What Is an Employment Contract?

An employment contract is the traditional document used in relationships between employees and employers for the purpose of laying out the rights, responsibilities, and obligations of both parties during the employment period. An employment contract has many synonyms in the modern usage within the employment law arena. They have traditionally been called Job Contracts, Employee Agreements, and Contracts of Employment. Given its purpose, an employment contract can be one of those vital documents utilized by an employer. The employment contract will allow an employer to solidify the relationship with employees to make certain that the key terms of the contractual relationship are understood by each party.

Typically, an employment contract will include information pertaining to compensation, vacation allotment, description of job responsibilities, any probation period, confidentiality or other clauses as well as basic information about the employer and employee.  The employment contract is traditionally reduced to a written document requiring the signature of both the employer and the employee. That said, an employment contract can also by implied if the employer and employee take specific actions based on the verbal statement made by either party or through other company specific employee-related documentation.

Who Needs an Employment Contract?

Employment contracts are generally used by employers, human resources departments or recruiting departments in the preparation of making an offer of employment to a prospective new hire. If an employee is working for an employer who does not utilize any type of employment contract, the employee should strongly consider suggesting that an employment contract be drafted and signed.

Types of Employee

Generally speaking, employees are classified as individuals who are hired by a company and receive cash compensation from their employer for completion of their responsibilities.  As the types of employment vary, employers must take great care to properly classify all workers when drafting a contract. For example, a full-time worker who is permanent would be an employee who meets the requirement for full-time employment and does not have a predefined conclusion date to their work.  On the other hand, a part-time worker who is employed on a permanent basis does not meet the required number of hours for full-time employment and also does not have a predefined conclusion date to their work.

An employee who has been hired for a fixed time period is defined as a fixed-term employee and will have a predefined conclusion date for their work. Their contract will automatically conclude on the end date set forth in the terms and conditions of their employment. In addition, an employer may terminate a fixed-term employee without any notice. The fixed-term employee may also terminate his/her employment without any advanced notice.

What Are Oral Contracts?

An oral employment contract is simply an agreement that has been reached verbally rather than reduced to a written document. An oral employment contract is typically formed when a job applicant has been extended a job offer and has verbally accepted the offer, which will typically include an agreement on starting date, salary and other logistical information. An oral employment contract, like a written employment contract, is also enforceable in a court of law, but it is generally harder to demonstrate its existence. Disputes over oral contracts are usually the word of an employee versus the word of an employer.

What Are Implied Contracts?

An employee agreement will typically be reduced to a traditional written agreement that will require the employer and employee to acknowledge and sign. That said, employers do not have to reduce every employee agreement to a written contract. In fact, more frequently than being reduced to writing, employee agreements can be implied via verbal statements or additional actions taken by either the employer or the employee. These implied agreements can take the form of company authorized memoranda, company policy and procedure, or employee handbook material.

Typical disputes between employees and employers over implied contracts usually revolve around an employee attempting to demonstrate that because of actions taken by the employer or statements made by the employer, the employee may only be fired for good reason and the employer’s actions were sufficient enough to meet the standard of an implied contract. It is important to note that like legal actions, different states will apply standards that differ from state to state when weighing whether an implied contract was formed.

For example, certain state courts will consider when the employer led the employee to believe that the employee had reasonable assurances that their job was secure. In addition, the court will generally give weight to the employee’s length of tenure as well as the employer’s policies for termination.  Of course, if there is an agreement that has been signed indicating the employee is at-will, the previous points will be moot in the eyes of the court.

What Is a Probationary Period?

Employers will often like to determine if the employee they interviewed meets the expectations they had upon hiring the employee. Thus, the common practice for newly hired employees is to be subject to a three-month probation period.

During this three-month probation period, the employer is evaluating the employee to determine whether the employee is a solid cultural fit within the company, if the employee truly has the skillset to perform his/her job responsibilities, and if the employer still believes that the employee can benefit the company in a long-term manner.

Often, an organization will structure the three-month probation period to allow for the employer to terminate the employee for whatever reason without the need to provide reasonable notice or compensation.

