Things to Look for in an Employment Contract
Updated 26 February 2021
What Is an Employment Contract?
An employment contract is a document signed between worker and employer (the company or labor union) that sets out the agreement between the parties.
While some employment rights are set out in law, there will be other rights and responsibilities that are specific to you and the company.
An employment contract should set out the terms on which you are engaged to work and all relevant rights and responsibilities, of both the worker and the employer.
Both parties should be able to refer to the contract should there be a dispute.
In addition to rights laid down by federal statute, there will be state and local laws that may be applicable. There will also be items specific to the job role and company, such as working hours, place of work, notice periods and so forth, which should all be set out in the employment contract.
Employment contracts are usually presented to conclude negotiations and therefore it is more usual to conduct the bulk of negotiations before being presented with the contract, particularly in relation to salary and job role.
Employment contracts are also different from a memo or summary of terms.
Types of Employment Contracts
Almost all US employment relationships are presumed to be 'at-will' unless you happen to be working in Montana.
At-will contracts are where either employee or employer can break the contract for pretty much any reason, without any notice, just so long as the reason isn’t illegal (for example, based on race or sex, etc.) or it doesn’t fall under one of the following exceptions.
Exceptions to At-Will Employment:
- Modification by Contract – In more senior roles, the employment contract may vary the ‘at-will’ presumption and give contractual exceptions such as that the employment may only be terminated for cause (for example, a specified list such as poor misconduct, performance issues or economic reasons, etc.).
- Public Policy Exception – Many states have exceptions to the ‘at-will employment’ where an employee cannot be fired, including in 42 states where if 'the termination would violate the state's public policy doctrine or a state or federal statute' there can be no termination.
- Implied Contract Exception – Fewer states (36) have an ‘implied contract’ exception where the employee cannot be fired if there is an implied contract; for example, where there is an employment handbook that states an employee will not be fired without following due process. Emails and conversations before the contract being signed may also be included in the ‘implied contract’ exception; for example, where the job advertised was for a specific period.
This is where no specific hours are guaranteed to the employee, rather they are given to the employee as and when they are required.
This could include seasonal work or be akin to a ‘zero-hours’ contract where there is no guarantee of work being available each week.
Fixed Term Employment
A fixed-term employment contract is one that is for a specified and determined amount of time.
This might cover seasonal work or when someone is employed to work on a specific project, or to cover a role until a person returns.
Unless the contract is renewed, it will expire on a specified date.
Fixed-term contracts typically do not extend past a three-year time frame. Fixed-term contracts usually include a termination clause that helps an employer avoid having to pay the employee for the entirety of the remainder of the term.
Arguably this makes the fixed term little different in practice from at-will employment; however in some states, such as California, state law prevents fixed-term contracts from being at-will.
These are the most common type of employment contract, also called indefinite contracts, where there is no specified end date.
There may be a specified date for renewal or re-negotiation (one, two or five years is usual).
Pros and Cons of an Employment Contract
Signing an employment contract brings both positives and negatives for both employer and employee.
- Signing a contract brings clarity and security, particularly if it is a fixed-term or permanent contract, setting out salary and expectations.
- Employment benefits, such as health insurance, 401(k) contribution, paid vacations and time off, are usually offered in some form, which is appealing to employees.
- Employer benefits to employment contracts include a more engaged and positive workforce who stick in a job role which they view as a career choice, rather than simply moving on when they have a better offer.
- The cons are more heavily weighted to the employer, who will have more employment rights to consider by contract.
- It is arguable that some employees prefer not to be tied down by a contract.
- Employers will also have to find time and money for the preparation and admin of employment contracts.
What to Look for in an Employment Contract
Period of Employment
This is the first thing to check, as you should make sure you understand on what basis you are being employed and whether it accords with your understanding of the job offer and/or negotiations.
You should check the hours you are to work and whether the role is full time or part time.
