Employment Contract Analysis: What To Look For in Your Contracts

April 26, 2022
April 26, 2022
Gary Sangha | Founder & CEO

Well-written employment contracts include mutually agreeable terms for both the employer and the employee. Whether you have five employees or five thousand, employment contracts outline rights and responsibilities — keeping employees happy by avoiding disputes and ensuring the business is running smoothly in the process. 

Once a contract has been drafted, the terms are negotiated. Once there is agreement on all of them, it is executed by the parties. Employers may want to limit the risk of employee underperformance, termination, theft of trade secrets, increased competition, and litigation. Employees may want to know they have reasonable rights and responsibilities, job security, and freedom of mobility to change jobs when necessary. 

Here we’ll cover the different types of employment contracts, essential elements and inclusions that make them valid, and methods for conducting more efficient employment contract analysis.

What Are the 3 Types of Employment Contracts?

Depending on business needs, employers may draft one of three types of contract:

  • Permanent employment contract: for employees who work regular hours (full or part-time) and receive either salaries or hourly pay. Employment will continue up until the employee or employer wishes to terminate the agreement. The full range of statutory benefits apply.
  • Fixed-term contract: for employees beginning and ending work on set dates or time periods. These contracts are common when staffing large projects, providing internship opportunities, or covering maternity leave.

  • Casual term contract: Casual employment arises in situations where working patterns are irregular. Contracts should specify minimum weekly hours, how to accrue sick and holiday pay, and include a statement that working patterns are subject to change.

What Are the 4 Key Elements of a Valid Employment Contract?

A legally enforceable employment contract will contain the following elements:

  • Offer: One party will make a sincere offer of employment. It can be invitational and directed to a particular person, or it may be conditional and posted widely on the internet with job ads specifying certain requirements.
  • Acceptance: Unqualified acceptance means the terms are agreed upon as they’re laid out. Parties may negotiate a counter-offer if the terms are not mutually agreeable, or acceptance can be conditional depending on adherence to certain requirements.
  • Consideration: Something of value must be traded in a contract. In this case, it is work from one party in exchange for compensation and benefits from the other.

  • Capacity: Restrictions imposed in any employment contract must be reasonable. For instance, employers cannot hire children to perform certain activities or (legally) hire undocumented workers. In certain positions, background checks and professional credentials may be necessary to meet state or federal requirements.

What Are the 5 Main Inclusions in an Employment Contract?

Employment contracts generally include these five terms:

  1. Terms of employment: The terms of a contract spell out how long the contract is valid, its expiration date (if applicable), and what the grounds are for extension or termination. Restrictive covenants like non-competes and confidentiality clauses may also be included to protect business knowledge and proprietary data.

  2. Obligations: This section should clearly specify the employee’s duties to prevent him or her from feeling misled, overloaded, or otherwise dissatisfied with the work environment.

  3. Compensation: Compensation can be weekly or biweekly and either hourly or salaried. Performance-based bonus structures and profit-sharing agreements may also be included. Employers can also spell out when and how raises are determined.

  4. Benefits: Benefits can include paid time off, 401(k), medical, vision, dental, and life insurance. Use of company cars or technology, lunch per diems, and other types of perks should also be outlined in this section.

  5. Severance: Should one or more parties wish to terminate the employment contract, the proper protocols for doing so will be listed here, such as whether the decision must be in writing, how much notice is required in advance, and to whom the notice should be given.

How Do You Review Employment Contracts?

Properly drafted and negotiated employment contracts are a crucial aspect of running a successful business, as choosing the best possible language minimizes risk and fosters goodwill amongst staff. Companies that draw up many contracts may have in-house legal teams reviewing them, or they may outsource the work to a contract law firm. 

If high volumes of contracts are involved, conducting routine in-house analysis with an artificial intelligence (AI)-powered contract review platform like LexCheck is often the most efficient way to tackle the task. LexCheck helps corporate legal departments across the globe cut down on the time and costs of legal work, including for employment contract analysis. Here’s how it works:

  • Upload: Legal departments upload their playbook of preferred clauses along with a few samples of previous labor contracts to the system.
  • Analyze: Finding patterns in vast amounts of information, LexCheck compares the newly uploaded draft to previous ones and reviews it for best practice standards — redlining risky clauses, errors, deviances, and areas of omission. 
  • Improve: The platform suggests context-based revisions and implements automated updates based on company playbook compliance.

  • Expedite: Initial employee contract review can be completed in five minutes, not five days. Changes can be accepted with the click of a button, or forwarded to senior attorneys for final review.

LexCheck leverages AI to ensure corporate legal departments consistently adhere to employment contract analysis best practices. Contact us at sales@lexcheck.com to learn more, or request a demo to experience the technology yourself.

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