11 types of employment contracts and how to choose the best for your new employees

Picking the perfect candidate is just one of many critical steps employers must take when building their team. Once you’ve decided on a candidate to hire (or to keep), selecting the proper employment contract that’s legally enforceable is crucial, as this choice impacts both the employer and the employee. A solid contract not only outlines the working relationship, rights, and obligations of the parties, it is a legal document that protects the employer and employee over the course of employment. 

What is a contract of employment? 

A contract of employment is a formal legal agreement between an employee and the employer. It’s usually drafted by legal professionals to specify the conditions of employment and the responsibilities of each party. Employment contracts are typically signed when an employee is hired or their position is renewed.

The agreement defines the employee's role within the organization, company expectations, and more. The agreement protects both parties in case of disagreements and future legal issues. 

In addition to legal protections, employment contracts help protect company data and other information, ensure compliance with federal, state, and local labor laws and regulations, and encourage a climate of trust and transparency. 

While there are many different types of contracts, the following elements are generally found in most agreements: 

• Basic information (employer and employee)
• Compensation
• Working schedule
• Duration of employment
• Medical and dental insurance coverage
• Sick leave policy
• Benefits and perks
• Conflict resolution protocol 
• Retirement plan information
• Paid time off (PTO) policy
• Additional clauses (e.g., non-compete, non-disclosure, etc.)
• Termination policy
• Other terms and conditions of employment

3 ways to offer an employment contract 

There are several ways to offer an employment contract. While they differ by formality, purpose, and legal protection, they are all legally binding.

1. Written contract 

This is the most common form of any employment contract. It generally contains most elements listed above and is much easier to enforce. Written contracts are legal documents that describe the agreement between the employer and employee in depth. Both parties sign the contract, ensuring each is familiar with the terms. The contract not only provides a physical copy of the terms agreed to but also provides legal protection to both parties in the case of disagreements. 

2. Verbal contract 

A verbal or oral contract is an employee agreement made through spoken words rather than written documentation. Verbal contracts are legally binding if they include the elements and intention to create a legal relationship. In the case of employment, a verbal agreement may arise when a job offer is made, and the parties discuss areas like salary, working hours, and benefits. While valid, it may be difficult to prove and enforce the terms of the verbal agreement as there is no physical evidence to review. This lack of clarity can easily lead to misunderstandings, disputes, and challenges in enforcement. In many cases, a verbal contract, such as accepting a job offer, forms the basis of a written contract.

3. Implied contract

An implied employment contract is an unwritten and unspoken agreement between an employer and employee inferred from actions, statements, and policies rather than explicitly stated. In this situation, an employee might make assumptions regarding their employment based on the employer's actions. However, proving the existence of an implied contract can be challenging, as courts consider various factors like length of employment, employer behavior, and workplace practices. 

11 types of employment contracts 

Employment contracts in the US are diverse and adaptable, each designed to meet the varied needs of organizations and its workforce. These agreements serve as important legal frameworks that define the relationship between employers and employees, offering flexibility while ensuring compliance with labor laws. Using the right contract in the right situation protects both the employer and employee and helps foster a positive work environment. 

1. Permanent employment contract 

In the US, a permanent employee contract, sometimes called an open-ended contract, generally refers to an agreement between an employer and an employee where the employee is hired indefinitely. They are the most common type of contract and can be used for full- and part-time positions. Contract terms include hours, benefits, and job responsibilities with the understanding that employment will continue until either party terminates the contract. In the US, most of these contracts fall under "at-will" employment, meaning the employer or employee can end the contract at any time, with or without notice. 

Permanent employees often receive benefits such as health insurance, paid time off, retirement contributions, and other perks that may not be available or offered to temporary or contract workers. Additionally, these employees usually have legal protections against unfair termination and are often eligible for severance packages if the employer needs to downsize. Permanent agreements are a popular option for workers seeking job security, career growth, and a stable income.

Permanent employment contracts are commonly used in sectors requiring a long-term, skilled workforce, such as corporate office roles.

