Types of Employment Contracts: A Complete Guide
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Many will agree that we live in the golden age of startups, and today's business world can be a fruitful field for anyone eager to dive into entrepreneurship. However, as exciting as it sounds, being self-employed comes with many responsibilities, especially if your ambition goes beyond having a company of one.
Although finding a high-quality workforce may seem challenging, keeping them is more like a mission impossible. So, if you want people to come and stay, building a long-term working relationship, you need to offer conditions of employment worth considering.
We still recognize verbal agreements as a legit way of closing deals. However, today's employees expect a written document as part of their overall onboarding process.
So what are the requirements for creating an employment contract?
Learn more about different contracts and how to determine which one is the most adequate for a specific employee profile.
Before discussing different types of employment contracts, let's define the basic terms
The term employment contract refers to a document signed by an employer and employee, comprising terms of employment. It defines rights and responsibilities, ensuring transparency and legal protection for both parties.
However, employment agreements can be completed in different ways - with a handshake or signing a legal document, and we can divide them into three groups - written, oral, or implied.
In addition, if you opt for a written contract, the thing you should determine first, even before creating a document, is the employment status of the person you plan to bring to the team. Finally, every agreement should contain working hours, employee compensation, and benefits, including paid time off and healthcare.
What if you don't provide a contract to an employee?
An employment contract exists from the moment someone starts working with you. So, it is your responsibility to provide a written statement defining the terms you and your new employee agreed on.
Introducing the most common employment agreement in the US
Most US employers offer at-will employment. Once they sign an at-will contract, both employer and employee confirm they are familiar with its primary condition - an employee can quit or get fired any time and for any (legal) reason.
The distinctions between written, oral, and implied employment contracts
Agreements come in different shapes and sizes, but each exists to meet the needs and expectations of all sides involved in the negotiation. So, here's what you should know about written, oral, and implied employment agreements.
A written employment contract
When signing a written contract, an employer and employee agree to respect the terms and conditions defined in such a document. Thus, we can refer to it as a "gold standard" in the contemporary business world because of the legal protection it provides for each side.
A written contract is in force within a specific timeframe. Once you and an employee sign it, you both agree that an employee will work at your company for a fixed period of time.
An oral (verbal) employment contract
The business practice recognizes verbal agreements as contracts, though they are based on oral promises and a handshake. The foundation of such an agreement is mutual trust, accompanied by any documentation used during that collaboration.
It is of the utmost importance that both parties agree on the terms of the verbal contract. For instance, as an employer, you need to be careful with what you are promising because the violation of oral contracts can lead to lawsuits.
An implied employment contract
An implied employment contract is the combination of verbal statements and written agreements. Although they are not formally documented, employees can use them in court because the violation of an implied contract can be grounds for a lawsuit.
But before making any concrete move, in this or similar scenarios, employees should talk to the human resources and ask for legal advice.
How does an implied employment contract work? Maybe the best way to explain it is by using football terminology. For example, if your company has a policy to only fire people who have made three fouls, and you fire someone after just one reprimand, this situation can be considered a breach of contract.
Types of employment contracts based on their expiration date
The following section covers permanent and other types of employee contracts.
A permanent employment contract
Once both parties sign a permanent contract, they agree an employee will work for an employer for an indefinite period of time or, at least, until one of them decides it is time to go separate ways.
When working on permanent contracts, employees receive a monthly salary or are paid at a set hourly rate while working full-time or part-time.
The experience has shown that most growing companies offer a permanent contract to attract and keep a high-quality workforce. Aside from secure compensation, these documents ensure benefits such as healthcare and paid time off and give space for professional development and advancements.
A fixed-term contract
Employees who sign a fixed-term contract have the same rights as permanent ones, but with an end date, usually six months or a year; it is the best option for companies that want to ensure maternity leave coverage or plan to hire interns.
Because the employment law protects fixed-term employees the same way as permanent employees, avoid offering them poor terms. After all, if you want excellent results, you need to motivate each team member properly.
Although there's an option of extending the duration of the fixed-term agreement, a person can work on such a contract for four years max. Once that period is over, a team member becomes a permanent employee.