This part will also set out any terms in relation to renewal if the contract is a fixed-term contract.
Renewal may be automatic or if a specific set of circumstances occur, or by negotiation before the contract comes to an end. Make sure you note which it is, as this could have implications down the line when deciding how to proceed.
This may seem inconsequential when you start work but you do want to make sure that your job title adequately reflects the work that you do, and is in line with your colleagues.
Bear in mind that a title too junior for the work that you are being asked to do can negatively affect your resume, but a title too senior for your position can equally cause issues down the line when new employers will make assumptions as to your knowledge or experience.
As job titles are largely employer dependent (with some exceptions in specific industries), this is one area of the employment contract that may be more negotiable (particularly if the employer is unwilling to move on salary).
Job Description and Responsibilities
The employment contract may not go into huge detail on the job description and responsibilities.
It is a balancing act – you want the contract to be quite specific about expectation, but equally, you want the room to grow and develop in your role, so you don’t always want to be tied down to a specific list of duties.
That said, you do want to be clear about what you are being employed to do, so it is worth making sure that you and the employer are clear about expectations, even if it is not within the document itself.
This is usually the first place that employees turn to when receiving a draft employment contract.
Additional benefits in addition to salary will be listed here.
These can include:
- Health insurance
- Health benefits
- Travel expenses
- Additional remuneration, including things like gym membership, company cars, cards and so on, depending on your role
Remember, that bonuses can be both guaranteed and discretionary – guaranteed bonuses and commission schemes should be set out here. Make sure that if there is a commission structure that you understand it.
This section will set out expectations in relation to working hours, locations and patterns.
It may be set out in terms of locations, specified hours (for example, at the office downtown between 7 a.m. and 4 p.m.) or in terms of hours across the week (for example, 40 hours to be completed at the employee’s discretion across the week).
Overtime expectations should be set out here (you may or may not be paid for that, or receive time back in lieu) as well as patterns of employment such as flexi-hours (where, for example, you must be available during ‘core hours’ – maybe 10 a.m. to 2 p.m. – and hours outside that are at your discretion over a working week, or where you might work an eight or nine day fortnight with compressed hours, and so on).
This is something that should be able to be negotiated, although it will depend on seniority and the employer.
Any flexible working patterns should be listed here and also whether the employee can work from home or is expected to be in a specific location if that is appropriate to the role (you would expect it to list the usual non-Covid position).
This is something that may be able to be negotiated, although generally should be done before the contract being presented.
Paid Leave (Vacation Days) and Sick Pay
Workers in the US are not guaranteed paid sick days and paid holiday like they are in other countries such as the UK and France. Paid leave is at the sole discretion of the employer, which the US Bureau of Labor Statistics estimates is only carried out by around 77% of private employers.
Employees often have to carry out up to one year of service before they can benefit from an average of 10 vacation days, plus public or federal holidays which add a further eight days per year.
It is usual for vacation days to increase with service, but in nearly a quarter of cases, no vacation days are offered at all.
Also make sure you know what state laws apply; for example, in New York State, if you leave before you’ve reached 12 months of service, your employer doesn’t have to reimburse you for accrued vacation days, yet this is not the case in other states, so it is worth checking.
Pension clauses relate to provision for after retirement, typically by either or both the employee or employer paying in a percentage of earnings into a specified pension fund.
In the US, there is no statutory requirement to provide retirement benefits or a pension, although the employer can provide one or there may be a collective bargaining agreement with a labor union.
If such a clause is provided, the administration is governed by federal law.
The probation period sets out an initial phase for a new employee where the expectations and rules may be slightly different.
It might mean that more training is provided, or more supervision required.
If the employment contract is ‘at-will’, it is important to remember that the probation period usually won’t have the effect of guaranteeing work for the specific period as the employer can still terminate the contract for any non-illegal reason.
