What to Include in an Employment Contract

The BTI Executive Search 2023 Workforce Insights Report revealed that “89% of Asia Pacific employers struggle to attract new talent” and “86% of companies find it hard to retain employees.”

Of course, many factors contribute to this difficulty, and we can refer to the 2022 Global Benefit Attitudes Survey that analyzes major markets in Asia Pacific for an explanation. Among others, it indicates that job security is a big factor in retaining and attracting your workforce. And it all starts with a solid employment contract.

As such, it’s crucial to draft an employment contract that not only protects your company but also inspires trust in your employees. In this guide, we’ll walk you through exactly what it should include.

What is an employment contract?

An employment contract or agreement is a legal document that details the terms and conditions of the work arrangements between you and your worker. You both sign it after they accept your job offer and before their first day (or a few weeks into the job).

This contract establishes your rights and responsibilities, defining the employment relationship between you. They include some standard details that ensure you’re legally compliant (think compensation, job description, benefits, and employment period), and the rest is tailored to your particular employment relationship.

Why is an employment contract important?

An employment contract is important because it ensures that you and your employee comply with its terms, since it’s legally binding. As a result, you can prevent misunderstandings about rights and responsibilities, remain compliant with labor laws, and maintain consistency in the work relationship.

What are the types of employment contracts?

employment contract

Understanding the different employment contract types helps you understand how legally binding they are and how well-suited they are for your employment arrangements. Here are the main ones: 

  • Written: The most common type is the formal, written contract, which is detailed, signed, and legally binding, meaning that it facilitates resolving disputes.
  • Verbal: Non-written, a verbal contract is the result of a discussion about the details of a position (such as salaries and benefits). Although difficult, this verbal contract can become legally binding, especially if there’s a witness to the conversation.
  • Implied: Common among small businesses, implied agreements are when you hire a worker without agreeing on certain terms in a discussion or writing. Instead, your general actions and guidelines might give them certain expectations. It’s difficult to uphold them, but they’re considered legal agreements in some contexts.
  • Fixed-term: Fixed-term contracts are written contracts that are effective for a specific period or until a project is completed. Employees under a fixed-term agreement should receive the same treatment and benefits as full-time permanent employees.
  • Open-ended: An open-ended contract doesn’t have a termination date. Instead, it ends if either you or your employee want to end it, which renders it flexible.

What to include in an employment contract

employment contract

well-rounded employment contract establishes a solid framework for your employment relationship, which promotes the thriving work culture you desire, so let’s look at its components:

1. Job title and description

What is the employee’s job title? Is the employee part of a team? Which team and department are they assigned to? Who do they report to, and who’s right above them? What does the position entail in terms of the role and its duties?

The employment contract should give defined guidelines about the employee’s key responsibilities, but it doesn’t need to include every single task. You might add a phrase like “additional duties as assigned,” which gives you the freedom to alter the job responsibilities as needed (as long as they’re minor/reasonable tasks).

Read next: How to Define Your Employee’s Job Scope (With a Template!)

2. Compensation and benefits

One of the main factors for employee retention is compensation and benefits. Ensuring transparency about them promotes employee satisfaction and trust and prevents disputes.

Your employee’s contract should include their wage amount (before applicable taxes), their payment cycle, whether their rate is yearly or hourly, the bonus system, equity options, raises, incentive opportunities, and signing-on bonuses.

As for benefits, refer to labor laws in your area to ensure compliance when you determine them. Also, mention when you’ll grant the employee access to these benefits. Is it immediately after signing or after the probation period is over?

Benefits can look like health insurance, medical leave, family leave, other paid leaves, unemployment insurance, workers’ compensation insurance, company stock options, retirement and investment plans, catered lunch, and gym memberships.

3. Start date and work location

One of the first points mentioned in an employment contract is the date when it becomes effective. It should also include the primary work location, clarifying crucial work arrangements (think remote, hybrid work model, on-site, and similar).

Additional reading: Flexible Working Policy Examples and Template

4. Termination clauses

When you write down the termination clauses, regulations that apply to your area usually heavily influence them. You should learn what the viable grounds for termination are. In other words, which actions from an employee could prompt you to let them go? What are the severance arrangements?

5. Resignation

How long of a notice period should your employees give you if they wish to resign? Does the notice period change after a while? Do you need the resignation in writing?

6. Confidentiality agreements

Confidentiality arrangements are essential to protect your company’s sensitive information and prevent employees from acting in ways that harm your business.

Before anything, ask yourself which data employees can share outside of work. Does your industry come with special circumstances that require extra levels of confidentiality (like psychiatric clinics)? 

After that, you can add clauses for confidentiality, including client contact information, supplier lists, and proprietary elements.