2. Part-time employment contract 

A part-time employment contract is an agreement for employees who work fewer hours than full-time employees, typically under 30–35 hours per week. However, exact hours vary by organization and local labor laws. Part-time employee contracts are flexible and commonly used when businesses need additional support but cannot justify or afford a full-time role. They work well for seasonal roles, temporary needs, or growing companies uncertain about long-term workload demands. For example, hiring an administrative assistant on a part-time basis allows a business to meet operational needs without committing to the expenses of a full-time hire.

The benefits of part-time contracts include cost savings on wages and benefits and flexibility for both the employer and employee. However, part-time employees may not receive the full range of benefits, such as health insurance or paid time off, that full-time employees do. Employers should ensure they understand and comply with local labor regulations, as some jurisdictions require that part-time employees receive benefits and protections similar to those of full-time staff.

3. 1099 employment contract

A 1099 employment contract, also known as a freelance or independent contractor agreement, is a legal document that outlines the terms of work between a self-employed individual (sometimes called a contingent worker) and the employer. Unlike traditional employment, these contracts offer flexibility and autonomy to the contractor while providing the hiring organization with specialized skills on a per-project basis. A 1099 form is an IRS document that reports payments to independent contractors. 

Benefits include cost-effectiveness for companies and independence for freelancers. Drawbacks include a lack of job security for the worker and potential disagreements over the scope of work and payment.

1099 contracts are commonly used for professionals such as web designers, writers, consultants, and gig workers. For example, a business might engage a freelance graphic artist to create a design, or a tech company could hire a programmer for a short-term project, with the 1099 contract defining the deliverables, payment, and other terms.

4. Fixed-term employment contract 

A fixed-term contract is an employment agreement with a defined start and end date. These contracts are often used to meet temporary staffing needs, such as seasonal demands, parental leave coverage, or project work. Fixed-term contracts are common in industries with fluctuating workloads and short-term requirements. 

These contracts provide several benefits, including flexibility for the employer and predictability for both parties. Employees on fixed-term contracts often receive similar benefits to permanent employees for the duration of their employment, making these roles attractive for workers seeking diverse experiences or short-term opportunities. 

Drawbacks include job insecurity for employees and the potential of reduced commitment, since workers may be uncertain about their long-term prospects. These contracts are best suited for organizations facing temporary staffing needs, allowing them to maintain service levels without long-term employment obligations.

5. Casual contract 

Casual employment contracts are flexible work agreements where workers are hired on an as-needed basis. In most cases, there is no guarantee of hours or a long-term commitment. Typically, casual workers are not eligible for benefits like paid time off or medical insurance. 

These contracts are suitable for people looking for flexible, short-term work. While the hours are varied, income is unpredictable, and this can lead to high turnover. For the employer, casual contracts are a cost-effective and flexible method of staffing during periods of fluctuating demand (e.g., seasonal holidays, high tourism seasons). At the same time, high turnover rates may prove costly in terms of ongoing training requirements and low employee engagement. 

6. At-will contract 

As noted above, many permanent contracts are at-will. At-will employment contracts allow either the employer or employee to terminate the employment relationship at any time, for any reason, without prior notice or cause, unless otherwise specified in the contract. It is the standard employment arrangement in most states, unless otherwise indicated. 

The benefits for employers include flexibility and reduced legal risks in terminating employees. Employees gain the freedom to leave a job without long-term commitments. The downsides of these contracts are a lack of job security for workers and an unpredictable workforce for employers. 

7. Internship contract 

An internship contract is an agreement between an intern, usually a student or recent graduate, and an employer, allowing the intern to gain practical skills, training, and industry experience. Unlike regular short-term employment contracts, internships are generally intended as learning experiences and may be paid or unpaid, often lasting for a predetermined duration. Unpaid internships are legal in specific situations, but it depends on who is the primary beneficiary of the agreement. The “primary beneficiary test“ will help determine whether the intern or student is considered an employee under the federal Fair Labor Standards Act. State laws may be more restrictive, so it’s best to seek legal advice.

The focus on skill-building and professional connections differentiates internships from other fixed-term work contracts. In most cases, internships generally do not offer benefits. 

