Why Written Employment Contracts Are Essential to Your Business

by Thom Tracy

2 min read

There are numerous details that need to be agreed upon between the employer and employee when entering into a work relationship. Along with the typical aspects, such as salary and benefits, both parties have interests to protect. A written contract documents the decisions regarding the terms of employment in a legally binding manner.

Employment Contract

An employment contract is a legal binding agreement stating that the employee will work for the employer. The contract includes the details of the job; documenting the terms of employment in such a way protects both you and the employee regarding any sort of liability. You will know the compensation to be paid, and the worker will understand exactly what is expected of his or her performance. Typically, contracts are reviewed yearly, though six-month or multi-year agreements are not uncommon.

Written vs. Verbal

All employment relationships are contracts, whether they are written or verbal. However, a written contract lists specifics on paper and is the safer option for all involved. A verbal contract can be difficult to prove, unless there is a witness. If the employment relationship ends less than amicably, one or both parties may pursue litigation. Without the terms of employment laid out in a document, a legal claim can be dismissed due to insufficient proof. For example, if there was a dispute about the number of paid time-off days the employee was entitled to his or her first year with the company, without a contract there is no way to prove either side.

Components of an Employment Contract

The employment contract documents the terms of employment. Included are likely the employee’s start date, position, primary duties, rate of pay and time tracking, number of paid time-off or vacation days, benefits, and payment terms. Bonuses or stock options, if applicable, will also probably be listed. The contract may include a confidentiality agreement to protect the employer’s intellectual property, a noncompetition clause that prevents the employee from working for a rival company for a certain amount of time, and a best effort clause stating the employee will work to the best of his or her ability. A termination clause is normal and states that either party can terminate the contract at any time as long as a standard amount of notice, usually two weeks, is given. The contract may include an arbitration clause, which specifies that any legal disputes be settled through arbitration rather than the courts.

Process for Employment Contract

Most often, the employer drafts the contract and submits it to the employee for review before the first day of work. If the employee requests revisions of terms, he or she sends the contract back with the notations. The process continues this way until both sides are happy with the terms. The employer and employee sign and date the contract. If possible, any discussion regarding the employment terms should be done through email so there is documentation of the conversation. Simple contracts can be handled on one’s own, but if the contract is complex, the employee may consider consulting with an attorney before signing the final copy.

References & Resources

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