Writing contracts of employment are necessary as a business owner. Here's what you need to know when creating them.

What Is a Contract of Employment?

A contract of employment is written or oral and has the implied terms and conditions of a specific agreement. A person agrees to perform specific duties as controlled and directed by an employer in exchange for a salary or wage that is agreed upon. This agreement is between an employee and an employer.

These can be verbal statements or actions taken by the employee and the employer through employee handbooks, company memoranda, or adopted policies for the duration of employment. Whether it's mentioned in the contract or not, both the employer and employee have mutual trust and confidence in each other. They also agree to only make reasonable and lawful demands from each other.

Each employee is obligated to carry out the assigned duties and the instructions of the employer to the best of their abilities. In turn, the employer is obligated to protect the employee from injury and harm. They must also provide fair compensation for any damage or loss related to an accident that happens on the job.

A contract of employment is also known as the following: 

  • Employment agreement. 
  • Contract of service. 
  • Job contract. 
  • Employee contract. 

The contract should list the details of how it can be terminated legally by either side and what the steps are in this case. There are differences in public and private sector employment contracts because the employment goals are different in each of these. Employment contracts are used by human resources managers, employers, and recruitment officers getting ready to hire a new employee.

Termination and "At Will" Employment

Employment contracts are often used by employees to show that the employer didn't have the right to fire the employee. Most states consider employment "at will," which means the employer can fire the employee anytime they wish. However, their right to fire an employee might be limited if the employee proves that the employer got into an explicit contract to keep the employee for a certain amount of time. They might also have an implied contract, which is neither written nor spoken.

Many states recognize verbal statements made by employers can form a binding contract, such as saying "You can be here as long as your sales are above budget." Verbal contracts are limited when it comes to being enforceable. There is a legal doctrine that's called the "statute of frauds" which states that oral agreements that can't be carried out within a year are invalid.

For example, if an employee falls below budget and gets fired within a year, the agreement is still enforceable even if the employee wasn't fired. A verbal contract also must be detailed in order for it to be enforceable. Saying something like, "You can work here as long as you want," isn't enforceable.

Several states recognize implied contracts where an employee can be kept on for years as long as they keep up their standards of performance. Due to this, an employee can state they can't be fired as long as those standards are met.

Employment Contracts: Other Considerations

Employment contracts, whether they're implied or written from employee policies or handbooks, should state the terms and conditions of a variety of items. These include sales commissions, stock options, health benefits, employee grievance procedures, vacation and sick leave, and employee behavior after a job is terminated. The scope of the agreement shouldn't be broader than is required to protect the business of the employer.

Types of Employment Contracts and Compensation Agreements

Employers often have clauses or provisions in their employment contracts. The clauses protect the employer from different situations that might otherwise cause the business to lose employees, business, and trade secrets. Any clause that's included must be reasonable and fair to both parties in order for it to be enforceable in court.

These are normally negotiated and reviewed by an attorney of employment law, an employee-side attorney who represents the new employee, and an employer-side attorney who represents the employer. Both parties will work hard to protect their interests.

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