period before offering a permanent contract.
Should HIPAA be mentioned in the contract?
If you fall under the classification of a Hipaa compliant entity, in many cases, your employees’ contracts may have an additional clause that concerns this. Please check with your legal advisor to find out whether by HR law you must include this in an employment contract.
What are some additional resources?
Learn more about different types of employment contracts by checking out Factorial posts on permanent, fixed-rate, and casual contracts for more info!
Written by Valerie Slaughter; Edited by Tanya Lesiuk