Relevant reading: Employee Data Management: How HRIS Can Help Achieve Accuracy and Security

7. Death and disability

Naturally, death and permanent disability terminate the employment contract. In the case of disability, the contract should include the duration after which the contract is terminated (like 30 days). Additionally, the contract should list the compensation that goes to the employee’s estate in either case.

8. Dispute resolution

You can add clauses in your employment contract about how to resolve employee disputes. What is the dispute process like? It can include measures like mandatory arbitration, mediation, and litigation.

9. Additional considerations

Finally, it’s the level of detail that determines how good an employee contract is, so don’t forget these minor yet important aspects:

Non-compete clauses

Non-compete clauses stop employees from competing with you during and after the end of their employment period for a certain duration. Consult with legal experts to confirm that your non-compete clause holds value in court.

With non-compete clauses, employees are prohibited from setting up a competing business or work for a competitor within a specified period. You can rest assured that your assets, clients, and proprietary information are safe.

Intellectual property ownership

Who owns the intellectual property of your employees’ work? What about your company’s knowledge? You can use the employment contract to make that clear. 

Add a clause about the ownership of intellectual property, including industry secrets, copyrights, patents, and trademarks. Also, a non-compete agreement can help with risk mitigation here.

What are the benefits of an employment contract?

When you understand the benefits of an employment contract, you’re more likely to invest in it and can assess the outcomes to determine the solidity of your contracts. 

For employers

As an employer, you should draft employment contracts to reap the following benefits:

Clarity and reduced risk

An employment contract makes expectations clear, so you’re less likely to have issues with your workers and resort to legal action. Your employees should understand their job functions, compensation, company goals, and procedures.

Employees who understand their roles and the repercussions if they don’t comply with them will avoid abandoning their post. This is because they know it’s grounds for examination and possible employment termination, making it likely to put your business at risk or hinder your business processes.

Protection of confidential information

As referenced earlier, an employment contract includes a clause about sensitive information. It ensures that your data is safe, your clients stay with you, and your processes are yours only.

For instance, if you run a restaurant, you’ve probably worked hard to develop your recipes and maybe even used a family secret recipe. The contract will protect your trade secrets, ensuring that customers will keep coming for your special lasagna.

Documentation for performance management

When you document the job title and description, including a detailed illustration of your employee’s tasks, you create a standard that you can hold them accountable to later on to determine how well they’re performing by comparing that to their job description.

For employees

To make an employment contract attractive for potential hires and fair to them, it should give them the following:

Security and predictability

Your employees will feel secure having guaranteed work for a specified period. There might also be severance at the end of their tenure. As for predictability, the employment contract includes your expectations for them, the actions you’ll take if they comply (such as bonuses and raises), and the actions you’ll take if they don’t.

Employment contracts also offer a certain legal security. Employees know they can use them to claim their rights. They can also refer to them to avoid legal action by not engaging in any behavior that could prompt it.

Clear expectations

Your employees will have clear expectations about their roles, working hours, salaries, paid leaves, benefits, and potential for growth in your company. This way, there’s less room for misunderstandings and dissatisfaction later on. Your employees are less likely to have issues with their jobs because they know what they signed up for.

For example, they’ll know that they can expect a promotion after two years if they reach certain performance milestones, which should boost satisfaction and employee engagement levels.

Potential for negotiation

When the termination date for your employee’s employment contract approaches, they have a chance to negotiate the terms of its renewal. They might ask for a raise or added benefits.

For instance, they might do market research to find that their current rates don’t align with market rates and request a raise accordingly. As an employer, you might find that the cost of retaining them for a higher rate is worth it and comply with their demands.

Optimize Employment Contract Management and Compliance

All-in-one HR software like Omni is a powerful tool for unifying all of the disparate employee data scattered across your company. As a single source of truth for employment contract management, HRIS streamlines your HR processes and makes them more efficient.

Powering Asia’s fastest-growing, modern companies, Omni’s employee database software scales alongside your company so you can customize and leverage the system to meet your evolving employee data management needs while ensuring compliance with regulations. 

With a full suite of modules to support every aspect of your business, Omni liberates HR teams from administrative cycles by automating the entire end-to-end employee life cycle — from recruitment and onboarding to employee engagement and payroll and beyond — allowing you to redirect your time to strategic initiatives that drives your business’s growth.

Omni’s intuitive and fully customizable platform integrates with your team’s favorite tools for a seamless and timely adoption. And at only $3/employee/month, you can leverage HR automation to decrease administrative costs.

Book a demo with our team today to learn how Omni can help transform your small businesses HR processes.

Get started today!

Get a 14-day free trial and see how Omni can work for your business.