What is an Employment Contract?
An employment contract is a legal agreement between an employer and employee that outlines the terms and conditions of employment. It can be a written document or a verbal agreement by both parties. This document includes the rights, responsibilities, and company policies to be followed by both sides. An employment contract includes the following:
- Job responsibilities
- Compensation and benefits
- Duration of employment
- Work schedule
- Leave and vacations
What is the importance of Employment Contract?
Employment contracts legally bind the employer and employee to uphold their side of obligations. The absence of an employment contract puts the employer and employee at a disadvantage, as it becomes more difficult to enforce any rights. For example, if an employer does not provide the employee with the promised compensation and benefits, it can be difficult to prove as there is no written contract that promises such compensation. This can apply to the employer as well in terms of the employee’s work schedule, employment duration, and responsibilities.
Hence, an employment contract is important for employers and employees to safeguard their rights and fulfill their side of duties. It brings clarity around work and defines the obligations of both parties, reflecting the employer-employee relationship.
What are the different types of employment contracts?
Businesses use different types of employment contracts, depending on their needs and the type of employment. The type of contract depends on factors like work schedule, compensation, job security, etc. There are 4 main types of employment contracts – full-time, part-time, fixed-term, and casual contract.
1. Full-time contract
In this type of employment contract, the employee works a specified number of hours per week, typically 40 hours or more. Full-time workers are entitled to paid time-off, health benefits, retirement, insurance, and other compensation and benefits.
2. Part-time contract
This contract requires the employee to work fewer hours per week when compared to a full-time employee. These contracts generally don’t offer any flexibility in work schedules or benefits, but it varies according to company.
3. Fixed-term contract
A fixed-term contract is used when an employee is hired for a specific, agreed amount of time. Upon completion of the period or a specific task, the contract will be terminated. Either party may terminate the contract before the completion of period or task by providing the required notice period.
4. Casual contract
In a casual employment contract, there are no fixed working hours, income, or benefits. Businesses use this contract when they are short-staffed, have irregular work demands, or have on-call positions.
How to write an employment contract?
To write an employment contract, businesses will need to include all information related to the job, conditions of employment, the benefits, and provisions. It should be clear so that employees understand the standards expected while working at the company. To write an employment contract, follow the 7 steps:
1. Write a title for the contract
The title should clearly state that the document is an employment contract. The title may also include the company’s name. For example, the title can be “Employment Agreement,” or “Employment Contract between [Employee Name] and [Company Name]” or “[Company Name] Employment Contract.”
2. Identify the parties
Next, fill in the basic information, such as the names of the employer and employee. The contract should clearly mention which parties are entering into an agreement.
3. Outline the job title and duties
Identify the employee’s job title and list their essential job functions or responsibilities. Include other duties or requirements that are relevant to the job. Businesses also use this section to talk about the work environment the employee will be working in. This helps employees understand what they are expected to do.
4. List down the terms and conditions
The terms and conditions of employment reflect the employee and employer’s obligations towards the other party. These include the number of working hours, grounds for termination, notice period, and other key details.
5. Include compensation and benefits
Specify the employee’s salary as well as the benefits they are entitled to. Some most common compensation and benefits that are included are salaries, bonuses, commissions, overtime payment, paid leave, insurance, retirement, and other benefits.
6. Discuss the provisions
Provisions are clauses that are included in an employment contract. These include confidentiality, dispute resolution, non-compete, severance pay, non-solicitation, intellectual property, and relocation. These provide a clear view of the rights and responsibilities of employer and employee.
7. Talk to a legal professional
Consult with a legal professional to ensure the employment contract is compliant with all relevant laws. This protects the business from any potential risks regarding contracts.
Employment Contract Template
An employment contract template can be used to customize the agreement with a new employee. It includes information related to work, compensation, performance, termination, etc. Below is an employment contract template.
This employment contact is written and entered into as of the [Date] by and between [Employer Name] residing at [Company’s address] and [Employee Name] at [Address]. This contract is an agreement between the above-mentioned parties and is governed by the laws of [State/District].
