Knowing the proper steps to hire someone is one of the key foundations of Human Resources, starting with understanding the various types of employment contracts. Being aware of the different employment contract types, their contents, and their implications protects organizations from risk.
This comprehensive guide will help break down the nuances of different types of employment contracts.
An employment contract is a formal legal agreement between the employee and the employer. It details the conditions of employment and the responsibilities of each party.
Employment contracts enhance an employee’s understanding of their role and expectations while also mitigating future risks for the organization.
Written employment contracts protect against legal risk in cases where the conditions laid out in the contract are not upheld. Having formalized agreements can assist in resolving disputes amicably and swiftly, minimizing disruptions to the business.
Moreover, they act as a guard against confidential information leaving the company and guide compliance with federal and local regulations.
An employment contract may also provide a sense of job stability and clear expectations of success in the role for the employee.
This structured approach to employment helps promote transparency and trust in the employee-employer relationship.
Written employee contracts are the most common form of work agreement. The written format is necessary for an employment contract to be recognized as formal. Other formats include oral and implied contracts.
Further, employment contracts can be categorized based on their duration, nature of work, and legal status. Each type of employment contract has its own unique purpose and legal standing, a blueprint for how and when work is performed.
Let’s have a look at the most commonly used contracts.
Permanent employee contracts are the most common type of employment contract in the United States, which includes about 60% of the workforce. They are used for ongoing, continuous employment unless the employer or employee decides to terminate the relationship.
These contracts can be used for salaried, hourly, part-time, or full-time employees.
Most contracts within the US are so-called at-will employment contracts in which either party can terminate the employment relationship for any reason, with or without notice.
A permanent employment contract typically includes the following elements, which are also present in most standard employment contracts:
| Job information | The full picture of the role and expectations – the “What,” “Who,” and “How” of the work: • What the job’s general duties, responsibilities, performance expectations, and title are • Who the worker will report to, and their department or team assignment • How the work is done, including the work schedule, location of the role, and the number of hours required per work week. |
| Terms and conditions of employment | Practical details of the employment contract, such as: • The terms of employment, including the effective date of hire • Expected hours per work week, either on a fixed or flexible schedule • Expected work hours during holidays, weekends, or irregular business hours • The process for resolving employment disputes and which legal entities may access the contract to resolve disagreements • Contingencies upon hire, such as background check processes or probationary periods. |
| Compensation | Compensation is a crucial piece of the employment contract and one that employees will likely pay the most attention to, including: • Employee classification, such as exempt or nonexempt • Salary or hourly wages, and payday schedule. Common schedules are monthly or biweekly • Performance bonuses, signing bonuses, commissions, other incentives, and the criteria to meet them • Equity, stock options, or profit-sharing plans. |
| Benefits and perks | Hand in hand with compensation, benefits are a vital part of the total rewards package, including: • Eligibility for benefits, when they take effect, and resources • Investment/retirement plan participation and health or other insurance benefits • Additional perks, such as pet insurance, catered food, volunteer days, wellness stipends, etc. |
| Leave policies | Examples of leave policies to include in the employment contract are: • Vacation, personal and sick days, paid company, federal, or floating holidays • How time off is accrued • Leave of absence for special circumstances, such as parental, disability, family and medical, and bereavement. |
| Agreements and clauses | These are supplemental documents that protect the employee and organization from future discord. Common agreements include: • Non-disclosure: A privacy agreement that blocks an employee from revealing confidential information or intellectual property to competitors at any time. • Non-compete and non-solicitation: Competition clauses that take effect once the employee leaves the organization, preventing them from working for a competitor or soliciting existing customers or employees. • Owner/intellectual property: any intellectual property that the employee creates or has access to while employed is owned by the company. |
| Termination | Setting conditions for the termination of the employment contract, standard for notice periods, and protecting the organization if an early termination is needed. This entails: • Expected notice period to terminate the agreement • Severance policy and packages • The circumstances in which an employee can be terminated in accordance with the termination policy. |
A part-time employment contract is a type of permanent or fixed-term employment contract that is used for employees scheduled to work fewer hours a week than what is considered a full-time employee.
Most companies consider less than 30 hours a week, on average, to be part-time. Working hours can vary week to week (e.g., 10 hours one week, 20 the next).
Contrary to permanent contracts, fixed-term employment contracts have a fixed end date or conclude based on the completion of a project. In other words, fixed-term contracts must include the duration of employment.
Typical uses of this contract include seasonal business needs, covering parental leave, or specific project work.
Employees with fixed-term contracts usually have similar conditions, wages, and policies as permanent employees.
