What Is a Contract of Employment? (Your Ultimate Guide)

Updated 25 December 2022

When you receive a job offer, you'll likely need to sign a contract of employment. This contract outlines the terms of your employment. It usually includes details such as your compensation, job responsibilities and working hours. Understanding your employment contract is essential to know what is expected of you in your new role.

In this article, we cover some basic information about contracts of employment and discuss what employment contracts are, what they include and why it's important to understand them.

What is a contract of employment?

A contract of employment establishes the terms of your employment, in writing. Both you and your employer sign your employment contract to formally signify your agreement. Employment contracts generally include both the employee's and the employer's rights and responsibilities. The purpose of a job contract is to assist all involved parties to understand their obligations during the term of employment.

Sometimes you may not need to sign a contract of employment, like if you're an at-will employee. Though, it is uncommon to enter into a role without a written record of sorts. You can't write your own employment contract. Legal professionals are responsible for drafting contracts of employment. A contract acts as a legally binding document to safeguard both the employee and employer.

Types of employment contracts

Below are the three main types of employment contracts:

Permanent employment contracts

Permanent employment contracts can be for full-time or part-time work. They apply to employees who work regular hours and receive a salary or hourly rate. These types of contracts don't have an end date. They are ongoing until terminated by either the employee or the employer. Being employed on this type of contract entitles you to all rights of employment.

Fixed-term employment contracts

Unlike permanent contracts, fixed-term contracts specify the duration of the employment agreement. For example, you may be employed on a fixed-term contract for 12 months. Fixed-term contracts can be extended, but not beyond four years, at which point a permanent employment contract would need to be put in place. These types of employment contracts generally work for employees who are covering maternity leave, working on a one-off project or completing an internship.

Casual employment contracts

A key difference between a casual employment contract and a permanent/fixed-term contract is that regular working hours are not stipulated. Usually, a casual contract of employment will include a minimum number of hours to be worked per week, but not a schedule. Casual employees aren't entitled to sick leave or annual leave. Though, they are often compensated with a higher hourly rate in comparison to employees on other types of contracts. Casual employment contracts offer a greater degree of flexibility than other employment contracts.

What does a contract of employment include?

Almost all contracts include what the role's responsibilities are and how much they are to be paid. Below are a few of the common components found in a written employment agreement:

Employer and employee details: An employment contract begins with the details of both you and your employer.
Job description: This should clearly outline your position and the duties you will be responsible for. A concise job description is necessary for you to know what is expected of you. It also allows your employer to ensure that the organisation's expectations are met during the term of your employment.
Payment details: This includes all forms of payment, for example, your salary, applicable penalties, superannuation, allowances and bonuses. A contract of employment should also provide information about salary reviews.
Benefits: In most cases, a contract details the benefits you will receive as an employee. These benefits may include health insurance, retirement plans and more.
Nature of employment: An employment contract needs to state the nature of your employment. This could be casual, part-time or full-time, for example. This section of your contract also includes information about how many hours your employer expects you to work each week and which days you should be present at work.
Leave entitlements: Annual leave, sick leave, compassionate leave and long service leave are examples of leave entitlement details you can expect to find in your employment contract.
Confidentiality and limitations: A contract may present you with employment limitations. These could include, for example, whether you can work in another concurrent role. In some industries, you may need to maintain confidentiality about various business practices. In cases like these, your contract should make clear what information is confidential and any consequences for failing to adhere to confidentiality.
Dispute resolution protocol: Some contracts outline a standard method used to resolve conflicts or disputes within the company, such as contacting a designated mediator like a human resources employee.
Process for termination: Your written employment agreement should include the conditions for termination. This section details resignation, termination protections and early conclusion protocols.

Why understanding a contract of employment is important

You must understand your employment contract before signing it. A contract of employment is a legally binding document. In signing one, you're agreeing to the terms and conditions it outlines. After you sign a contract, you yield your ability to negotiate or alter the contract until it expires.

Before signing an employment contract, read through it in detail. Ensure you understand your obligations. It can be worth getting professional advice to assist you in understanding the main terms and conditions of your contract.

Negotiating conditions of employment

If you disagree with part of your contract or want to clarify information, you can enter a negotiation phase. Here are a few reasons you may try to negotiate your conditions of employment:

You believe you deserve more compensation.
You don't think the duration of the contract or schedule will work for you.
You would like to have fewer limitations on the supplemental or freelance work you can do.
You're seeking more benefits than offered.
You would like more or less responsibility than outlined.

Benefits of an employment contract

An employment contract can be beneficial to you and your employer. It offers protection to both parties. It also provides a point of reference throughout the term of employment. Here are a few specific benefits of using a contract of employment:

Clear expectations

A major benefit of having a contract in place is clear expectations of your new employment. This leaves less room for misunderstanding. It also provides you with a document to revert to in case of discrepancies later on.

Guaranteed term of employment

Often an employment contract will specify the duration of your employment. Knowing your job is guaranteed for a period, assuming you meet the expectations of your position, can offer you stability. This is beneficial because it allows you to plan for the future and focus on doing your best work.

Increased job security

An employment contract promotes fair work. As an employee, it protects you from challenging scenarios, for example, wrongful termination. Your employer must adhere to the conditions of employment as per your contract. So, your job security can often increase with a contract of employment in place.

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Quick tips for navigating an employment contract

When presented with a contract of employment, you must be attentive to ensuring that it protects you and your interests. Here are some quick tips for navigating your employment agreement with confidence:

Review your state's laws

While you can engage the help of a legal professional, it's not always the most financially practical option. Reviewing your state's laws can assist you in determining the legal compliance of your employment contract. It can also help you avoid challenging situations in the future.

Research salary averages

Researching salary averages for positions like yours can help you know if the compensation on offer is in line with the industry average. If you decide to negotiate your payment, you can use these numbers as evidence. It's also important to understand what type of bonuses or commissions your contract entitles you to, besides the base salary on offer.

Look for outside work restrictions

If you're a freelancer or have an important side-hustle, you need to be mindful of any limitations outlined in your contract. Some companies limit the amount of outside work their employees can do during their term of employment. Review your contract for any conflicting regulations before signing it.

Negotiate

Negotiating the terms and conditions of an employment contract is common practice. You are well within your rights to do so. To excel in your role, you must be comfortable with what your new employer is expecting of you. If your contract fails to address some of your needs as an employee, negotiate before you sign.