What is an employment contract? (Plus types and benefits)

By Indeed Editorial Team

Updated 30 September 2022 | Published 30 November 2021

Updated 30 September 2022

Published 30 November 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Employment contracts help to outline the agreement between an employer and an employee. A detailed contract includes the obligations and responsibilities of both parties, including salaries, job description, schedule, benefits and duration. If you're considering applying for a job or about to accept a job offer, it's important to understand the different types of employment contracts and what they include. In this article, we discuss what an employment contract is, what it includes, the different types of employment contracts and the benefits of signing one.

What is an employment contract?

If you're searching for a job or are about to accept an offer, you might be wondering, 'what is an employment contract?' An employment contract is a written agreement that employers issue during the hiring or contract renewal process. This signed document establishes the working relationship between a company and its employee.

One of the main purposes of an employment contract is that it helps parties to understand the employment conditions, their rights, responsibilities and terms of the employment. Although most modern employment contracts are in writing, sometimes, they can also be oral or implied, subject to the agreement made by both parties.

What does an employment contract include?

Most employers require their new recruits to sign an employment contract. This is why it's necessary to understand what a typical contract includes. Below are the main components of an employment contract:

  • Name and address of parties: This section of a contract contains the full name and address of the employee and the organisation.

  • Duration of employment: Contracts often reflect the agreed length of time an employee work in a particular organisation. In some cases, it can be a fixed duration, and in others, it can be an ongoing period that both parties renew after it elapses.

  • Salary or wages: Your contract of employment reflects the agreed salary, wages or commission. It can also include information about your salary matrix and the conditions for a pay raise.

  • Schedule: This part of your contract explains the number of hours and specific days your employer expects you to work. Where the job accommodates a flexible working option like remote working, your contract also reflects this.

  • Confidentiality: Most employment contracts include a confidentiality clause, and your employer may even expect you to sign a separate non-disclosure agreement. This helps the organisation to protect sensitive information of the company like client data or trade secrets.

  • Job title and responsibilities: This part of the contract clearly shows the position the employee occupies in the organisation. It also explains the day-to-day duties and tasks an employee completes in their role.

  • Benefits and compensations: This shows all the promised benefits an employee stands to gain by working for the organisation, such as health insurance, pension plan and holiday time. It can also include information about bonuses, raises and compensation in the event that an employee becomes sick or injured at work.

  • Conflict resolution procedure: Some contracts establish a standard method for conflict resolution within the organisation. This could be through a third-party conciliator or a designated mediator, such as the company's human resource team.

  • Non-compete agreement: Some organisations include a non-compete clause or require employees to sign a non-compete agreement. This agreement requires that, upon leaving the company, an employee doesn't enter into any job that can make them compete with the company.

  • Termination terms and conditions: Your contract also reflects the conditions upon which an employer or employee can terminate the contract. This includes whether you provide the notice in writing or verbally and the amount of notice you when you resign.

Related: How to terminate an employee: a step-by-step guide

Different types of employment contracts

Different factors determine the type of contract an employer offers to employees they hire. They may base this on the employee's experience, the needs of the organisation and the duties the employee performs. Below are some of the possible types of contracts you may get as an employee:

Fixed-term contract

Employers offer fixed-term contracts to employees who are to work for a specific period of time until the completion of a particular task or a specific event takes place. Employers commonly issue these to contract or temporary workers that work for only a specific period, like a few weeks, months or years. Legally, an employee with a fixed-term contract receives the same protections and benefits as other permanent staff of the organisation. Although this contract terminates at the conclusion of the project, both parties can renew it if they so choose.

Full-time contract

One of the most common types of contracts is the full-time contract. In this contract, employees usually work throughout the week for 35 hours or more. Full-time contracts are usually in writing and contain information about paid holidays, benefits, sick leave and retirement plans. Forward-thinking companies also present employees with opportunities, such as professional development programmes and other workplace perks. It also includes the terms of work, like working conditions, rights, responsibilities and duties.

Related: Part-time vs. full-time: what's the difference?

Part-time contract

This contract is similar to the full-time contract except for the number of hours the employee works. Part-time employees work a reduced number of hours, usually less than 35 hours per week, but can also work overtime subject to the agreement made with the management. They enjoy the same rights and privileges enjoyed by full-time employees. If you're working under a part-time contract, then your contract has to show your agreed weekly schedules and the rate of pay, either hourly or daily.

Zero hour contract

Employers offer zero-hour contracts to employees whose working schedules are irregular. A zero-hour contract specifies the minimum number of hours an employee is to work in a week or a month. These employees work on a sporadic basis and remain on call when the work is available. But where the employee is unable to take on the job, they may refuse them. Zero-hour employees may not have an entitlement to the benefits permanent employees get, but they often receive statutory annual leave. This contract is typically given to temporary employees like shop assistants or day labourers.

Read more: The pros and cons of a zero-hour contract

Freelance contract

Employers issue contracts to freelancers they hire to execute a specific task. This includes writing an article for a brand or blog, taking photographs, designing a website or managing a website. Freelance contracts include information like the project details, salary or wages and payment terms. Most freelance employees don't enjoy benefits like insurance or paid holidays, but their contracts are clear and protect them from project-related problems such as no payment or late payment. Freelancers are self-employed, so in addition to their existing job, they may take on more jobs from other employees.

Internship contract

This is a contract between an intern and an employer outlining the nature of the internship, job title and responsibilities, term of the internship, confidentiality, facilities and equipment usage. An intern can either be a worker, volunteer or employee. When an intern performs regular work for an organisation, they're an employee and can gain employment rights.

Where an intern is a worker, they have an entitlement to the National Minimum Wage. But where they're volunteers, they don't receive payment. Though there is no legal obligation for employers to offer interns contracts, most employers choose to do so to ensure an understanding of the work relationship and responsibilities.

Non-compete contract

This contract aims to protect the interest of the employer and prevent employees from working with their competition, selling clients' information or using their business trade secrets. Oftentimes, employers include a non-compete contract in the main employment contract or have them sign in a separate document.

Benefits of an employment contract

Employment contracts are useful to both the employer and the employee. They protect both parties and can serve as a future reference point for information regarding the entire employment process. Here are some of the benefits of having an employment contract:

  • Job security: Employment contracts often stipulate the conditions for termination of the contract. This increases your job security as your employer is bound to abide by the terms of the contract where they seek to terminate your employment.

  • Stipulated term of employment: Most contracts specify the duration of employment. This helps you to know the guaranteed time frame for your job and when you may begin searching for a new job if you don't wish to renew your contract.

  • Reduces risks: One of the biggest advantages of signing an employment contract is that it reduces the risks of future claims by an employee or employer. Where all parties abide by the agreements of the contract, no party can have legal grounds to make unnecessary claims in the future.

  • Clear expectations: Employment contracts outlines in detail the responsibilities of the employer and employee. This helps employees to know acceptable and unacceptable behaviours and what the employer expects of them in their roles.

  • Protects sensitive information: An employment contract is most beneficial to employers and help to ensure that employees who leave their employ cannot leak sensitive information about their company to the public. This also ensures that these employees don't compete with them using their trade secrets.

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