4 Types of Employment Contracts to Consider for Hiring
Choosing the appropriate employment contract is an important step toward protecting both your company and your workers' rights. We walked through the four main types of contracts.
Published on July 29, 2022
Employment contracts define the relationship between an employer and an employee, so drafting one for a new hire sounds straightforward. But employers sometimes — intentionally or unintentionally — misclassify full-time employees as independent contractors, neglect employee rights in their jurisdiction, and choose the wrong contract type for employees. These mistakes are a sure way to waste valuable time, incur fines, and/or face criminal penalties.The right employment contract protects you, your business, and your employees or contractors. Thankfully, there are different types of employment contracts to help you sort your hiring process. You’ll discover what these four contracts are, their use cases, and why they may or may not be suitable for your needs.
1. Full-time contractFull-time employment contracts are agreements between employers and employees that include details of the employee’s work hours, salary, and other benefits. There’s no fixed end date unless either employee or employer willingly ends the relationship. Full-time contracts with a fixed end date are called fixed-term contracts, but more on that later.Full-time employee contracts allow you to:
- Give employees more responsibility at work. You can entrust longer-term projects to employees with the confidence that they’ll see them through since a full-time contract signifies long-term commitment.
- Enjoy higher employee dedication and focus. Full-time employees are able to spend more time on your projects and give you consistent output as long as you have tasks for them.
2. Part-time contractA part-time employment contract is an agreement where employees work fewer hours than their full-time counterparts. “Fewer hours” is relative; a part-time worker may work 20 hours in one organization and 30 hours in another, depending on a business’ needs.The IRS says that “a full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week, or 130 hours of service per month.” Part-time contracts in the Czech Republic, by contrast, are for seasonal jobs — employees cannot work for the same employer for more than 20 hours a week and 300 hours a year.A part-time contract is useful when you want to keep your running costs low and can’t afford to pay full-time wages and benefits. It’s also useful when you don’t need to elaborately onboard or train new employees to perform their roles. For example, an administrative assistant will usually not need extensive training to perform their duties efficiently.Part-time contracts work well when your company is growing rapidly but you’re not sure there’s enough work to justify hiring people full time. Hire new employees on a part-time employment contract until you’re certain there’s more work to delegate long term.Depending on local laws, part-time employees enjoy all the benefits of full-time employees. Always do due diligence and seek legal advice to ensure you’re adhering to local government regulations.
3. Fixed-term contractFixed-term contracts are employment agreements in which the employer and employee agree to work together from a fixed start date to a fixed end date. In some countries, a fixed-term contract lasts more than a year, while other countries like South Africa accept contracts lasting up to three months unless an employer can justify an extension.Typically, local laws in some countries allow you to extend the contract after the initial expiration date if the scope of the project expands or the initial timeline for completion is longer than expected. However, the employee must also agree to continue the working relationship, and the length of additional time is subject to local laws. In Kenya, for example, contracts with specific end dates can only be extended for an additional month, while Indonesian employment law allows only a one-time extension of a fixed-term contract. Do your own research and seek legal advice to ensure you’ll draft a locally compliant contract.You can combine fixed-term contracts with other types of contracts for added flexibility. For example, your contract can state that employees will work part time or full time for the period outlined in the contract. Full-time, fixed-term employees enjoy the benefits of full-time employees. When the contract lasts less than a year, employers calculate benefits based on the number of months the employee works.A fixed-term contract is suitable for when you need help for seasonal projects or specific one-time projects. For example, the end of the year might be a peak period for customer inquiries, but most of your support specialists will take time off to be with their families. Offer new incoming customer support specialists a fixed-term contract to cover for your employees on vacation. That’s why fixed-term employees are called temporary employees.
4. Casual contractCasual employment contracts (also known as zero-hour contracts in the UK) require independent contractors to be available for work whenever they’re needed without any assurance of long-term engagement. Contractors don’t get a fixed wage because they’re paid based on the amount of work they do each month. Pay is based on each project or calculated hourly — this type of contract is common for freelancers and other self-employed people.Some employers consider casual contracts because they are wary of paying employees a fixed amount every month for inconsistent output. For example, let’s say a full-time employee is required to write six blog posts a month for a monthly salary of $5,000. The employee gets $5,000 every month, including other benefits, whether they write five, four, or even just two blog posts.Employers pay a fixed salary to full-time employees whether the business is doing well or not, but casual contracts make room for pausing tasks assigned to independent contractors when business is slow.Granted, experienced independent contractors often charge more than full-time employees per hour. But when you factor in employees’ compensation, casual contracts are still the most cost-efficient route in many scenarios. Employers often make no deductions from their pay, nor do they need to offer any benefits or training, depending on their location. Some countries, like Spain and France, require companies to offer contractors benefits and deduct taxes, too.The problem is that contractors may turn down incoming work from an employer due to availability or other issues. So, while they’re expected to be on call, there’s no guarantee they’ll be available — the same way employers offer them no assurance of consistent work.Casual contracts are a good option when you don’t have enough money or work to fill up full-time working hours. Sure, part-time contracts also work in such scenarios. But unlike part-time employees who can be unskilled and get by with minimal training, independent contractors are expected to have the skills essential for their role. For example, anyone can restock a bookshelf at a bookstore with minimal training, so a bookstore can hire people part time. But not everyone can write a good article, so companies need to hire a skilled freelance writer for that.Combining casual contracts with other contract types gives you added flexibility. It’s not uncommon for employers to offer casual contracts for a fixed term in anticipation of an increased workload during the contract’s duration.
Choose the right contract for each new hireNo contract is a one-size-fits-all solution to your employment needs. Resist the urge to choose a contract type just because it’s popular or your competitors are doing it.Carefully consider your unique situation and decide what will work best for you. When you’re hiring internationally, it can get even more complicated. So don’t skimp on learning about local labor laws to protect yourself from future legal repercussions — you’ll avoid weighty fines and unpleasant sanctions.True, all of this sounds like hard work, and it is, but you don’t need to do it on your own. Pilot simplifies global hiring and helps you create employment contracts that meet local laws with the help of our legal team. We’ll also help you choose the suitable employment classification for your new hires. Try Pilot now, and you’ll be on your way to seamlessly managing employee relationships no matter their contract type.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
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