Types of employment contract

Building strong relationships with your employees can begin with employment contracts or employment agreements; specifically, using the right ones for your employees. Contracts can outline employee benefits, salaries and ensure compliance with global employment laws—an essential for keeping business operations legitimate, maintaining healthy finances, and preserving your reputation.

Employee contracts are an agreement between the employer and employee that defines the terms and conditions of the employment.

What are employee contracts?

Written or verbal, standard employee contracts describe things like the employee’s job title and role, responsibilities of both parties, commencement date, compensation and benefits, and much more. Let’s take a closer look at this legal document.

Essentially, A standard employee contract outlines the working relationship between the employer and the employee. Generally, an employment contract clarifies job duties, employee rights, and responsibilities, and ensures legal protection and compliance for the employer and employee.

The importance of employment contracts

Clearly defining job duties, responsibilities, and rights helps employees know how to be successful in the role. It’s also a reference for whether employers are giving employees their agreed upon rights.

Employee contracts are essential documents that offer legal protection to both parties and ensures compliance with relevant employment laws and regulations. If your company is unsure whether to classify a worker as a contractor or an employee for instance, you could reference the employee contract which will indicate the correct classification and help you avoid legal and financial penalties resulting from employee misclassification.

Let’s quickly recap: Employee contracts are vital to running a successful business. The benefits of employment contracts include:

• Outlining job duties to align employers and employees on expectations
• Establishing employee rights and responsibilities to protect both parties
• Legally protecting the employer and employee in case of disputes or compliance queries

Not all employment contracts cover the same topics. There are several types of employment contracts, each with specific purposes.

4 main types of employment agreements

There are four primary types of employment agreements. Here’s a overview of each:

1. At-will employment contracts
   During at-will employment, an employee or employer can end the working relationship without notice. Exceptions for termination could be protected classes, discrimination, or retaliation.
   This contract is one of the most common employment types in the United States, though it is one of the only countries that use this kind of contract.
2. Written employment contracts
   A written employment contract describes the employee’s and employer’s responsibilities and a specific date for the employment duration.
   Once signed, both parties must honor the terms and conditions of a written contract. Employers usually cannot terminate employees unless the worker breaks the contract terms.
   Most countries use written employment contracts, though they are mandatory the U.K., China, and New Zealand.
3. Verbal employment contracts
   In this contract, an employer and employee verbally agree to specific terms and conditions either by phone or in person.
   Verbal contracts are not always legally binding and may not uphold in a court of law. In the US, verbal contracts can uphold if they include specifics such as:
   – An offer and acceptance
   – Awareness of both parties (each party understands what they are doing)
   – Intention
   – Consideration
   – Legality within the relevant jurisdiction(s)Verbal employment contracts are also used in the UK, Belgium, Sweden, Vietnam, Spain, Malaysia, and Venezuela.
4. Implied employment contracts
   An implied employment contract is an agreement between the employer and employee that is based on an employer’s actions and behavior. Implied contracts can address job security, labor laws, employee policies, and length of employment. For instance, if a company routinely hires a technician for $100 per hour, but then asks the technician to fix their equipment for $70 per hour, the technician receive more payment by referencing their past agreements. Even if employers do not document the contract, breaking it still grounds for legal action. Aside from the above, work agreements can also be based on other factors, such as how long the employee works for the employer.

Types of work agreement contracts based on duration

These work agreement contracts are based on timing or the duration of the employment. There are three types of contracts based on duration:

1. Indefinite employment contracts
   An indefinite employment contract, (also called a permanent employment contract), is valid for full-time and part-time employees until either party ends the agreement, which can cease due to lawful termination, employee resignation, retirement, or business closure.
   Indefinite employment contracts are the most common contracts used worldwide, apart from in the US. Employees are guaranteed wages and benefits, job security, and financial stability.
2. Limited-term employment contracts
   Under a limited-term contract, an employer hires an employee with a specific start and end date such as for short-term projects, during busy seasons, covering an employee on leave, and so on. The employee will receive full benefits and rights and can renew or extend the contract once the contract ends. Fixed-term laws vary worldwide and many countries cap the amount of times an employer can renew or extend a fixed-term contract.
3. Zero-hour employment contracts
   Under zero-hour employment contracts, employers do not need to state guaranteed working hours. In turn, the employee does not need to work the hours employers offer but will get paid for hours worked.
   Employers may use zero-contracts in industries such as retail and hospitality. The UK mainly uses these types of contracts, while it’s illegal in New Zealand, France, Ireland, and Germany.

