How to manage employment contracts

An integral part of HR contract management is the signing and management of employment contracts. Given the scale of hiring, managing these contracts can quickly become complex without the right systems in place. This guide breaks down everything about employment contracts and explores how modern HR contract management software can streamline the entire process, improve compliance, and support a seamless onboarding experience.

What is an employment contract?

An employment contract is a legally binding agreement between an employer and an employee that details the rights, duties, and obligations of their working relationship.

HR contract management is the process that ensures these critical documents are properly drafted, reviewed, approved, executed, and maintained throughout the employee lifecycle.

An employment contract is crucial for setting clear expectations, promoting transparency, and protecting employers and employees in disputes.

Typically, the employer initiates an employment contract after selecting a candidate. The contract is usually created and signed before the employee's joining date, often following their offer letter. By signing the employment contract, the employee formally accepts the role and agrees to the specified terms.

What is the purpose of an employment contract?  

There are three main factors that make employment contracts important: providing structure, ensuring protection, and improving compliance.

Provides structure

An employment contract detailing the employees' responsibilities and role-related obligations brings structure and clarity to the relationship. It sets the right expectations and helps avoid misunderstandings.

Ensures protection

An employment contract offers legal protection to both the employer and the employee. During conflicts, misconduct, or termination, it helps navigate the situations on legal grounds and resolve disputes.

Improves compliance  

Having an employment contract in place ensures adherence to labor laws. This reduces legal issues and reinforces a fair, lawful workplace that protects the interests of both parties.

What type of contract is an employment contract?

Based on their formation, execution, validity, nature, duration, and function, employment contracts can be express or implied. In most cases, they are express contracts in which all terms and conditions are explicitly stated, either in writing or verbally. However, in exceptional cases, an employment relationship can be based on an implied contract formed by the actions, conduct, or circumstances.

Both types are legally valid and enforceable. But, a written express contract provides greater clarity, accountability, and protection for all involved parties.

Express employment contract example

A company hires a software developer and sends them an employment contract outlining the job role, salary, working hours, leave policy, and other terms. All terms are documented and agreed upon, making it an express employment contract.

Implied employment contract example

A delivery partner joins a food delivery platform, completes onboarding, and starts taking orders, following platform guidelines, and receiving payment per delivery. Though there's no formal employment agreement, the arrangement functions as an implied contract based on ongoing actions and expectations.

What is included in an employment contract?

While each employment contract differs in nature and scope based on the role, company, or region, they share common elements, such as:

• Job description -  This section describes the employee's role and primary duties associated with their position. It includes details on the reporting manager, working hours, weekly schedule, and possibilities for remote work.

• Compensation and benefits -  This part of an employment agreement details the employee's salary, eligible bonuses, incentives, insurance coverage, and overtime compensation following country-wise regulations.

• Confidentiality -  Including this clause in an employment contract protects the company's interests. It clarifies what information an employee can and cannot share with others. This typically includes internal processes, customer data, trade secrets, and other sensitive company information.

• Non-compete clause -  Adding a non-compete clause in an employment contract prevents employees from working for a competitor or starting a similar venture after leaving the company. This clause usually includes a restraint period, which defines how long the restrictions remain in effect after the employment ends.

• Non-solicitation clause -  This clause in an employment contract requires the employee to agree not to solicit, recruit, or hire any employees or customers of the employer for a specified period after leaving the company.

• Dispute resolution -  This section explains how conflicts between the employer and employee will be handled and resolved. It also specifies the legal jurisdiction and governing laws that apply to the agreement.

• Termination clause -  This part of the contract lists the situations or circumstances under which the contract can be terminated. It also mentions the notice period requirements and the process for resignation or dismissal, if any.

What are three ways in which an employment contract can be terminated?  

Termination processes and legal requirements vary based on the type of employment contract and the applicable laws in the region. However, there are three common ways in which employment contracts are typically terminated.

• Resignation by the employee:  In this type, an employee voluntarily ends the contract by serving the notice period and fulfilling any other exit requirements agreed upon in the employment contract.

• Termination by the employer:  In this type, an employer initiates the termination process for various reasons, including performance issues, misconduct, or organizational changes. During layoffs or unforeseen restructuring, companies provide prior notice, severance pay, or compensation based on company policy or labor laws.

• Mutual termination:  Here, both the employer and the employee agree to end the contract by mutual consent. For example, an employee may request an early release for personal reasons, and the employer agrees without enforcing the full notice period. This is considered a mutual termination where both parties see value in ending the employment contract.

Traditional employment contract management vs. managing contracts with CLM software

For years, employment contracts have been managed through printed documents stored in folders. Digitally, too, they have been drafted using a word processing tool, sent for signature, and managed using document management software. This model is difficult to scale and can be error-prone due to scattered documents.

Contract lifecycle management (CLM) systems are designed to streamline the employment contract management process. When applied to employment contracts, CLM software offers a structured and scalable alternative to traditional contract administration.

Here's how CLM systems simplify the management of employment contracts.

By adopting a CLM platform such as Zoho Contracts, HR and legal teams can efficiently manage employment contracts, reduce administrative burden, and ensure alignment with regulatory and organizational standards throughout the contract lifecycle.

Sign up today for a 15-day free trial and see how Zoho Contracts can transform your employment contract management.