Types of Clauses in an Employment Contract

Employment contract clauses are generally inserted in the contract to protect an employer from a variety of possible issues that may arise in the course of an employment relationship. The following are several clauses that are found in a traditional employment contract:

  1. Best effort clause – this clause is used to ensure that an employee is bound to do his/her work to the best of his/her ability while remaining loyal to the employer.
  2. No Authority to Contract – this clause leaves no uncertain impression that the employee/employer employment relationship is anything more than just an employment relationship.  There is no agency relationship.
  3. Confidentiality clause - are generally used to ensure that an employee does not divulge confidential or proprietary information outside the employer’s walls.
  4. Non-compete clauses or agreements - require an employee to agree to a restriction that will limit the employee’s ability to work in a similar capacity for a competitor. In addition, employees are also restricted from participating in a business that would be in direct competition with their previous employer.
  5. Non-solicitation clause - an employer may be concerned that an employee who has resigned may attempt to take customers or other employees from their former employer for the benefit of their new employer. Like non-compete clauses, non-solicitation clauses must meet certain parameters to be declared valid, such as a provision that limits the time in which this restriction would apply to a reasonable length of time.
  6. Inventions ownership language - requires an employee to acknowledge that any inventions developed during employment are the property of the employer.
  7. Exclusive employment language – requires that the employee restrict his/her work to this company and they refuse to engage an employer in a similar function while the employee is currently employed via contract with their current employer.
  8. An additional compensation clause – requires that an employee not be entitled to any extra cash or non-cash compensation should he/she become an elected officer or a committee member.
  9. Termination clause language – allows either party to the contract the ability terminate their employment relationship. This would generally include situations in which the employee can no longer perform his/her job responsibilities due to a physical incapability.
  10. Arbitration language – is found in a contract to ensure that the employee will agree to resolve any issues with the employer through arbitration or mediation mechanisms, rather than a court of law.
  1. Laws of a state language - asserts that should any conflict between an employee and employer result in a lawsuit, that lawsuit will be conducted based upon the laws of the state selected by the contract, regardless of the location in which it was filed.

Termination and At-Will Employment

In the event of termination, an employee is most likely to use an employment contract to demonstrate that an employer did not have an exclusive right to terminate the employee. In many states, employment is most frequently classified as at-will, which allows the employer to terminate any employee at any given moment, so long as the rationale for termination is not an illegal action against the employee.  An at-will employment agreement also works the other way, as it allows an employee to resign at any time.

Employees that have agreed with employers to obtain employment via an employment agreement will not be classified as an at-will employee, as the employee agreement will generally dictate the conditions upon which an employer may terminate an employee. Employers who form employment relationships with employees who are classified as at-will employees will require at-will employees to acknowledge via signature on an employee handbook that the employee confirms and understands that by signing the document his/her employment is an at-will arrangement. For at-will employees, it is important to understand that signing an acknowledgement or employee handbook is unlike signing an employment agreement as an employer may terminate an employee, so long as the reason is not illegal.

Along these lines, employers may have limited rights when it comes to terminating an employee who can demonstrate that either they entered into an explicit contract to employ the individual for a specific period of time or there is an implied contract that could be shown to indicate that employment may only be terminated for cause.  Employees who are relying on the enforceability of implied or verbal contracts may find that limitations as a result of a legal provision known as the statute of frauds will preclude them from bringing a successful claim. The statute of frauds in this context dictates that a verbal contract that cannot be completed in less than one year would be deemed legally invalid. 

For employees to likely succeed on a contract claim pertaining to a verbal contract, the contract must be specific to demonstrate enforceability.  If an employer has made a statement along the lines of “you will always have a place on our team for as long as want,” you will be unlikely to prove to a court that the employer’s claim was an enforceable contract. That said, a few state courts have held that an implied contract may have been formed if the employer, over a period of years, engaged in a specific course of dealing in which employees were retained if certain performance standards were maintained.

Advantages of Using Employment Contracts

While most employment in the U.S. is at-will, employers may utilize employment contracts as a way to ensure that their most qualified talent is bound by the terms of a contract, which will be a deterrent to employees leaving the company and an advantage to the contract.

Employment contracts can also incentivize highly skilled employees to join your company.  The prospect of having a contract can ensure greater stability for the highly skilled employee.  These employees may have other job offers and a contract with appealing turns could lure top talent to your company.  Lastly, the presence of an employment agreement will provide the employer with greater control over the work being done by the employee subjected to the contract provisions.

Disadvantages of Using Employee Contracts

Unlike an at-will employment relationship, the presence of a contract will preclude an employer from simply terminating an employee if the employer experiences a downturn in business or the employee does not meet the employer’s original expectations.  Unfortunately, in either of these cases, the employer will be left to likely renegotiate the employment contract with the employee.

Under the legal provisions of the contract, an employer is obligated to act under a covenant of good faith and deal fairly with the employees as they enforce the original terms and conditions of the contract.  This provision is an important protection for employees as it serves as a deterrent to prevent an employer from breaching the contract as acting in bad faith could ultimately lead to more extensive legal damages under the law.

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