Organizations may choose to renew, extend, or terminate the contract once expired.
A temporary employment contract is used for the flexibility of filling a role. These contracts are short-term in nature (up to one year in the US) and have a specific end date. They exist between a company and an individual, or more commonly, a staffing or employment agency on behalf of an individual.
Temporary employment contracts differ from fixed-term contracts due to their short-term nature. Although both have a duration limit, fixed-term contracts can still be long-term. Temporary contracts usually do not need a notice to terminate the relationship on either side.
Unlike part-time or fixed-term contracts, temporary employee contracts do not usually receive benefits as part of the work agreement. Some companies may add a temp-to-hire statement if they intend to transition the temporary worker to a permanent employee.
A1099 employment contract is a signed legal agreement between the independent contractor and the company that hires them for work; however, they are not considered employees in the true sense of the word.
This type of contract is also referred to as “1099 Agreement,” “Independent Contractor Agreement,” or, for freelancers specifically, “Freelance Employment Contract.”
1099 employment contracts differ from other work contracts because the contractor is not an employee of the company, and it acts simply as an agreement of work. This means the contractor has control over how the work will be done. There are no limits to the duration or number of hours within the contract.
The 1099 contracts should describe the non-employee relationship, ownership of work, scope of work, timelines, payment, conditions and terms of agreements, confidentiality, liability and insurance, and termination notice.
Examples of 1099 workers include freelancers, consultants, gig workers, sole proprietors, or self-employed workers.
A casual worker is a less common form of employment within the US. It’s someone who works on an as-needed basis. This type of employment arrangement is also known as flexible work.
A casual employment contract is an employment contract without a guarantee of hours or intention of full-time employment, and the employee is not obligated to accept the work once assigned.
Casual employment contracts differ from part-time employment contracts in that the workers are not considered ‘regular’ employees and do not usually receive associated benefits. Unlike temporary contracts, casual employees are paid and hired directly by the employer, without third-party involvement.
Although not required, casual employment contracts can include a duration or kept indefinitely and should clarify the casual relationship.
An internship contract is a mutually beneficial employment agreement between an intern (usually a student providing the labor) and an employer in which the intern gains skills, training, and exposure to a field.
Internships are intended to support learning experiences, are short-term in nature, and can be paid or unpaid.
Even though this contract includes a start and end date, it is conceptually different from other short-term employment contracts (e.g., temporary or fixed-term agreements) because the contract intends for the worker to learn skills and connections during the engagement and is usually meant for students.
Internship contracts also differ from fixed-term contracts in that interns are not generally eligible for benefits if they work under 120 days.
An apprenticeship, a foundational form of training in history, is a structured program that combines on-the-job training with classroom learning, typically aiming to build expertise in a specific trade or profession through hands-on learning and development.
Regulated by the US Department of Labor (DOL), an apprenticeship agreement is a written agreement between the apprentice and the sponsor/employer and outlines the terms and conditions of the apprenticeship. This agreement usually lasts one to six years.
In contrast to internships – apprentice agreements have specific regulations and are formally registered with the DOL. They are more detailed about the program due to regulations, are longer-term, require a “sponsor,” and focus on trade occupations specifically.
As a regulated program, a comprehensive apprenticeship agreement is crucial to compliance. HR professionals should include the apprentice and program details, the salary/wages and criteria for increases, contact information, terms and conditions, duration, working hours, and the trade specific to the apprenticeship.
With the growing popularity of remote work, remote work agreements have become a common addendum to employment contracts.
A form of flexible work arrangements, remote work agreements document an employee’s right to perform work outside of an employer’s worksite. The employee does not have to live locally to the employer’s worksite, and the employee is not expected to be onsite in any regular capacity.
HR professionals should have a foundational knowledge of different types of employment contracts to ensure compliance, protect employee rights, and minimize risks for the organization.
Equipped with this expertise, they can tailor contracts to specific roles and circumstances, enhancing the effectiveness and legal soundness of every employment relationship.
The most common employment contract in the United States is the permanent employee contract – making up around 60% of the workforce. Permanent employee contracts can include both full-time and part-time employees.
Is an employment contract a formal contract?In order for a contract of employment to be considered a formal contract, it needs to be in writing and signed by both parties. Although the terms “employment contract” and “employment agreement” tend to be interchangeable, employment contracts are legally enforceable, whereas employment agreements are not.
Why are employment contracts important?Employment contracts protect the company from risk in cases of termination, liability, or confidentiality issues if the hired party does not uphold their documented responsibilities or fails to meet expectations. Employment contracts also help businesses comply with federal and local regulations and provide clear expectations of the role of employees.
