Companies everywhere rely on employment contracts to hire employees. Create your own customized agreement for your business with the help of our step-by-step instructions and pre-prepared templates.
Last Update August 2nd, 2022
- What is a Contract of Employment
- Types of Employment
- How Does an Employment Contract Work
- Terms to Include in a Working Employment Agreement
- How to Write a Contract Agreement
- Employment Contract: Pros and Cons
- IRS Requirements for Employment Contracts
- Employment Contract Sample
- Employment Contract FAQs
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What is a Contract of Employment
A contract of employment is a written agreement between an employer and an employee. It covers a number of essential elements that detail the precise nature of the relationship between the two parties. This might include the salary that will be paid and whether the employee is bound to any agreements of confidentiality (such as an NDA), in addition to other conditions.
Contracts of employment can be known by a number of alternative names, such as:
Contracts of service
Types of Employment
Employment can take many different forms. Whether you are running a company or applying for a job you will see a variety of employment types that can be secured by prospective employees. This will usually include one of the following examples:
Full-time employment: Full-time jobs are an indefinite working position (i.e. there is no pre-defined end date to it) that usually requires employees to work a full schedule of around 40 hours per week.
Part-time employment: Part-time jobs are another kind of indefinite work, although they require an employee to work fewer hours per week than a full-time position (usually below 30 hours per week).
Period or term employment: This kind of employment is usually used for shorter-term projects. Period or term employees are employed for a defined amount of time and most often leave the company once the duration has elapsed.
Trial period (probationary employment): Most full-time and part-time employment contracts will include a trial period of a few weeks or months to allow both parties to decide if the agreement meets their needs as expected. This allows one side to end the contract early without penalties if it doesn’t live up to its promise.
At-will employment: At-will contracts cover a working arrangement where an employee may be terminated at any time for any reason as long as it doesn’t contravene federal workplace discrimination laws.
Temporary employment: Temporary employees are contracted for a fixed period of time to fill sudden or short-term vacancies in a company’s workforce. Workers may be hired on this basis for a few weeks or months at a time.
How Does an Employment Contract Work
An employment contract is used to set expectations and clarify the nature of a relationship between an employer and an employee. It does this by binding both parties and outlining their responsibilities in writing.
The contract provides legal protection for both parties by defining what obligations must be met. It also sets clear and understandable conditions for the relationship to avoid any confusion or misunderstandings about who is responsible for what.
Terms to Include in a Working Employment Agreement
It is very important that your employment agreement covers a number of essential terms. These will define, among other things, the type of employment that will be contracted, and the salary that will be paid.
However, each individual contract is different and will usually be written to allow the conditions to fit the needs of the employer and employee best. The following terms will normally be covered in an employment agreement:
The names of both parties.
A description of the employee’s duties.
The employee’s daily schedule and the hours of work they must fulfill.
The salary that will be paid.
When the contract will end or how it can be legally ended.
Notice periods for ending the contract early.
The applicable state law that will prevail over the agreement.
How disputes will be resolved.
Additional clauses, for example, terms that protect the confidentiality of company data or stipulating indemnification.
How to Write a Contract Agreement
An employment contract must be written with care in order to be fully effective and valid. It is important to ensure that all the information is written in plain English in full sentences so that there can be no ambiguity about its contents.
The main body of the document will be structured into essential sections that outline and explain the main terms of the contract. At the end of the form, it is also possible to add additional clauses and restrictive covenants that place controls on what the employee can and can’t do whilst working under the agreement.
Our step-by-step template customization questions can take you simply through this process. It will help you ensure you don’t miss any important information in your final draft and will help explain each essential element you must add.
Employment Contract: Pros and Cons
Most employers and employees choose to create employment contracts to create trust and a clearly defined working partnership between them and the other party. However, these agreements don’t work best in every situation.
Depending on the type of employee you want to hire and the type of work that is to be done, an employment agreement may or may not suit your needs. Some of the most important pros and cons to consider before deciding if this is the right kind of contact for you can be found below.
|Employment contracts create a clear and understandable outline of the obligations of both parties.||Whilst this is also an advantage, the legally binding nature of the contract can deter some parties.|
|Employment contracts can be written to include special protections for private data and copyrighted material that is being used by the employee.||Employment contracts usually contain rigid, unchangeable terms and offer little in the way of flexibility.|
|Employment contracts are usually the most stable form of working agreement available.||Parties can face financial penalties if they break the contract.|
|The agreement provides legal protections for both parties so that nobody can be defrauded.||As the terms are set from when the contract is signed, the agreement can only be changed following negotiation and a new agreement being approved by both parties.|
IRS Requirements for Employment Contracts
Usually, employers are required to withhold and pay income taxes, Medicare taxes, social security taxes, and unemployment tax on wages paid to employees, but not to independent contractors.
If you are unsure whether a worker is an independent contractor or employee, you can fill out a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will review the circumstances and decide the worker’s status.
In the case of employees, employers must report taxes by filing one or more of the following forms:
Employers who withhold federal income tax, social security or Medicare taxes (including withholding on sick pay and supplemental unemployment benefits): Form 941, Employer's Quarterly Federal Tax Return
Employers who are filing to report agricultural wages: Form 943, Employer's Annual Federal Tax Return for Agricultural Employees
Employers who have received written notification about the Form 944 program: Form 944, Employer’s Annual Federal Tax Return
Employers who are filing to report backup withholding: Form 945, Annual Return of Withheld Federal Income Tax
Employment Contract Sample
It can often help to see a real example of how your final employment contract will appear before starting one of your own. If you want to understand more about how these essential documents are structured and written, take a look through our template example below.
Employment Contract FAQs
There are many fine details that must be considered when creating a secure and legally effective employment contract. To find out more about some of the key elements found in these agreements read through our FAQs and answers below.
Who are the Parties in an Employment Agreement?
There are two main parties in an employment contract, the employer and the employee. Under the agreement, the employee agrees to provide a service in return for financial remuneration from the employer.
What is the Difference Between an Employment Contract and a Temporary Employment Contract?
The main difference between a conventional employment contract and a temporary employment contract is its duration.
Most employment contracts will be created with no end date and will only terminate once an employee or the company serves official notice by submitting a resignation letter or an employee termination letter. Temporary contracts on the other hand will have a pre-arranged expiry date when they will come to their natural end.
What is a Probationary Period?
Probationary periods are exit clauses that are often written into employment contracts to give both parties a chance to assess the new agreement. This will normally consist of a number of weeks and months at the beginning of the contract in which either party can terminate the agreement early without notice.
It is possible that in this period, a party might decide not to continue working under the contract before the probation period ends. This might happen if they are dissatisfied with their new working relationship and wish to pursue other opportunities instead.
What are Confidentiality Clauses?
Confidentiality clauses are important restrictive covenants that police how employees and contractors can use secret information and private data. These kinds of clauses are often found in employment contracts and independent contractor agreements and prevent hired workers from sharing certain types of data outside the remit of their employment.
What is a Notice Period?
A notice period for an employment contract indicates the minimum amount of time that either party must give to inform the other party of their intention to terminate the agreement. In many jobs, this will often be just 2-4 weeks in advance of ending the contract. However, for positions of greater seniority, it might be necessary to serve a notice period of several months.