The Ultimate Guide to Employment Contract Types

Bringing new talent to your company is exciting. But, before your new hire gets to work, there’s one important thing to sort out - the employment contract. The type of contract in place will determine everything, from the job responsibilities to benefits, salary, termination rules, and more. 

With so many different employment contracts out there, it’s important to understand your options and choose the right one for the role. In this guide, we’ll break down the most common contract types and how to choose the right option. Keep reading for more insights!

What is an employment contract?

In simple terms, an employment contract is a formal agreement between an employer and an employee that defines the most important terms and conditions of an employment relationship. Besides covering the most important details, employment contracts should also provide clarity and legal protection for both parties.

While the specifics can vary depending on the job type and local regulations, some of the most common elements of employment contracts include compensation, working hours, notice period, termination of employment, and similar. 

Types of employment contracts

There are many types of employment contracts, some offering greater job stability, while some are more flexible and used for temporary job arrangements. Understanding the different types is essential for hiring the right way - with legal compliance, to protect your business, and to set clear expectations for your new employee from day one. 

Below, we explore the different types of employment contracts and their pros and cons to help you choose the right one for each new hire:

Permanent employment contract (indefinite contract) 

A permanent employment contract, also known as an indefinite contract, is an agreement between an employer and an employee without a set end date. It remains valid until one of the parties decides to terminate it, following the termination policies outlined in the contract or the employee’s labour laws. 

This type of contract is mostly used for full-time employees and typically includes terms like salaries, benefits, working hours, and other important employment conditions.

As an employer, permanent employment contracts offer several advantages for you, including:

• Employee retention - Permanent contracts help you hire the best talent by offering job stability and security, which can lead to higher employee loyalty and long-term commitment. 
• Stronger company culture - Employees on indefinite contracts are committed to the company and, therefore, are more likely to align with the company culture, contribute to the team, and invest in the business's success. 
• Legal compliance - Offering clear terms on responsibilities, notice periods, and termination policies protects both parties under the relevant labour laws. 

Besides the set of advantages, permanent employment contracts can also bring some challenges for employers, including:

• Higher costs - Employers who hire with indefinite-term contracts are responsible for providing benefits such as health insurance, pensions, paid time off, and others, which increases their labour costs.
• Less flexibility - Terminating a permanent employment contract can be difficult as it requires justifiable reasons, a notice period, and, in some cases, severance pay. 
• Long-term commitment - If your business needs a change or the employee underperforms, replacing them can be a lengthy and costly process. 

Fixed-term employment contract 

A fixed-term employment contract is an agreement that lasts for a specific period of time, with start and end dates clearly defined. Unlike permanent contracts, fixed-term ones automatically terminate on the specified end date unless renewed. Hence, they’re most commonly used for project-based roles, seasonal work, or temporary workforce needs. 

Below are some of the advantages of fixed-term contracts for employers:

• Flexible workforce planning - With fixed-term contracts, employers can hire workers for a set duration, making it easier to manage short-term projects or fluctuating workloads.
• Lower long-term commitment - Since the contract has a defined start and end date, employers are not obligated to retain the employee beyond that period.
• Cost management - Businesses can adjust their staffing needs without long-term financial commitments to salaries, benefits, or severance packages.

Fixed-term contracts also impose several disadvantages for employers, among which are:

• Limited employee retention - Fixed-term employees may not be as invested in the company’s long-term success, which typically leads to higher turnover.
• Potential legal risks - Some jurisdictions impose restrictions on repeated contract renewals or may require fixed-term employees to receive benefits as permanent staff.
• Training and onboarding efforts - If a company frequently hires fixed-term employees, the time and resources spent on onboarding new hires can add up over time. 

Part-time employment contract

Part-time employment contracts are designed for employees who work fewer hours than full-time staff, typically on a set schedule but with reduced weekly working hours. The exact number of hours can be different depending on the country and industry, but part-time employees typically work less than 30-35 hours per week. 

As such, part-time contracts are mostly used for roles that don’t require a full-time commitment, including seasonal work, project-based tasks, or positions where the workload fluctuates.

Here are some of the advantages of part-time contracts for employers:

• Cost savings - Part-time employees often receive fewer benefits and lower wages than full-time employees, which reduces the overall labour costs for employers.
• Workforce flexibility - Employers can adjust staffing levels based on demand without committing to full-time salaries.
• Larger talent pool - Offering part-time roles can attract highly skilled employees who prefer flexible work arrangements. 

However, part-time employment contracts also bring several disadvantages, such as:

• Limited availability - Part-time employees may not be as available for urgent or extended work hours as full-time staff.
• Productivity challenges - Managing schedules and ensuring effective communication between part-time and full-time employees can be difficult and lead to decreased productivity.
• Employee retention concerns - Part-time employees may seek full-time roles elsewhere, which leads to higher turnover rates. 

Casual employment contract

Casual employment contracts are used for flexible work arrangements where employees work on an as-needed basis without a guaranteed number of working hours. Unlike part-time and full-time employees, casual workers are typically hired for short-term or unpredictable workloads, such as seasonal jobs, event staffing, or covering unexpected absences.

The following are some of the casual contract advantages for employers:

• Flexibility - Casual contracts allow businesses to adjust their staffing levels based on demand. This is especially useful for industries like hospitality, retail, and event management. 
• Cost savings - Employers don’t have to provide paid leave (sick days, vacation, etc) or long-term benefits, which can reduce their costs.
• Trial period - Employers can assess workers’ skills and performance before deciding whether to offer a more permanent job position. 