The advantages of an internship contract include valuable industry experience for interns and a cost-effective way for employers to assess potential hires. Drawbacks include limited or no financial compensation for interns, and there is potential for exploitation if the internship lacks proper regulation. An ideal use scenario for an internship contract is a student seeking real-world experience in their field of study. At the same time, the employer gains a temporary addition to their workforce, who may later transition to a permanent role.

8. Temporary employment contract 

Temporary employment contracts are short-term agreements companies use for flexibility in filling immediate or unpredictable staffing needs, such as covering employee absences or managing increased workloads. Typically lasting up to a year, these contracts can be arranged directly with individuals or, more commonly, through staffing agencies. Unlike fixed-term contracts, which can also be limited in duration but generally offer more stability and benefits, temporary contracts do not usually require advance notice for termination by either party. 

The main advantage of temporary contracts is their flexibility for employers, as they allow rapid response to changing staffing needs without long-term commitments. However, temporary employees often receive minimal job security and limited or no benefits compared to fixed-term or permanent employees. These contracts are ideal for situations where employers need staff only for a brief period, such as to handle seasonal surges or to fill gaps left by employee absences. Fixed-term contracts are better suited for projects with defined end dates or for covering extended leaves.

9. Remote work agreement

A remote work agreement is a formal document, usually attached to an existing employment contract, that allows employees to work outside the traditional office, typically from home. It specifies job duties, compensation, company expense policies, and equipment requirements.

Benefits include flexibility, increased productivity, and access to a wider talent pool. However, remote work can involve potential data security risks, communication challenges, and team cohesion issues. Remote work agreements suit companies looking to support employees who need flexibility or live far from the office. 

10. Union contact

A union contract is a legal agreement between a union and an employer that outlines wages, work hours, job duties, benefits, vacation time, and job security. Designed to protect workers' rights, these contracts ensure fair treatment and include grievance procedures. They are commonly used in industries like construction, healthcare, and public services. 

11. Zero-hour contract

Zero-hour contracts are more popular outside the US and are similar to casual employment contracts.

How to choose the right type of employment contract

In some situations, it’s obvious which type of employment contract you should use. But sometimes the choice isn’t always clear. The following steps will help you determine the best contract for your situation:

1. Understand employment laws 

Understanding the federal, state, and local employment laws that apply in your situation is critical to using an employment contract that is legally sound. Employment laws directly affect areas including: 

• Legal compliance
• Legal protections
• Worker classification
• Employee termination
• Protection of business interests (e.g., confidentiality, non-compete clauses)
• Risk management

A firm grasp of employment laws will help you pick the proper contract and avoid potential legal issues. 

2. Assess the role’s duration 

The length of employment is crucial in choosing the right, legally compliant contract. For short-term requirements, including project-based or temporary hires, a fixed-term contract is usually the best choice. It provides flexibility and lower costs because there is no requirement to provide long-term benefits.

On the other hand, for ongoing roles, permanent contracts offer many benefits, including stability for both the employee and employer. Matching contract types with role durations helps simplify and streamline workforce planning, lower turnover rates, and ensure compliance with labor laws and regulations. 

3. Evaluate the level of supervision needed 

Assessing the level of supervision needed is also essential for deciding which type of employment contract you should use. A freelance or contractor agreement may be the best choice if the role requires minimal supervision. Traditional full- or part-time contracts may be beneficial for positions requiring more oversight as they allow for more managerial control and clearer expectations. Matching supervision needs with contract type helps streamline workflow and mitigate legal risks, like worker misclassification.

4 benefits of employment contracts and agreements 

From legal protection to dispute resolution, there are many important benefits to using employment contracts, especially written ones, for hiring or renewing employees.

1. Legal compliance 

Clear terms in a written contract make it easier for employers to demonstrate and maintain legal compliance with federal, state, and local employment laws, including the Fair Labor Standards Act (FLSA). By including anti-discrimination and equal treatment policies, contracts align with Equal Employment Opportunity Commission (EEOC) standards, which reduces the risk of discrimination claims.

Clearly stating leave and other guidelines keep businesses compliant with laws, including the Family and Medical Leave Act (FMLA) and Affordable Care Act (ACA). Detailing termination reasons and procedures can protect against wrongful termination claims. Including state and local labor law requirements such as minimum wage and paid sick leave also helps ensure legal compliance.

