An employment contract is usually a written agreement outlining the services and pay arrangements for employees or independent contractors. The focus of a contract is usually the employer's promise to hire and the employee's promise to perform services. Written employment contracts are usually in non-traditional employment relationships--the hiring of an independent contractor, subcontractor, attorney, consultant or the use of a temporary employee. Employment contracts are also common when hiring executives, professionals, academics, sales representatives and those with special skills. The reasons for using employment contracts vary according to the position being filled. The most common reasons include:
- The need to establish a term of employment;
- Establishing compensation and benefits;
- Clarifying duties and expectations;
- Protecting trade secrets and confidential information; and
- Limiting competition during and after the agreement
Employment contracts may contain a provision on how disputes are handled. For example, some contracts contain a binding arbitration agreement for all employment related disputes. Some jurisdictions allow employers to require arbitration as the sole method of resolving disputes while others require employees to agree to arbitrate disputes.
In the past the IRS used the "factor test" to determine whether a worker is considered an "employee" or an "independent contractor." This test, however has been losing ground in the courts and in Congress. In response, the IRS published new guidelines to assist auditors and employers in determining worker classification. The focus is now on the following three categories of evidence that the agency considers to be most important in making a determination:
- Behavioral Control - If the employer has the right to control or direct how the work is performed then the individual is an employee and not an independent contractor. Consider the need for approval before performing tasks. Employees are generally subject to the instructions of the employer to specify when, where, and how to work- independent contractors are not. In addition, employees are usually trained by employers, while independent contractors must supply their own training.
Financial Control - If the employer controls the business aspects of the worker's job duties, then the individual is an employee. Factors to consider:
- a. If the worker can realize a profit or incur a loss then he/she is a contractor.
- b. If the worker has a significant investment in the equipment or facilities he utilizes in performing services for others then he is classified as an independent contractor. Evidence that can be used to support this is: the amount of un-reimbursed expenses, payment of business and/or travel expenses, furnishing of tools and materials, and analysis of lease arrangements between worker and business.
- c. When the worker makes his/her services available to the general public. If the worker uses yellow page advertising and works for more than one firm, this is evidence to support independent contractor status.
- d. The method of payment. Generally an employee is paid by the hour, week or month, but an independent contractor is generally paid a flat fee or by the job.
- Relationship Between Parties - If the organization provides the worker with benefits such as a pension plan, insurance, vacation pay, or sick pay then an employer?employee relationship likely exists. Employee benefits are paid only to employees. Another indicator of employee status is if the parties perceive a permanent and indefinite relationship. Employees are generally hired for an on?going, indefinite period. Contractors can have a long?lasting relationship, but they are usually terminated when the job is completed. Also, when the success of an organization or department is dependent to a certain degree on the employee's performance, then an employer-employee relationship exists.
Developing Written Employment Contracts
Employers and employees are free to agree on the different terms of an employment contract, but the courts hold that ambiguities or provisions deemed illegal are held against the employer. Employers therefore must have a working knowledge of the various federal and state laws dealing with the employment relationship.
Federal and State Non-discrimination Laws
- Title VII of the Civil Rights Act of 1964, as amended, prohibits discrimination based on race, color, religion, sex, and national origin for employers employing fifteen or more employees.
- The Americans With Disabilities Act (ADA) prohibits discrimination against those with physical or mental disabilities.
- The Age Discrimination in Employment Act (ADEA) prohibits discrimination against those forty years and older (for employers with 20 or more employees)
- The Immigration Reform and Control Act, (IRCA) requires employers to verify the eligibility of employees to work in the United States.
- The Uniform Services Employment and Reemployment Rights Act (USERRA) prohibits discrimination against veterans and grants reemployment rights to those serving in the military.
- Executive Order 11246 requires federal contractors to take affirmative action to increase employment of minorities and women and to refrain from discrimination based on race, color, sex, religion, and national origin.
Some state laws go even further than federal law, barring discrimination based on marital status, arrest records, sexual orientation and legal behaviors engaged in while off duty, e.g. smoking. Some of these laws and regulations overlap with various pre-employment testing programs, the requirement of medical examinations and drug testing, as well as the insurability of a new employee. The Fair Labor Standards Act (FLSA) governing compensation, minimum wage, and the hiring of minors is another important statute to consider when entering into an employment contract.
Some employees are hourly/non-exempt, making them entitled to overtime when working over forty hours in a work week. Other categories of employees, which include professionals, executives, administrative employees and outside sales persons may be classified as "salaried exempt" and not due overtime compensation when working over forty hours per week.
FLSA also restricts the employment of minors under the age of 18 by limiting employment in any hazardous job. Minors aged fourteen and fifteen are restricted by the hours they are permitted to work, only 3 hours per day, with no more than 18 hours per week when school is in session.
A number of state laws also affect employment contracts. Various states have some form of minimum wage law for those job areas not covered by the Fair Labor Standards Act. In addition some states restrict an employer's right to terminate an employment contract without showing just cause. Public employers must also consider employees' due process rights.
Employment Contract Content
Include a preliminary statement showing intent to enter into an employment contract.
Establish the term or length of the agreement. Consider whether the employer wants a short term agreement (one year or less) or a continuous relationship where the agreement is automatically renewed. Include a probationary period if there is to be one.
Although public employers generally must provide due process prior to terminating an employee, a provision stating that the employment is for an indefinite amount of time and is terminable at will may be included. For independent contractors or temporary employees, the contract should specify when the relationship will end; will the contract end at the completion of a project or on a specified date.
The agreement should include the duties of the employee as set forth in the contract. Additional language may require an employee to carry out his/her duties industriously and observe all rules and regulations.
Depending on the organizational culture, you may want to include a confidentiality provision. The confidentiality provision should prohibit the disclosure of any secrets or confidential information while employed or for a period of time after employment ends. Make reference to the fact that the employee understands and agrees that the confidentiality obligations go beyond the termination of the employment agreement. An alternative is a non-compete clause. Basically, a non-compete agreement limits the employee's ability to obtain employment of a similar nature within a geographical limitation for a set time frame, e.g. 12 months. Geographical limitations usually include restrictions on the employee calling on clients/customers of the employer whom he/she called while employed. Non-compete agreements are strictly scrutinized by the courts and should be carefully crafted.
Compensation and benefits are usually included in the terms of the contract; and include annual salary, hourly wage, or the flat fee, as well as any health insurance or retirement benefits.
A provision on the use of arbitration may be included but be aware that the Equal Employment Opportunity Commission (EEOC) has taken the position that mandatory arbitration of employment discrimination claims as a condition of employment is contrary to the purpose of the civil rights laws. However, the courts have been willing to uphold clearly worded and specific arbitration agreements.
Miscellaneous provisions, such as which state's laws are applicable in case of a dispute and the effect of a waiver on any remaining provisions may be included. Employers also may want to include language as to how the agreement may be modified.
Sample Employment Contracts
- Town Administrator Employment Agreement, Town of Alton, NH
- Independent Contract Agreement, City of Phoenix
- City Manager Employee Agreement
- Memorandum Of Understanding
- Employment Agreement Merrimak, NH
- Employment Contract, St. Mary's County, MD
- Obdyke, Louis K Esq., Society for Human Resource Management, "Written Employment Contracts - When? Why? How?" White Paper, June 1998.
- Yenerall, Paul, M., Radack, David, V., & Myers, John, J., "Making the Most of Employment Contracts," HR Magazine, August, 1998.