Hiring your first employee is a huge milestone for any business owner. But if you’ve never drafted an employment contract before, you might be unsure of where to start or what to include.
It’s not easy to grow a business on your own. Bringing on some help, even on a part-time or short-term basis, can help ease your workload so you can reach your goals that much faster.
Fortunately for you, we’re breaking it all down so you can hire with confidence.
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What is an employment contract?
So what exactly is an employment contract? In simple terms, an employment contract sets out the terms and expectations of the employment relationship. It should cover areas such as:
- Pay rate
- Probationary periods (if any)
- Any restrictive clauses such as non-competition or confidentiality agreements
There are two types of employment contracts you can use:
1. Fixed-term contract
This is typically used for independent contractors, freelancers or specialists who will work with you for a specified period of time.
2. Indefinite contract
The employment relationship is indefinite and will continue until either you or the employee chooses to end it.
As an employer, you need to make it crystal clear whether your new hire is a contractor or an employee.
Employees are entitled to certain rights and protections that contractors generally don’t get.
If you incorrectly classify your hire as a contractor when the working situation and expectations are closer to that of an employee, you could be hit with steep fines and significant legal fees.
Related: How to write a job description
What to Include in an employment contract
While employment laws can vary depending on where your business is located, there are some common things that most employment contracts contain. This includes:
- An invitation to begin employment at your company
- Job title and employment status
- Job responsibilities and expectations (i.e. a job description)
- Start date
- End date, if it is a fixed-term contract
- Name of manager, supervisor or other reporting relationships
- Work hours
- Probationary period if any
- Travel requirements, allowances and/or relocation
- Pay including commission, overtime, bonuses and stock options
- Employee benefits
- Retirement benefits (RRSP or pension contributions)
- Vacation time
- Salary increases
- Intellectual property rights
- Restrictive covenants, including non-disclosure, non-solicitation and non-competition clauses
- A termination clause
- A clause stating the employer’s right to amend certain parts of the contract
- The date by which the employment contract must be signed and returned
Most employment contracts also have an Entire Agreement clause. This states that the signed contract constitutes the entire agreement between the parties, and that previous conversations, negotiations and promises are not binding on either party.
Writing your first employment contract
So now that we’ve covered the basics, how do you make sure you draft a document that’s valid and enforceable? Here are some quick tips.
Create a template
To save time in the future, create an employment contract template that you can personalize for each new hire.
Make sure you use plain language. If you don’t understand the terms of the contract, your new employee won’t either.
Seek legal advice
Before you send out that contract, review your jurisdiction’s employment laws to ensure it’s compliant and up-to-date. If you need help, many organizations and universities offer free legal advice hotlines or drop-in sessions.
Present your offer and contract together
Having your candidates sign an informal letter first and then a detailed contract later might invalidate your agreement. Your best bet is to send all your hiring documents to your chosen candidate at the same time as a job offer package.
A contract vs. a letter of employment
One mistake that many new employers make is confusing an employment contract with a letter of employment or job offer. These two documents are both key to the hiring process, but they’re not the same.
Offer or letter of employment
A job offer or letter of employment is a brief invitation to begin work at a company, made from an employer to a potential employee.
It can be made over the phone, in person or via email but it should include general information about the job, including:
- Start date
- Employment status (full-time, part-time, etc)
It should also contain conditions of employment, such as whether the offer depend upon the results of a background check or agreeing to the employment contract.
On the other hand, an employment contract or agreement is a much more detailed contract that outlines the employer’s expectations and covers the areas mentioned above — compensation, benefits, vacation, termination, etc.
But you can’t have one without the other. At the most fundamental level, a contract needs to meet the following conditions to be valid and enforceable:
- There must be an offer and acceptance of the offer.
- The contract and its terms must not be unconscionable or illegal.
- There must be “consideration,” or in other words, some benefit for each of the parties for entering into the contract like the exchange of wages for work completed.
The hiring process can be a little overwhelming at first. But if you take the time to do things the right way, you’ll set up your employees — and your business — for long, productive relationships.