Just like the other types, casual employment contracts also have several disadvantages, including:

• Higher turnover - Since casual workers don’t have long-term job security, they may leave for more stable work opportunities, which leads to higher turnover rates.
• Unpredictability - The availability of casual workers can be unpredictable, which might cause difficulties in staff planning or scheduling. 
• Lack of commitment - Casual employees may not feel as loyal and engaged as full-time employees, as they don’t have the same job stability and career progression. 

An independent contractor agreement is a type of contract used when a business hires an individual or a company to provide services on a temporary basis. Independent contractors are not considered employees, but they are self-employed professionals or businesses that offer their expertise to clients. As such, they typically work under their own control and direction, set their own working hours, and use their own tools and equipment.

Here are some of the advantages for businesses that work with independent contractors:

• Cost savings - Employers are not obligated to pay for employee benefits, such as health insurance, pension contributions, paid leave, and taxes for contractors. 
• Flexibility - Contractors can be hired for specific projects or tasks, which provides businesses with the ability to scale staffing levels up or down depending on the workload. 
• Specialised expertise - Employers can easily tap into specialised skills and knowledge that may not be available within their in-house team without any long-term commitments. 

However, besides the set of advantages, working with independent contractors imposes several challenges, such as:

• Less control - Employers have limited authority over how, when, and where the work is done, which can make it challenging to maintain control over the workflow.
• Misclassification risks - If an independent contractor is treated like an employee, there could be legal consequences for misclassification. Hence, the working relationship must meet the criteria established by labour law, or the contractor must transition into a full-time role. 
• Lack of long-term loyalty - Contractors often work with multiple clients at the same time, so there’s no guarantee of their commitment to your business over the long run.

How to choose the right employment contract type?

Choosing the right employment contract is of utmost importance for both your business and your employees. It helps you meet your operational needs while keeping you and your team legally protected. Let’s break down the most important factors to consider when making this decision.

Business needs

The type of employment contract you choose should align with your unique business needs. A permanent employment contract might be the best option if you’re hiring for a long-term role that requires ongoing commitment. On the other hand, a fixed-term contract might be more suitable if you’re hiring someone for a short-term project or to fill in for an employee on leave. 

Think about how much flexibility you need, whether the role requires a full-time commitment, or if the employee’s hours can fluctuate based on the workload. The right type of contract will help your business stay flexible and efficient while ensuring that both you and the employee are clear on the terms from the start. 

Budget

Your budget plays a big role in deciding which employment contract to use. Full-time, permanent contracts often come with higher costs since you must provide salaries, benefits, insurance, and other employment perks. Therefore, if you’re working with a tight budget or looking to save on operational costs, a part-time or temporary contract might be a more affordable option.

At the same time, offering competitive compensation and benefits is crucial for attracting and retaining the best employees, so keep your budget in mind while making sure that the contract type meets the needs of the role and the candidate. 

Employee preferences

Employee preferences can also impact the type of contract you choose. Some employees may prefer the stability and security of a permanent contract, especially if they’re looking for a long-term employment and benefits. On the other hand, others might value flexibility and working fewer hours or choosing projects that interest them, making part-time, casual, and contractor agreements a better fit. 

When possible, it’s recommended to discuss contract options with potential employees so you can assess what would make the role more appealing for them. Offering contracts that align with your employees’ preferences can help you increase retention and attract quality employees in future. 

Legal requirements

Local labour laws play a key role in determining the type of employment contract. Different countries have varying regulations around things like minimum wage, benefits, working hours, and termination conditions. For example, some countries might require full-time employees to receive certain benefits that aren’t necessary for part-time or temporary workers.

Hence, make sure that you’re familiar with the employment laws in your region. If you’re hiring globally, it’s recommended to consult with a legal or HR expert who can help you stay compliant with local regulations. Not adhering to the law requirements can lead to legal disputes and other consequences. 

Industry standards

Certain industries have standard practices or expectations regarding employment contracts. For example, the tech industry is known for commonly using freelance and independent contractor agreements for specific projects. Education and healthcare industries, on the other hand, might be more likely to use permanent contracts due to the ongoing nature of work. 

Understanding the norms of your industry can help you ensure that you’re staying competitive in your hiring practices and meeting both employer and employee expectations. It can also help you avoid confusion or frustration that might arise if an employee is expecting a contract type different from what’s typically offered in your sector. 

How can Native Teams help you generate compliant employment contracts?

Creating an employment contract that meets all the legal requirements can be tricky, especially when you’re hiring across different countries. With Native Teams, you can leave all these legal complexities to the experts and get fully compliant employment contracts across 85+ countries.

Whether you’re working with full-time employees, freelancers, or contractors, our platform makes it easy to generate contracts that follow the local laws for each country where your team members are. Our simplified tools and professional teams will help you stay compliant, so you don’t have to worry about keeping up with the ever-changing employment laws.

Check out our employment contract templates or book a free demo call to see how we can help you stay on top of local labour laws for each team member you hire. 

To sum up 

Choosing the right employment contract type is essential for both your business and your employees. Not only does it ensure clarity and a smoother working relationship, but it also safeguards both parties in case of any legal issues. 

Therefore, whether you’re hiring full-time employees, freelancers, or contractors, it’s crucial to understand the different contract types and choose the most appropriate one. By selecting the right contract, you can support your business needs while maintaining strong, fair, and productive relationships with your team.