Employment Contracts: What Small Businesses Need To Know

We know what you’re thinking. Having a detailed employment contract in place sounds great, but is it realistic for small business owners and managers to put them together in their busy workdays, let alone have them reviewed by a lawyer or a human resources expert? Wouldn’t they be better off hiring people they trust and hope they’re on the same page in terms of work responsibilities, conditions, and expectations after a few quick conversations?

Homebase is here to answer all those questions and beyond. We’ll break down exactly what employment contracts are, as well as how they can work in your small business’s favor, even if you feel like your time is limited and your plate is already full.

What is an employment contract?

An employment contract is an agreement that an employer and an employee enter into when they start their working relationship.

They are typically formal, written documents that employers develop with the help of a lawyer, human resources professional, or HR tool and ask team members to revise and sign before their first day. However, especially in the small business world, employment contracts may be more informal or even verbal, though this isn’t recommended from a legal perspective. 

It’s also worth noting that in some cases, freelancers or independent contractors may have their own employment contracts that they ask their employers or clients to sign.

Some of the most common points included in employment contracts — though they can vary — are basic employee and employer information, job details, compensation information, benefits and perks details, employee schedule information, resignation and termination policies, and conflict resolution processes.

It’s also good for both employers and employees to know that not all jobs require employment contracts, and many don’t involve them at all. Historically, they’ve been most commonplace when team members are hard to replace or handle confidential information, or when employers want to clearly define responsibilities or have specific compliance requirements to consider. However, human resources professionals are recommending employment contracts more and more as they protect both employers and employees and help avoid misunderstandings and uncomfortable situations.

A screenshot from a YouTube video tutorial about Homebase's HR Pro tool.

4 reasons your small business should use employment contracts

Now that you know what employment contracts are, let’s discuss what they can actually do for you and your small business. 

1. Better compliance with labor regulations

A screenshot of the "laws" tab within the Homebase HR compliance feature.

Because employment contracts are usually written documents that contain details about the working agreement and relationship between an employee and an employer, they prompt both parties to consider whether everything is consistent with applicable labor norms and regulations.

Plus, when small business owners develop employment contracts with the help of a human resources professional and/or lawyer, they make sure that the agreement complies with local, state, and federal labor laws.

Some common aspects of employment contracts that need to be compliant with labor regulations include:

  • Wage laws, like minimum wage, overtime, and job misclassification
  • Extended leaves of absence
  • Employment termination
  • Workplace safety violations
  • Workers’ compensation
  • Discrimination, harassment, and retaliation

Many small business owners don’t have the budget to hire a human resources consultant every time they need to write an employment contract, which might be why many SMBs don’t use employment contracts at all.

But there’s another option — a small business management platform like Homebase. Our HR and compliance tool not only provides customers with HR experts who can answer their questions and offer personalized guidance in the development of internal policies and documentation, but it’ll even notify them when relevant local, state, or federal labor laws change. That means you’ll never have to worry about your employment contracts getting out of date or irrelevant without you realizing it.

2. More clarity surrounding job expectations and responsibilities

Small businesses are notorious for scrappy mentalities. Owners and managers often have to wear many hats and fulfill several different roles like human resources manager, marketing manager, accountant, and beyond. However, that reality isn’t limited to owners and managers — it extends to team members as well. They often have to flit between different positions and help out wherever necessary. For example, a retail shop employee might spend an hour assisting customers on the floor, an hour at the till, and an hour taking inventory and organizing the back end.

While this is convenient because it helps SMB owners and managers optimize labor costs, gives them more flexibility in terms of shift swaps and covers, and often means that team members can get more done in a day, it can also lead to confusion about what people’s responsibilities really are. For example, a retail shop employee might have helped take inventory for a week while the team was understaffed and the manager was busy dealing with other issues, but that doesn’t necessarily mean the task is part of their regular duties.

This can also cause tensions in informal feedback or performance evaluation situations as team members may resent negative or lackluster reviews they don’t feel are fair. For example, if they get criticized for not doing tasks they didn’t think were a regular part of their position in the first place. That’s why clearly defining job expectations in employment contracts is so important for small businesses — it avoids these kinds of mix-ups and means staff members always have a clear source of truth to refer back to in terms of their responsibilities.

3. Increased professionalism and credibility as a great place to work

A screenshot of an interface within Homebase HR and compliance where admins can easily upload, organize, and keep track of employee documents.

