7 types of employment contracts and when to use them

Across countless industries and regions, the employer-employee relationship can take many forms. With a firm understanding of the various types of employment contracts, you can maintain organizational efficiency and legal compliance.

Company operators and leaders require a well-structured written contract to solidify rights and obligations, but the type they use will depend on the work they need. Here, we’ll break down the essential types of contracts so your business can form beneficial relationships with global talent.

What is an employment contract?

An employment contract is a legally binding agreement between an employer and an employee that sets the terms and conditions of their working relationship. Both parties have rights and responsibilities. The document should set financial and logistical expectations to ensure a clear understanding of the job.

Employment contracts typically include the following info:

• Salary information: Pay is one of the most significant factors. The salary information will lay out the compensation amount and payment frequency.
• Duration of employment: This section states the length of the employment, whether it’s permanent, temporary, or fixed-term.
• Medical insurance: Here, you’ll include medical, dental, and vision coverage options, if any.
• Paid time off (PTO) policy: This outlines the employee’s entitlement to vacation days, sick leave, and personal days. 
• Benefits for full-time contract employees: Full-time employment contracts also explain benefits for full-time employees, including retirement plans, bonuses, and professional development opportunities.

Contracts may also address confidentiality, non-compete clauses, and grounds for termination. These agreements minimize misunderstandings and potential disputes.

7 types of employment contracts

Employers and employees must understand the different types of employment contracts to optimize their working relationships. Here are seven common types of employment contracts, each with unique features:

1. Full-time contract

Full-time contracts are for employees working a full workweek, typically 35 to 40 hours. These contracts usually include benefits like equity compensation, health insurance, retirement plans, and paid time off (PTO). Full-time employees often have more job security and consistent income than independent contractors.

2. Part-time contract

Part-time employment contracts are for employees who work fewer hours than full-time employees, usually less than 35 hours per week. These contracts offer flexibility but may lack the benefits of full-time contracts.

3. Fixed-term or temporary contract

A fixed-term employment contract is an employment agreement that ends after a set period or upon a project’s completion. Its benefits are similar to those of permanent contracts but are limited to the contract’s duration.

4. Freelance or independent contractor contract

A 1099 employment contract is for independent contractors, who are not considered employees. Instead, these workers are self-employed and handle their own taxes and benefits. They may work with multiple organizations, or they may want to convert to full-time employment. You’ll save time training new employees by converting independent contractors into full-time employees.

Freelance contracts are limited to specific projects or tasks. They include the scope of work (SOW), deadlines, and payment terms. They may also include a non-compete agreement or a non-solicitation agreement.

5. At-will contract

An at-will contract lets either party terminate the employment relationship without notice or cause. This gives flexibility to employers and employees but lacks stability. This agreement does not protect the employer from liability if an employee’s termination violates anti-discrimination or workers’ protection laws.

6. Casual employment contract

Casual contracts are for employees who work on an as-needed basis without a guaranteed quota of hours. These contracts offer flexibility but typically don’t include benefits. They are suitable for irregular work demands and employees who are using the role as a side gig.

7. Open-ended employment contract

Open-ended contracts don’t have a defined end date, so employment can continue indefinitely until either party decides to terminate the relationship.

How are employment contracts delivered?

Employment contracts may come in different forms, including written, verbal, or implied agreements. Here’s a rundown of the ways a contract can be delivered:

• Written contracts: Written contracts are the most common. They give both parties a chance to explicitly outline the terms of employment, including job responsibilities, salary, benefits, and length of employment. Written contracts are typically preferred since they can be referenced in the advent of any disputes. They must be signed by both parties.
• Verbal contracts: Verbal agreements can be legally binding if both parties agree to the terms discussed. However, enforcing verbal contracts through litigation or other means is challenging since there is no tangible evidence for a neutral third party to examine. Nevertheless, words must be chosen carefully to avoid misunderstandings regarding expectations, roles, pay, or other stipulations.
• Implied contracts: These come from actions, behaviors, or circumstances that suggest an agreement. They assume certain terms and conditions of employment are understood based on established practices or how the employer and employee interact. As you might expect, these are challenging to prove in legal settings.

Understanding the importance of employment contracts

Employment contracts are the bedrock of the employer-employee relationship, and they should be taken seriously. You can draft a contract without a lawyer, but legal expertise will ground the contract’s terms in the relevant employment laws and protect all parties involved.

Here are some reasons to draft your contracts with care:

1. Legal implications

Employment contracts are legally binding agreements that protect the rights of both parties. They require clear terms, mutual consent, and consideration. This clarity helps prevent legal disputes and explicitly lays out responsibilities. It also protects your business from legal liability.

2. Clear communication and expectations

Well-drafted employment contracts promote clear communication between employers and employees. They specify job responsibilities, performance expectations, and termination cases. Employees and employers know what is expected of them, and each can hold the other accountable to the agreed-upon terms in a mutually beneficial arrangement.

3. Simplified dispute resolution

Employment contracts simplify dispute resolution by providing clear reference points for conflicts or misunderstandings. Contracts typically include terms for addressing disputes, like mediation or arbitration clauses. An at-will agreement is most straightforward in such cases, as either party is free to leave the employment relationship at any time.

Create and manage employment contracts with ease

Managing employment contracts can be a complex and time-consuming task for any employer. However, as an employer of record, Oyster can assist with locally compliant contracts as well as hiring, payroll, and benefits for a global workforce.

Oyster’s global employment platform provides the tools, infrastructure, and expertise to help you build a global team compliantly and confidently. Use Oyster’s global employment tools to look up employment costs, get salary insights, compare employment terms, and build competitive compensation packages.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.