Employment Contract

Definition

The term employment contract refers to a document that outlines a services agreement between an employee and their employer.  In addition to specifying the duration of the agreement, the employment contract will outline the employee's responsibilities, benefits, and starting salary.

Explanation

Also known as an employment agreement, an employment contract is often used by employers that want to limit an employee's ability to leave their company.  Typically, employers will limit the use of contracts to senior managers that are also officers of the company.  While the exact content of a contract may be specific to the employee's role, the following items are normally addressed:

  • Duration of the agreement
  • Employee roles and responsibilities
  • Grounds for termination
  • Starting salary, incentive compensation, health insurance coverage, vacation time, and disability benefits

The terms and conditions found in employment contracts may also include non-compete agreements as well as non-disclosure agreements (NDA).

While employment contracts offer employers a number of advantages, there is a downside to these agreements too.  For example, if business conditions change, and the employee's services are no longer needed, the employer may have to buy out the employee's contract.  The contract may also contain a dispute resolution clause.  This means each party must treat each other in a fair and equitable manner, especially when it comes to termination.  This makes it more difficult to deal with an under-performing employee than one employed at-will.

Related Terms

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