HR Glossary  /  Recruitment and Hiring  /  Employment Contract

Employment Contract

What is an employment contract?

An employment contract or employment agreement is a document that outlines the relationship between the hiring organization and an individual. A contract of employment lays out the terms and conditions of employment and the employee’s entitlements. An employment contract also outlines the expectations the organization has for the individual. Once both parties sign the contract, they are bound by its terms. 

What is in an employment contract? 

An employment contract governs the employment relationship; as such it covers all (or at least most) of the major details relevant to an employee. This can include provisions like hours and location of work, compensation, vacation entitlements, benefits, workplace expectations, and notice requirements for termination or end of employment. The contract is also likely to cover things important to an employer, such as clauses on confidentiality and, in some instances, non-compete, and non-solicitation. Finally, each jurisdiction has employment standards legislation that sets out minimal entitlements for employees. Contracts should provide entitlements that at least meet those minimums. 

How do contracts protect employers? 

Contracts protect employers by allowing the employer to set out their expectations for the employee. Having these important details clearly set out in writing means everyone is on the same page about the job, the benefits, and the expectations. While an employment contract is typically signed at the start of an employment relationship, it can save employers a lot of time and money at the end of the relationship. If an employee is not meeting the expectations set out in the contract, or the employer needs to dismiss the employee for other reasons, the employer is in a stronger position to terminate the relationship with some certainty about how to do it and what the employee is owed. If properly drafted, contracts can protect against protracted and costly legal proceedings following a termination. 

What clauses should be in every contract? 

The answer is “it depends.” An employment contract should be unique to the organization, the role, and the jurisdiction. Having said that, many contracts contain clauses on: 

  • Conditions of employment; 
  • Compensation and benefits (including group, retirement, and any entitlements); 
  • Time away from work; 
  • Work location; 
  • Hours of work; 
  • Expectations (for example, dress code, reference to code of conduct, outside employment, non-compete (not permitted in all jurisdictions), non-solicitation, and so on); and 
  • End of employment. 

Keep in mind that some of these clauses are not permitted in certain jurisdictions. For example, Ontario law prohibits non-compete clauses in employment contracts for most positions.  

Should every employee have a contract? 

Yes! Every employee should have a contract. Having said that, it’s important to ensure the contract aligns with your needs. That’s why there’s no universal approach to contracts. You also have to consider whether the person you’re preparing a contract for is in fact an employee. If they are an independent contractor, that contract has to include different details.

Misclassification of workers can result in costly implications for the employer. You can learn about how to avoid this misclassification in our blog, Contractor vs. Employee: How to Classify Workers

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