An employment agreement is a document outlining the terms and conditions of employment between an employer and an individual (the employee). Typically, an employment agreement defines and details the expectations of the role, the obligations of both parties, and any legal rights.
This document aims to ensure both parties mutually understand the employment relationship and mitigate any future confusion or disputes. The agreement must be made before beginning the employment relationship, and companies should store employment contracts on file for all employees in case of future concerns.
Types of employment agreements
There are several types of employment agreements, categorized by the contract mechanism itself (written vs. verbal), the timeframe of the work, the type of worker (e.g., contractor vs. permanent employee, part-time vs. full-time), or other factors.
Written employment contract
Often, the most thorough type of agreement, a written contract, lays out the terms of employment, the obligations on both sides and each party’s rights. Both parties must sign a written contract as proof of agreement.
Oral contract
An oral or verbal contract is a discussion between an employer and employee in which they agree to terms without documenting them in writing. Although this type of agreement can be enforceable, the lack of documentation can invite disagreement between employers and employees.
At-will contract
In most US states, standard agreements include a clause for at-will employment. This means that the employer may legally terminate the employee at any time for any reason that is not discriminatory, and the employee may similarly vacate the job at any time. Due to at-will employment laws, the majority of employment contracts cannot guarantee a specific length of employment.
Temporary contract
Some employment relationships are intended to be short-term, in which case the employer may use a temporary contract to document terms such as the length of time of the engagement and the expected project deliverables.
Independent contractor agreement
When hiring freelancers, consultants, or self-employed contract workers, companies may use a contract that specifies how the worker is engaged differently than a full-time employee. For example, such a contract may include an hourly wage with an acknowledgment that the role does not include employee benefits such as 401(k) retirement plans, health insurance, paid vacation, and sick leave.
What is in an employment agreement?
The specifics of an employment agreement will vary based on the company, role, and other details. However, there are standard items in most agreements, including:
- Identification of the parties involved: Names and addresses of the employer and the new employee
- Role details: The job title and general responsibilities of the position, as well as the expected work location (or noting the role as remote), work schedule, and official start date
- Compensation: Details and terms of the base salary or wage, as well as any other compensation offered, such as commission, bonuses, or equity
- Benefits: Information about vacation time off, sick leave, health insurance, retirement plans, stock options, and any other company-sponsored in-kind benefits
- Duration of employment: Specification of an ongoing engagement or a fixed term with a specific end date
- Probationary period: Information about any probationary period during which the company will assess the employee to determine continued employment
- Termination of employment: An explanation of at-will employment, if relevant, and any required notice periods, severance pay agreements, or other requirements
- Non-disclosure agreement: Information on company policies regarding how the employee should protect confidential information and intellectual property, both the company’s and their own
- Non-solicitation and non-compete agreement: Acknowledgment of any restrictions upon the employee’s future ability to work with competitors, soliciting of the company’s clients or employees for business elsewhere, or sharing of trade secrets
- Dispute resolution: Explanation of options or rules for resolving future disputes, such as mediation or arbitration
- Signatures: Dated acceptance of the agreement by both parties
What is the difference between an employment contract and an agreement?
The terms “employment contract” and “employee agreement” are frequently used interchangeably, but there are some distinctions between them. All employment contracts are a type of employment agreement, but not all employment agreements result in formal employment contracts.
Employment or employee contracts are typically formal, legally binding written documents that specify the terms and conditions of an employment relationship. They often include clauses regarding confidentiality, non-compete and non-solicitation agreements, and termination clauses. These documents are signed and usually legally enforceable.
Alternatively, “employment agreement” or “employee contract agreement” is often used more broadly, referring to any agreement between employer and employee, including oral contracts. While these may be legally binding, their enforceability depends on the content, the mechanism of the agreement, and other details.
Are employment agreements legally binding?
While not all employment agreements are legally binding, those in a written contract often are. Companies must check whether a contract of employment includes the following points to ensure it’s legally binding:
- An offer: Legally binding employment contracts must contain an offer of an employment relationship.
- Acceptance: The employee must accept the offer and terms the company proposes.
- Mutual assent: Both parties must agree to the terms outlined in the contract.
- Consideration: Each party should give and receive value from an employee contract.
- Adherence to laws: All terms and conditions must comply with employment laws and regulations.
The enforceability of contracts also depends on the jurisdiction. Some states, like California, have exceptions to at-will laws, and at-will employment is not enforced in Montana. Additionally, non-compete clauses are no longer enforceable in the US outside of a few specific jobs (for instance, executive leadership).
Companies that hire in several jurisdictions or allow remote work must also be aware of the differences in legal requirements in each location. Global companies should adhere to local employment laws in each country of operation.
Finally, although a verbal agreement can be legally enforced, it is often more challenging to do so than enforcing a written agreement or contract. Companies should leverage written contracts for all employment-related agreements to avoid undue legal issues and expenses.
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