As an employer, you can also create a work agreement contract based on the employee’s skills and what they will contribute to your organization. These types of agreements are talent-based.

What are the types of employment agreements based on talent?

There are four types of talent-based employment contracts. Here’s an overview of each:

1. Self-employment contract:
   Self-employment contracts are between contractors and employers and outline the project terms, contractor rate, and project specifics. Self-employment contractor agreement establish the contractor’s classification and state that only the contractor can decide how, where, and when they work. Self-employment contracts also specify that contractors do not receive benefits from the employer, and must pay and file their own taxes.
2. Temporary employment contract
   A temporary employment contract is between a temporary employee and an employer. Usually, a company works with an agency that provides temporary employees to meet staffing needs for busy seasons or to fill in for an employee on leave.
   Employers typically hire temporary workers to perform work for an undetermined amount of time. Employers usually pay hourly wages to employees.
3. Internship employment contracts
   In this agreement, a employer hires an intern for unpaid work and on a temporary basis. The intern agrees to the conditions in exchange for job training, experience, and educational credit. Interns typically do not replace employees or guarantee permanent work after the internship is completed.
4. Apprentice agreements
   An apprentice agreement is for those wanting training opportunities to learn new skills. An apprentice agreement states the apprentice’s rights and responsibilities and includes details on the training or skills to be learned.
   An apprentice is not an employee but someone employed for a certain time period who participates in the employer’s apprenticeship program.

After reviewed the different contract types and choosing one that best represents your situation, it’s time to create the contract. Reviewing which clauses to include will help you protect the company as well as the employee.

Drafting and managing employment contracts

Writing an employment contract can be straightforward. Here are the main elements to include:

• Employment responsibilities
  In this section, the employee must agree to carry out the duties and responsibilities included in the contract and job description. The employee is also agreeing to comply with all company policies, rules, and procedures at all times.
• Employee’s position
  This will include the employee’s job title as well as a statement that the employee will agree to perform all necessary functions of the job as well as any other duties the employer adds within a reasonable scope of the employee’s work.
• Compensation
  The employer will specify the employee’s compensation annually and monthly, as well as include any mandatory employment deductions (State & Federal Taxes, Social Security, Medicare).
• Benefits
  The employer will list the benefits they offer as well as specify that the employee may not be able to access them until the probation period has ended.
• Probationary Period
  The agreement will define the probationary period and outline which benefits the employee is and is not entitled to. Employers may also want to include a statement notifying the employee that the employer has the right to terminate employment at any time without advanced notice.
• Paid Time Off
  Written details of paid-time off must include the length of time for vacation, number of sick days, and whether the employee is granted bereavement leave.
• Termination
  To protect themselves legally, employers can include a statement which reads that the working relationship may be terminated by either party for any reason with proper written notice.Finally, all written contracts must include the employee signature, date of signing, the company’s official signature, and the signing date.
  This is a good starting point for companies drafting employment agreements, but, there are additional clauses you may want add.

What else should you include in an employment contract?

Along with basics such as terms of employment, benefits, responsibilities, and compensation, employers may want to include other information as well. Here’s a short list of adendums:

• A non-compete and confidentiality: Employees must agree not to share the company’s propriety information and work for a competitor
• Legal disclaimer: Compensation packages, intellectual property or confidential information, will vary based on your location, industry, and the legal requirements mandated by your local government.
• Entirety: A clause that states the agreement supercendes any previous agreements
  Legal authorization: The employee acknowledges they are authorized to work in [country] and can provide legal proof.
• Severability: The parties agree that if any portion of this contract is found to be void or unenforceable, it shall be struck from the record.
• Jurisdiction: The contract will be governed in accordance with the laws of [state, province, or territory].
• Employee classification: The new hire must be classified as either an employee or contractor to ensure tax compliance.

Beyond an employee classification clause, you’ll need to include other elements in the contract to ensure compliance.

