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What you need to know before signing an employment contract

What you need to know before signing an employment contract

Before you sign an employment contract, it's a good idea to get a clear understanding of exactly what it involves. You may be eager to start your new job, but signing an employment contract without all the information you need might not be in your best interest. Since employment contracts act as legal protection for employees and employers, it's important to learn about the details they often contain and how to negotiate an employment contract.

What is an employment contract?

An employment contract is a signed agreement between an employer and an employee that contains many of the terms and conditions of a job. Having a solid grasp of the contract can be crucial to understanding the employer's expectations and the company's inner workings. However, an employment contract may not protect you in some circumstances. Reviewing your employment contract carefully can help you discern the terms of a job offer and decide whether or not you want to sign the contract and accept the position.

What details do employment contracts contain?

Employment contracts can include: 

  • Start and end dates of employment
  • Name of the company
  • Job title
  • Location of the office or other job site
  • Hours or work schedule
  • Whether the position is salaried or hourly

These contracts can also provide important information about the job description, the position's legal status, benefits, and more.

The job description

A clear job description can help you learn exactly what the employer expects from you. It can keep you from feeling overloaded by responsibilities that keep expanding or changing. Another benefit is that it can help you prove your performance on the job. When you ask for a raise or promotion, you can reference the job description in your employment contract to show how you met or exceeded the requirements of the position.

Make sure the job description in an employment contract matches the duties listed in the company's job posting. If you notice any differences, it's a good idea to discuss them with the human resources manager or the hiring manager before you sign the contract.

The legal status of the job

In the United States, several types of positions exist and are governed by different regulations. Jobs are usually exempt or nonexempt, and at-will or contract. 

According to the Fair Labor Standards Act, exempt jobs don't offer overtime pay and they usually pay employees a salary. This means they receive the same amount of money weekly, monthly, or biweekly no matter how many hours they work. These positions can involve sales or administrative work. Some computer professionals are exempt, as are professionals like lawyers, and they often receive hourly pay. 

When a job is nonexempt, it is subject to the terms of the Fair Labor Standards Act. With a nonexempt job, you should get overtime pay for every hour you work beyond 40 hours per week. Some nonexempt employees receive a base salary and additional overtime pay. Others get paid on an hourly basis.

With an at-will job, the employer can fire the employee at any time, for any legal reason. According to the National Conference of State Legislatures, every state in the U.S. except for Montana presumes at-will employment relationships. If an employment contract doesn't include an end date or acceptable causes for termination, the position is likely at-will. Contracts with these details can keep an employer from terminating you without cause.

Instead of stating one of these categories, an employment contract could designate you as an independent contractor. This means you're not an employee and can't get unemployment if you lose your job. Taxes are also not taken out of your pay, so you'll need to file separately. Employees have taxes deducted from their pay automatically. Even independent contractors sometimes sign contracts similar to employment contracts with clients, which often contain much of the same information, like job descriptions and compensation.

Compensation and benefits

Employment contracts often mention:

  • The amount of compensation and whether the job is salaried or hourly
  • Information about commissions for sales, potential bonuses for good performance, and whether or not an employee can accept tips
  • Stock options or profit-sharing plans

Benefits can also include a retirement plan such as a 401(k), the use of a company car, and severance pay. Severance provides additional compensation that you could receive if you were fired without cause or laid off. The amount of severance often depends on the number of years you have worked at a business. For example, an employment contract could say that people terminated without cause can receive two weeks of their normal salary for every year they worked at the company. Or, a contract might say that someone with two years of experience in an organization could get an additional month of pay before they leave.

"An employment contract may not protect you in some circumstances. Reviewing your employment contract carefully can help you discern the terms of a job offer and decide whether or not you want to sign the contract and accept the position."

Negotiating an employment contract

When you receive an employment contract, the employer may ask you to sign it right away. However, it's usually not a good idea to sign any type of agreement without reading it carefully first. Plan to:

  • Ask if you can look over the contract for a day or two and then speak with the hiring manager or human resource representative again.
  • Use the extra time to examine the contract terms and make notes about any clauses you would like to add or delete.

If the contract is long or it contains complex language or terms you're not familiar with, you may want to get an attorney who specializes in employment law to review and summarize it for you. A lawyer can also let you know if any clauses like non-disclosure agreements (NDAs) are overly restrictive or if any information or stipulations should be added.

Before you start negotiating, decide whether you want to take the job if the employer refuses to modify the contract. As long as you're courteous and friendly, asking for more won't hurt. However, many businesses have compensation caps for some positions. The hiring manager may not have the authority to give you everything you ask for. Ahead of the process, do some research about the compensation that other people in the position with similar qualifications receive. Ask for compensation that's in the same range to help employers realize that you're asking for fair pay, not an unusually high salary.

During the negotiating process, you can also ask for:

  • A change to the start date or end date of the contract or job
  • The ability to work remotely
  • A more flexible schedule, more vacation time, and other changes

Don't wait to ask for additions or changes to your employment contract after you start the job. You have more leverage before your start date.

If you're still looking for job offers, you can upload a resume to make finding and contacting you easier for potential employers. If you get more than one offer at around the same time, comparing employment contracts is an excellent way to decide which position is best for you.

 Related reading: More information about signing an employment contract