What is an employment contract?

A contract is an oral or written agreement between two or more parties that they will do or not do something. In the employment context, an employer usually makes an offer of employment to an employee who then accepts the offer by performing the work. For a contract to be enforceable there must be something of value exchanged between the parties. In an employment agreement, the employer is giving wages and the employee is giving his services.

Take, for example, an agreement where a plumber promises to fix your sink for free. If he never ends up fixing your sink, you cannot take him to court to get him to do what he promised to do. The agreement is not enforceable because you have not given anything in exchange (i.e., money) for the plumber’s promise to fix your sink.

To constitute an enforceable contract, the agreement doesn’t have to be a formal, written agreement titled “Employment Contract.” Offer letters can be employment contracts, and so can even an exchange of emails. A contract can be based on an offer letter if the letter clearly establishes an agreement limiting the right to discharge. However, employee handbooks generally do not create contractual obligations under Texas law.

Employment contracts can provide many advantages for employees. They often provide greater job security by limiting the employer’s right to terminate at-will. For example, an employee can demand a certain length of employment, and such an agreement for a fixed period of time would require the employer to have “good cause” before firing the employee. However, the parties must clearly define what constitutes “good cause” in their agreement.

If one party to the contract party to the contract breaks the terms of the agreement—for example, an employer refuses to pay the employee—the other party can sue to have the court order the breaking party to perform or to recover any monetary loss or damages. Also, the winning party in a lawsuit based on a written contract can recover attorneys’ fees.

A contract for employment usually also has certain elements: position and job duties, compensation, duration, and termination. These elements ensure that the agreement is sufficiently definite to be enforced.

When it comes to position and job duties, an employee should make sure that these are specifically stated in the agreement because, under Texas law, an employee can sue an employer for changing the employee’s job duties in the contract.

Compensation can be provided for in a contract in a variety of ways. A contract can provide a base wage, incentive compensation, employee benefits, or severance benefits. The base wage is an employee’s primary source of income—for example, an hourly rate or an annual salary. However, the base wage is subject to the national minimum wage and the overtime requirements of the Fair Labor Standards Act. Incentive compensation is paid in addition to the base wage and is based on an employee’s performance—for example, an end-of-the-year bonus. Employee benefits might include health insurance, life insurance, vacation, or a 401(k) savings plan. Severance benefits are payments made to an employee after the contract has been terminated.

Most, if not all, contracts will provide how long the period of employment is to last. For example, a fixed-term agreement remains in effect for a defined period, usually one to three years. Similarly, a condition subsequent agreement provides that the agreement will end when some future event occurs, such as completion of a particular project or an employee’s retirement.

A contract will also usually include specific circumstances under which the agreement can be terminated. In Texas, there are five types of termination provisions: termination at-will, termination for good cause, termination for good faith dissatisfaction, termination upon notice, and non-durational termination.