Achieving employment contract compliance: 5 tips

Contracts vary from employment types, but there are also vast differences when hiring employees in different countries. The below tips can help you achieve global compliance when hiring abroad:

1. Understand labor laws
   Employment laws vary by country. Most countries have strict employment regulations and requirements and non-compliance can become costly. Hiring a local law expert or creating a special team for this purpose can help companies save time and avoid non-compliance.
2. Know the difference between contractors and employees
   Companies risk misclassification when they hire contractors. If an employer purposely or mistakenly misclassifies workers, they can face penalties such as legal fines or reputational damage. Be sure to check the country’s regulations around classifying workers.
3. Create HR policies that align with international employment contracts
   Companies that hire in foreign countries need to create employment contracts that abide by the country’s employment laws and regulations, address expectations, and adjust strategies for global markets. A comprehensive global payroll platform with AI capabilities can help employers draft compliant contracts.
4. Consider appropriate supplemental benefits
   Supplemental benefits depend on the market, but can include additional healthy insurance, perks, incentives, additional time off, and professional development opportunities. Be sure to look into what local competitors offer and what will work best for your company.
5. Work with a partner
   One method to ensure compliance is to partner with an employer of record (EOR). An EOR can easily navigate complex international employment laws and help you create contracts for easy hiring. An EOR can also handle onboarding, benefits, payroll, administration, compliance, and other HR duties so your company can expand with peace of mind.

Not every company has the resources to hire internal experts to ensure compliance. That’s where an advanced payroll platform comes into play. Leading payroll platforms can easily handle HR and payroll duties, using AI for a variety of tasks to avoid human error. But best of all, they can help you remain compliant no matter where you hire from.

Creating remote employment contracts

According to an Owl Labs study, 84% of employees are interested in working from wherever they want in the future. Remote workers require unique contracts that specify working hours across time zones, communication expectations, and compliance with your company’s remote work policies.

Contracts for remote workers will also need to comply with local minimum wages and payday frequency laws and how to distribute payroll for hourly and salaried workers in their local currency.

Knowing which laws you’ll need to comply with for foreign-based workers can be challenging. Luckily, there are resources to help you figure out which rights employees are entitled to. For example, the Canadian Rights in the Workplace guide helps those based in Canada understand their rights. Employers can read this guide to European Labour law – Employment, Employment, Social Affairs & Inclusion to help create compliant global remote employee contracts.

Employment contract templates and tools

There’s no need to reinvent the wheel or start from scratch when crafting employment contracts. There are a wide variety of employment contract template services that can save HR teams time and effort. Contract management tools can be especially helpful for large global organizations, as they:

Enable quicker contract creation

Software for drafting contracts typically allows users to customize their templates and write in specific clauses. Working with a template shortens the creation process, allowing HR to send out, amend, review, and sign contracts at faster rates, which can help eliminate delays in the hiring process.

Require less manual work

Most SaaS solutions offer features that automate time-consuming manual processes, like creating automated notifications around contract activity so teams automatically stay updated.

Contract drafting software can also automatically populate contacts and company information, renewal dates, and other data by integrating with your CRM. Filling in forms may sound like it takes seconds but a Zapier report tells a different story: In a study of 1000 knowledge workers, 76% of respondents said they spend 1-3 hours a day simply moving data from one place to another or trying to find information.

Reduce risk and ensure compliance

Contracts are legal documents subject to regulatory compliance standards. Many employment contract templates are created by legal experts and ensure documents meet all requirements for your region. This reduces risks of noncompliance and can allow in-house legal teams to put their focus elsewhere.

Organize documents

Can you remember a time when you spent hours looking for the right information? Software designed for drafting contracts stores all documents in one secure, centralized location so you can find what you need in seconds. Some tools even have built-in naming conventions and version histories to make it even easier to find what you’re looking for.

Improve the contract process

Just as with other processes within your business, it’s beneficial to assess how your contract management is performing so you can address any issues that slow down progress or drain resources. Contract management software often includes dashboards and reporting that provide insight into contract approval flows, renewal cycles, and performance metrics.

From this data, you can track your efficiency and find areas of improvement to reduce workflow bottlenecks.

Let the experts handle your employment contracts

Understanding and managing different types of employment contracts for global hiring is essential for running a legitimate business operation and avoiding legal troubles. If your company’s legal team is weighed down by other essential tasks, Papaya Global workforce solution can help your organization expand compliantly in 160+ countries.

With a team of local legal experts that handle everything from contract creation to payroll, you can focus on finding the best talent while Papaya takes care of the admin.
For an end-to-end solution that has 100% data accuracy, schedule a demo.