Also, it's your responsibility to inform each team member working on the fixed-term agreement of every permanent vacancy. Finally, if an employee continues working after the fixed-term contract has expired, you can use an implied agreement to announce that you've changed the end date, providing the new notice period.
A casual employment contract
Casual employment contracts are an ideal option when you need someone new in your team, but you can't specify the work you will give them per week, how many hours you'll need them each day or how the workflow will look.
However, even if an employee agrees to those terms, you still may change the agreement, meaning, if the workload increases and you are satisfied with their performance, you can offer them some other contract.
Still, a casual employment agreement must comprise the minimum number of hours you expect someone to work with you per day or week and a prominent note that working hours and the workload may vary in the future. In addition, casual employees are entitled to holidays based on the number of working hours they completed, and their rights include statutory sick pay.
Remember, transparency is the key to every successful business, so if at some point you need a casual employee to work regular hours, you need to inform them by providing a written notice. Explain it is a short-term thing, and it doesn't include rights defined in permanent contracts.
To understand this type of contract, let's learn more about the mutuality of obligation. What does it mean? It means the employer is not obligated to specify and offer minimum working hours, and employees to accept them.
Unfortunately, in most cases, employers expect their zero-hours employees to work on short notice. Therefore, while some employees can decline the offer, others must accept every assignment.
Those who agree to a zero-hour contract can still claim some statutory employment rights, such as a minimum level of paid holiday and national minimum wage.
A favorable contract for each new employee
It's just a matter of time before we discuss the nine-to-five work model in the past tense. Companies have embraced the benefits of the digital era, hiring people from all around the globe, almost adjusting to their work dynamics.
That doesn't mean that full-time employees will disappear from the map. On the contrary, they will continue to present the foundation of every company, but many doors are open to workers with more flexible work routines. Still, a contract and a full-time employee are not the same, and you'll need different agreements for each.
Full-time and part-time contracts
The number of hours required for an employee to be working under a full-time contract differs between countries. For instance, the standard workweek scheme in the US includes 40 hours per week, with employees working five days a week, eight hours per day. On the other hand, team members working regularly but fewer hours are part-time employees.
Whether full-time or part-time, employees working on permanent contracts enjoy the same level of job security while those on full-time may enjoy more considerable benefits. Overall, both types of employees are entitled to health insurance, paid days off, and overtime rates.
An independent contractor
Unlike people paid at a set hourly rate, independent contractors receive compensation after completing a specific task.
For instance, freelancers usually work at a piece rate, which means most charge a flat fee when agreeing to complete a particular assignment, such as writing a post, making a video, or creating a logo.
They can be fixed-term employees because of their professional offering, so every contract signed with a freelancer should contain deadlines, project details, and pay per piece.
Trainees and apprentices
If your company offers training to everyone eager to sharpen their skills and learn something new, students, for instance, in that case, an apprentice contract is the most suitable solution. Although it presents a specific type of agreement and cooperation, this contract also comprises the start date, training plan, working hours, and pay.
It's one thing to promote a responsible business and another to act according to it
Modern business is not about solid leaders; it is about mentors and teachers. But, of course, hierarchy within an organization is inevitable. Still, as a manager, your goal should be to make a team of like-minded individuals free to express their thoughts and ideas.
Every person presents themselves in the best light during a job interview. But it is the same with employers. Even if someone's idea of success is not monetary, we all work to earn money to ensure financial stability.
That's the reason people want to protect their employment rights before accepting the job offer. Remember, the verbal agreement accompanied by a written contract is the foundation of a prosperous employment relationship.
After all, contracts protect both employers' and employees' rights and ensure everyone will respect their part of the deal, including non-compete agreement. Without them, the entire business world would be like a house of cards.
Staying compliant with the local laws is the number one concern for many employers wanting to hire internationally, but don't let it stop you from diving into the global talent pool.
Deel ensures each contract a full-time employee or contractor signs is entirely compliant with local regulations. Finally, there is no need to learn a new set of rules each time you're ready to hire in a new country.