At the end of the day, your business will seem more professional and be more likely to develop a good reputation in your community as a desirable place to work if you use employment contracts and other formal documentation. Imagine the difference between these two situations:

  • A recent hire shows up for their first day of work already having reviewed, clearly understood, and e-signed their work contract and read through a comprehensive employee handbook that outlined all of the company’s internal processes and policies.
  • A recent hire shows up for their first day of work based on a vague verbal agreement after a brief job interview and a sticky note with their hourly wage and work schedule scribbled on it.

There’d be a big difference between those two new team members’ experiences with you as an employer, wouldn’t there?

4. Easier to enforce company policies in tricky situations

Even on the most harmonious small business teams, problems and tensions arise eventually. And they’re much easier to solve without the situation escalating when you can refer to formal documents like employment contracts that all parties read and signed at the beginning of their working relationship.

Let’s consider a couple of examples:

  • You own a small cafe and hired a barista four months ago. She signed a simple employment contract that said that her work schedule would be from Tuesday to Saturday, 7am to 3pm. Now, she says she’s frustrated that she has to work every Friday and Saturday morning. She points out that other employees only work Monday to Thursday. As her employer, while you can try to find a compromise that meets her needs, your employment contracts put you in a much stronger negotiating position because just four months before, she agreed to work every Friday and Saturday morning.
  • You manage a seasonal winter sports equipment shop that’s open between September and April and is particularly busy between December and March. All your seasonal team members signed employment contracts that said once they’d been working with the business for over a year, they were entitled to seven days of paid holiday while the store was open, other than in peak season between December and March. One of your employees is frustrated because you’ve denied their paid time off request for ten days in February. Again, while you should ideally find some kind of compromise with this team member, you’d be able to refer back to your employment contract and reiterate that you have your PTO policies in place for a reason and, therefore, should apply them equally to all staff members.

Pro tip: Want to learn more about how Homebase can help you manage your small business’s paid time off (PTO) admin? Check out this dedicated tutorial video.

You don’t need an HR team to develop an employment contract — just Homebase HR and compliance

As you can see, employment contracts are worth the effort — even for small business owners. While they require a time investment to develop and share, they can bring tons of benefits to SMBs. Namely, they help small businesses better comply with relevant labor laws, make job expectations and responsibilities more clear, increase professionalism, community reputation, and credibility, and help enforce internal policies and guidelines. 

Don’t make the mistake of assuming you’ll have to hire a human resources team or legal consultant in order to put together worthwhile employment contracts, either. Ultimately, they’re relatively straightforward documents that a small business management platform like Homebase is perfectly equipped to help you with. Specifically, our HR and compliance feature can provide you with access to a team of HR experts who can answer your questions, review your existing employment contracts, and even assist you in crafting yours and making sure it’s compliant. Best of all, our platform will alert you about changing labor laws and take other team management admin tasks like scheduling, payroll, and team communication off your plate, too.

FAQs about employment contracts

What’s inside an employment contract?

The contents of employment contracts vary depending on the business’s size, needs, industry, and geographic location. However, the following elements are often included:

  • Basic information about the employee and the employer
  • Position details like job title, job description, employment type, start date, and duration
  • Compensation information related to salary or wage, payroll schedule, payment method, overtime rates, bonuses, and commissions
  • Benefits and perks details, for example, regarding health insurance, retirement plans, paid time off (PTO), and sick leave
  • Employee schedule information
  • Probationary, discipline, resignation, and termination policies
  • Grievance and dispute resolution processes
  • Confidentiality requirements and intellectual property protections 
  • Information about workers’ rights and applicable law and jurisdiction
  • Signatures

When do you need to use an employment contract?

Although some small businesses might feel that employment contracts aren’t worth the hassle, employers and employees should use them when they begin any kind of working relationship. That much is true whether the employee is a full-time worker, part-time worker, independent contractor, or any other type of worker. Ideally, a human resources expert should review any employment contract to make sure it ticks all the regulatory boxes it needs to and includes all the information it should before anyone signs it. SMB-friendly tools like Homebase HR and compliance — specifically the HR Pro feature — are ideal for this kind of work.

Who uses employment contracts?

Both employers and employees in businesses of all shapes and sizes use employment contracts. They’re helpful for employers because they clearly outline work conditions, reduce misunderstandings and conflicts, and provide legal protection. Putting agreed-upon employment conditions down in writing and reviewing them with a human resources expert also ensures they’re compliant with local, state, and federal labor laws. Employment contracts are also useful for employees because they allow them to better understand their job responsibilities and expectations, give them better future negotiation power, help with dispute and grievance resolution, and protect their rights.

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