This contract shall commence on [Start Date], continue for a period of one (1) year, and end on [End Date]. The employee agrees to perform all the duties and responsibilities of their position in accordance with all company rules, policies, and procedures. As per the terms and conditions, this contract may be renewed or terminated.
Position and duties
As a [Job Title], the employee agrees to perform the duties communicated by the employer, which include but are not limited to the assigned responsibilities.
The employee will be paid an annual salary of [Amount] for the duration of this contract. Payment will be made in monthly installments. The employee shall also be eligible for the following benefits, subject to the company’s policies and eligibility:
[List of Benefits]
The first [time frame] of employment shall be a probationary period during which time the employee shall not be eligible for any benefits or paid time off. The employer may choose to terminate the employee without prior notice or severance pay.
Either party may terminate this contract at any time with [Notice Period] days’ written notice or payment in lieu of notice, except for any valid reason for termination.
The employee agrees to maintain all confidential information of the employer and not to disclose the information to any other party during and after the employment term.
The employee agrees that following the termination of this contract, he/she will not engage in any work for a company that is related to or is in competition with the company.
This contract constitutes the entire agreement between the employer and employee. This contract can be modified at any time, provided with written consent from both parties.
If any provision of this contract is found to be invalid or unenforceable, such provision shall be struck from this agreement and the remaining shall remain in full force.
In witness thereof, the employer and employee have executed this contract as of the date given here in writing.
Employee Signature ________________
Company’s Signature ________________
What are the Advantages and Disadvantages of Employment Contracts?
Employment contracts serve as proof of the obligations and rights of both parties and help to uphold the employer-employee relationship. This reduces conflicts and promotes a clearer and more positive work environment. The following are advantages of employment contracts:
Advantages of an employment contract
Employment contracts serve as a legal document and are enforceable in a court of law. They protect the rights of employees and the employer. The 4 main advantages of an employment contract are:
1. Protects the interests of the employer
Employment contracts include the specific duration of employment and remove any risk of losing the top performers to competitors. Including attractive compensation and benefits packages in the employment contract is key.
2. Increases job security
The main reason for making an employment agreement is to guarantee the job to the employee. By signing the document, the employee is guaranteed job security for the specified amount of time.
3. Improves accountability
In the employment agreement, the job role and responsibilities are clearly outlined, thereby helping with performance and productivity. Ultimately, it improves the accountability of the work as employees know what they are expected to do.
4. Reduces disputes
By creating a clear written employment agreement, any disputes arising between the employer and employee are reduced. For example, if a dispute occurs on compensation, both parties can review the terms of employment and resolve the issue instead of taking the matter to a court or a lawyer.
Disadvantages of an employment contract
The main disadvantage of an employment contract is that it restricts the employer-employee relationship. The employee might be interested in working for the company for the specific amount of time and leaving the company thereafter. On the other hand, employees are also at a disadvantage as they cannot leave before the agreed period. This causes them to lose better opportunities after the contract ends.
1. Who are the parties in an employment contract?
There are two parties in an employment contract – the employer and the employee. The document is signed by both parties and forms as the basis for rights, responsibilities, and any entitlements.
2. What should a contract of employment include?
An employment contract should include information related to the employer and employee, compensation, benefits, role, responsibilities, termination, notice period, work schedule, and other requirements.
3. How long is an employment contract valid?
The validity of an employment contract depends on the conditions laid down by the employer. If the contract specifies a specific period of employment, both parties are obligated to fulfill the condition.
4. Can an employee break the employment contract?
If the company’s policy and conditions allow for termination of contract before its due date, then the employee can break the employment contract. However, most companies may still require the employee to complete his notice period before leaving.
5. Are employment contracts confidential?
If the employment contract contains a non-disclosure clause restricting any sharing of documents, the employee should keep the contract confidential. These obligations are legal and are enforceable in the court of law.
6. Can the employer withdraw the offer after signing the contract?
Once the employee signs the employment contract, he is legally bound to the company to uphold his duties. He cannot withdraw the employment offer after signing it. He is, however, free to do so before signing the contract.
7. Can employers change employment contracts in India?
According to the Indian Contract Act 1872, the terms and conditions of an employment contract can only be changed with the consent of both the employee and employer.