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What’s the purpose of an employment agreement?

What does an employment agreement contain?

Types of employment agreements

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What is employment agreement

An employment agreement, often known as an employment contract or job contract, is a legally binding document that establishes the terms of the employment relationship between an employer and their employee.

Employment agreement is crucial as it clearly defines the role, responsibilities, salary, benefits, and conditions under which the employment relationship will operate. It's typically finalized and signed by both parties once the employee agrees to the job offer, ensuring mutual understanding and agreement.

  • Purpose of employment agreements: These contracts clarify the roles and responsibilities of both the employer and employee, enhancing job security and aiding in dispute resolution.
  • Key contents: Employment agreements detail essential aspects such as employee identification, role requirements, compensation, benefits, and termination clauses, tailored to company and legal standards.
  • Types of agreements: Common forms include written contracts for detailed documentation, implied contracts based on company policies, and oral contracts for basic agreements, each varying in formality and enforceability.
  • Legal clauses: Include confidentiality, non-compete, and non-solicitation clauses to protect company interests and define employment terms further.

What’s the purpose of an employment agreement?

The purpose of an employment agreement is to solidify a working relationship between employee and employer by defining the responsibilities and obligations of both parties. By using this type of contract, employers can improve the employee experience and mitigate legal risks.

  • Provide new employees with a clear understanding of their position and job responsibilities
  • Offer stronger job security to employees by protecting their employment status with a legally binding contract
  • Streamline dispute resolution by using the agreement as a source of truth to resolve workplace issues and avoid the rise in workplace arbitration cases. For example, if there’s a dispute over the amount of paid time off an employee is entitled to, either party can refer to the agreement for clarification
  • Protect the company’s confidential information, rights to contract termination, and more

What does an employment agreement contain?

In every agreement, the terms of employment should be tailored to the company, the employee’s job responsibilities, and the local employment laws. A member of the human resources team will typically create the employment agreement and include the following information:

  • ID: Employee’s full name and address

  • Role requirements: Job title and job duties

  • Employment duration: Contract start date and end date (if contracted), and probationary period (usually 90 days)

  • Compensation: Pay rate (hourly or annual salary), bonus structure, stock options, and pay dates

  • Employee benefits**:** Such as health insurance, paid vacation time, retirement plans, dental insurance, life insurance, or disability insurance

  • Performance review cycle: Outline when performance reviews are held, what will be discussed, and what rights employees have during the review process

  • Termination clause: Defines how and why the employer can terminate the employee agreement, as well as the required notice period if the employee resigns. It also includes the best practices for returning company-owned equipment

  • At-will employment clause: This clause states that the employer can terminate an employee agreement for any reason without warning, as long as the rationale is legal, and employees can resign for any reason without warning, as long as the rationale is legal. At-will employment is not legal in all countries

  • Confidentiality agreement or non-disclosure agreement**:** Restricts employees from sharing confidential information, trade secrets, and intellectual property learned during their employment with unauthorized individuals

  • Non-compete agreement**:** Employees agree not to work for a direct competitor during their employment or for a specific amount of time (typically one year) after they are terminated or resign

  • Non-solicitation clause: Prohibits employees from soliciting clients or workers from the company during their employment or after the employee has been terminated or resigns. Applicable for a defined period of time (typically one year)

  • Other employment terms as required for the role, company, or country

Types of employment agreements

Different types of employment contracts offer varying degrees of clarity, formality, and legal enforceability. The three most common are written contracts, implied contracts, and oral contracts.

Written employment contract

Written agreements are typically the most thorough type of employment contract as they list out the rights, rules, and obligations of both parties. These agreements can be created and signed digitally or in print form. 

Implied contract

An employee can enter into an implied contract—or implied agreement—when they receive documentation related to their role that the employer expects them to abide by. For example, if an employer shares their company policy or employee handbook with a new hire, it’s implied the new hire will follow the rules and regulations within those documents, though they may not formally acknowledge or sign the documents.

Oral contract

An oral employment contract is a verbal agreement between an employer and employee. This type of employment agreement tends to be broad and includes basic information such as the pay rate, start date, and scope of work. Oral contracts are not formally filed and therefore difficult to enforce.

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