2. Clear role expectations 

Including clear role expectations in employment contracts helps reduce misunderstandings and ensure accountability for both employers and employees. By defining duties and responsibilities, your employees know exactly what is expected of them. This can help improve both morale and job performance. Clear expectations also make it easier for employers to address performance issues. Including duties and responsibilities can also help protect organizations facing wrongful termination claims or performance-related disputes.

3. Enhanced employee-employer relationship

By formalizing the terms of employment in writing, both parties clearly understand their obligations and rights. A well-written contract covers important areas like pay, benefits, responsibilities and expectations, and company policies. This helps create an equitable workplace where employees feel valued and employers gain a framework for managing and addressing issues, strengthening the employer-employee relationship. 

4. Simplified dispute resolution

Workplace disputes can happen. But, resolving these disputes is much easier when a valid employment contract is in force. By clearly outlining expectations, terms, and procedures, both parties have a solid foundation for addressing potential conflicts. A well-written and legally sound contract is an objective reference point. It reduces ambiguity, making dispute resolution straightforward. In addition, contracts that include provisions covering disciplinary procedures and termination minimize the risk of misunderstanding and potential legal issues. A comprehensive employment contract simplifies dispute resolution and saves time and resources for all parties. 

Easy hiring with Rippling 

Rippling Recruiting connects and automates every step of the recruiting process, enabling you to build a hiring engine that streamlines all the necessary tasks. It’s the first applicant tracking system (ATS) that lets everyone—from recruiters and hiring managers to department heads—hire more efficiently.Whether it’s classifying workers or generating legally compliant employee contracts, Rippling improves the effectiveness of your hiring lifecycle. From onboarding to offboarding and every step in between, Rippling takes a data-driven approach to recruiting. Changes sync across your applications, eliminating busy work and keeping every team closely aligned. Rippling is a single platform that helps your business manage all its employee data and operations, regardless of size. With Rippling, your entire company is hiring on all cylinders.

FAQs on ​employment contracts

How are temporary contracts different from fixed-term contracts?

Temporary and fixed-term contracts differ in several important ways. Temporary contracts generally have no specific end date and can be terminated at any time, while fixed-term contracts have a predetermined end date or are linked to the completion of a particular project. 

Temporary workers are often employed through staffing agencies, creating a more complicated employment relationship. Most fixed-term employees are hired directly by an organization. Fixed-term contracts usually include additional benefits and legal protections. Unlike temporary contracts, they may also contain provisions for renewal or conversion to permanent status. 

Fixed-term employees usually enjoy a working relationship similar to permanent staff, while temporary workers typically have more limited rights and benefits.

How should non-compete and confidentiality clauses vary by contract type?

Non-compete and confidentiality clauses should be tailored based on the employee's role and level. For example, executive contracts may include broader non-compete and confidentiality provisions. Entry-level staff contracts may require only basic confidentiality requirements. Independent contractor agreements should use non-competes cautiously, if at all, but may include detailed confidentiality provisions. Across all contract types, it's crucial to ensure restrictions are reasonable, legally compliant, and protect legitimate business interests. 

What’s the best way to outline job responsibilities in an employment contract?

Provide a clear and concise description of the employee's role, key duties, and reporting structure. Begin with a brief overview of the position and its primary purpose within the company. List the main responsibilities and tasks expected of the employee. Focus on core functions instead of exhaustive details. Be sure to include information about who the employee reports to and any direct reports they may have. You should use specific language to describe the worker’s responsibilities, but allow for flexibility as their role evolves. Be sure to state that the list is not all-inclusive and that other duties may be assigned as necessary. 

What are termination clauses, and why are they important in contracts?

Termination clauses outline the conditions and procedures for ending employment relationships. These clauses cover several areas, including grounds for termination, notice periods, and severance pay. They clarify, limit liability, protect company interests, and define employee rights upon termination. 

Termination clauses must be written to ensure compliance with federal and state labor laws. Poorly written or overly restrictive clauses may be deemed unenforceable.

This blog is based on information available to Rippling as of November 13, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.