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What Is an Employment Contract?
An employment contract is an agreement between an employer and employee regarding the employee's term of employment. It can be implied, oral, or written, involving a lengthy physical contract that the employee signs. The terms laid out in the contract depend on what was agreed upon when the employee confirmed that they would take a position.
What Are At-Will Employment Contracts?
Most U.S. employees work at will. That means that they can quit or be terminated for any reason, as long as the termination is legal and isn't because of retaliation or discrimination. Almost every state follows the at-will employment rule with the single exception of Montana.
In Montana, after an employee has completed the employer's probationary period or has worked for the employer for six months if no probationary period is in place, the employee can only be fired with good cause. Outside of Montana, at-will employment is assumed unless the employer and employee agree on a different relationship.
Find out more about at-will employment contracts here.
Advantages and Drawbacks of Employment Contracts
There are some clear advantages as well as a few drawbacks to having an employment contract in place.
Advantages of Employment Contracts
- Clearly defined duties and benefits: The employment contract defines the responsibilities for the job and benefits that are included as part of the employment. Employers can use it to specify standards for the employee's performance and reasons where termination would be justified.
- Protects both employers and employees: The employment contract protects the rights of both parties. The employer can include a noncompete or nondisclosure clause into the employment contract to prevent the employee from sharing confidential information for personal gain. Likewise, it can prevent them from leaving their jobs and competing against you at another company.
- Stability: Both the employee and employer know what to expect from their relationship.
- Legally binding: The employment contract is legally binding, and there are consequences if the employee breaks the contract.
- Attract employees: An employment contract can be used to attract candidates to work for you rather than the competition, as you can promise job security or other beneficial terms in the employment contract.
Drawback of Employment Contracts
The primary drawback of an employment contract is that it limits the employer's flexibility. Both the employer and employee are legally bound to the terms of the contract, and it cannot be changed without renegotiating the terms. That can be problematic if the employer later decides they need to change the terms. There is no guarantee the employee will agree to the new terms when renegotiating.
What Is Included in an Employment Contract?
An employment contract can include:
- Wages or salary: Contracts will itemize the wage, salary, or commission that the employer and employee agree upon.
- General responsibilities: An employment contract can list the different responsibilities and tasks that an employee is required to complete while employed.
- Schedule: The contract may include the days and hours that the employee is expected to be at work.
- Employment duration: The contract may specify the length of time that the employee agrees that they will work for the company. The agreement could be set for a specific period or could state that employment is ongoing.
- Confidentiality: Employers sometimes include a statement about confidentiality in the employment contract, although many also require employees to sign a separate confidentiality agreement.
- Benefits: The employment contract should lay out all of the benefits that are promised to the employee, including health insurance, paid time off, retirement plans, and other perks.
- Noncompete agreement: An employer may include a noncompete agreement or clause that prohibits the employee from leaving their job and taking a position that would put them in competition with the current employer.
What Is a Trial Period?
A trial period is when a new employee is hired on the basis that there are no commitments yet between the employee and employer. This period is also sometimes referred to as a probation or probationary period.
Full Time vs. Part Time
There are actually no federal laws in place that define what full-time work is. However, an employee who works between 30 and 40 hours per week is considered to be a full-time employee. As a general standard, under § 778.101 , 40 hours is the maximum number that an employee can work for an employer without additional compensation unless they're exempt from overtime pay.
Minimum wage is the lowest amount that employers can legally pay their employees per hour. The federal minimum wage for nonexempt employees is $8.56 per hour. A nonexempt employee is one that is not exempt from overtime pay. These employees must be paid at a rate that is one-and-a-half times their usual pay rate for hours that they work beyond 40.
Types of Employment
There are a few different types of hiring arrangements:
- Employees: This can be a full- or part-time relationship where an individual is directly hired by a company.
- Independent contractors: This is when an employer hires an independent freelancer or business to provide goods or services according to the terms of a contract.
- Apprentices: In this arrangement, someone works under the direction of an experienced individual who teaches them the skills they need to learn to become licensed for a trade.
- Interns: This is an arrangement in which an individual works in a paid or unpaid position within a business for a short period of time to learn skills for white-collar careers.
Employee vs. Independent Contractor
The primary difference between an employee and an independent contractor is how their taxes are handled. An employer is responsible for withholding federal income tax, while the independent contractor is responsible for paying their own state and federal taxes.
Here is a more in-depth look at the primary differences:
- Paid hourly or salary
- Employer withholds tax payments
- Employer is responsible for obtaining unemployment insurance
- Employee completes IRS Form W-4
- Employee works directly for the employer's business
- Paid per project, task, or sometimes hourly
- Taxes not withheld from payments
- Employer doesn't obtain unemployment insurance for contractor
- Contractor fills out IRS Form W-9
- Works for their own business rather than the employer's
How Employment Contracts Work
There are different kinds of employment agreements depending on the company and job:
A written contract can be beneficial because it allows the employer to define the responsibilities, roles, and benefits to prevent any future confusion. Employees are required to fulfill the terms of the contract, including complying with any limits on where they can work if they leave the company.
An implied contract is where employment is inferred from information communication and comments made during an interview or promotion. An implied contract can also fall into place as a result of a handbook or training manual.
Should You Have an Employment Contract?
In general, it's a good idea to have an employment contract in place if you're giving money for work that's completed for your company. The employment contract lays out the terms for employment and, because it's legally enforceable, protects both parties. You may want to use an employment contract if:
- You're hiring a new employee, and you want them to understand their duties and responsibilities.
- You want a new employee to sign a confidentiality agreement.
- You want to clearly communicate to a new employee that they're being hired " at will."
- You want a formal agreement in place when you've only had a verbal or implied agreement in the past.
If you need to create an employment contract for your team, Contracts Counsel can help. We have a team of lawyers who have been vetted and work in over 30 different industries. Contact us today to find out how we can help.
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