Confidentiality Agreements/Non-Disclosure Agreements
These clauses largely protect the employer and their trade and commercial secrets. They can cover all stages of the employment process, written and verbal, including discussions, proposals, reviews, analysis and negotiations, as well as all elements of the employee’s work.
The clause effectively permits the employee to use company proprietary information for the purposes of employment, for the duration of employment.
It means that you cannot take any information you are made aware of during or in the course of your employment and use it to your advantage outside of the workplace. This could be in relation to the product, employees or clients.
It is commonplace in some roles for a stand-alone non-disclosure agreement to be signed at the termination of employment to protect the employer.
Depending on the role, it is usual for a contract to have some clauses setting out what the employee is prevented from doing after the contract concludes.
These can include:
This clause relates to preventing employees from moving to a competitor.
Typically, the more senior your role, or the closer you work to the nub of the product/business (for example, product designer), the more likely your contract is to include a non-compete clause.
Non-compete clauses impose restrictions to prevent employees from moving to work for a competitor, which can in itself be hard to define, and can have a duration (for example, six months) and can also – or instead – have a defined region (for example, within five miles).
In practice, it varies as to how enforced non-compete clauses are and they are often circumstance depending, particularly in terms of how friendly the relationship is when it ends.
To be enforced, contact law requirements must be satisfied (namely adequate consideratio; for example, payment or money) as well as complying with state-specific requirements.
For example, to enforce a non-compete clause in Florida, there must be a legitimate business interest.
Non-solicitation clauses are related to retaining or inviting (‘soliciting’) clients or other employees to follow you to new employment or if you set up on your own as a new enterprise. These clauses are usually time-limited.
Enforcement of non-solicitation clauses varies from state to state, with California’s laws stating that agreements may only be enforceable where they are protecting trade secrets.
Non-poaching agreements are harder to enforce. These are agreements not to poach employees, or even sometimes to wage fix.
In the US, the Federal Trade Commission and Department of Justice have been cracking down on employers who use these agreements and have indicated that they would start to seek criminal prosecutions against employers who continued to attempt to enforce these clauses.
There should be a clause setting how much notice is required for each party to give, who and how that notice should be given (for example, to your manager, in writing).
In the US, there is no statutory notice period and although two weeks is customary, the contract should set this out so both parties are clear.
The time frame may be different for an employer or employee.
As a guide, both parties should be able to look at an employment contract’s termination conditions when the employment ends.
Which conditions apply will depend on the relationship between employer and employee, but it should include, at the very least, the procedure that should be followed, particularly if the parties are not in agreement or one is forced to bring the contract to an end.
Depending on your role and industry, you may want to check for a clause in relation to what happens if the company is sold.
This may be particularly relevant for smaller businesses in industries that often get bought out or taken over (for example, tech).
Can You Negotiate the Terms in an Employment Contract?
It is possible to negotiate the terms of an employment contract but that doesn’t always mean that it will be possible – it will depend on several factors, including:
- Your bargaining position
- Which terms you wish to negotiate
- Where your work is based
More senior and seasoned employees would expect to negotiate on some elements of the contract, most usually salary and commission structures, as well as flexibility.
Generally speaking, clauses such as job title, salary, flexibility, office location, benefits, termination/length of contract and so on should have been negotiated ahead of you receiving the actual draft contract.
The physical draft of the contract should, in most cases, merely reflect what you have agreed during the negotiations or confirm the job offer if no negotiations took place.
It is more usual to then negotiate on the restrictive elements once the contract has been presented, perhaps to reduce time frames or geographical radius, or even to remove them fully.
Particularly if you are a junior employee and this is your first job, it can be tempting to just sign the contract without reading or negotiating, but that can be an expensive mistake down the line.
It’s always worth knowing what you’re signing up to and what the expectations of you are, and also whether the employer is abiding by their legal obligations.
If you’re a more senior employee, you will be expected to negotiate.
This is particularly true if you are being hired into a management or sales role where this is your first chance to demonstrate how you will add value to the company or organization.