Note: You can review sample employment contracts and compensation agreements in FindLaw's Corporate Counsel Center.

An employment contract can take the form of a traditional written agreement that is signed and agreed to by employer and employee. More frequently, however, employment agreements are "implied" -- from verbal statements or actions taken by the employer and employee, through company memoranda or employee handbooks, or via policies adopted during the employee's employment.

Termination and "At Will" Employment

Employment contracts are most often used by employees to show that the employer's right to fire an employee was limited.  In most states, employment is generally considered "at will," meaning that the employer can terminate employment (or the employee may voluntarily leave) at any time. An employer's right to fire an employee may be limited, however, where the employee can show that the employer entered into either an explicit contract to retain the employee for a certain length of time, or an "implied contract" which dictates that employment will be terminated only for specific disciplinary reasons.  For example, an implied contract may be enforced against the employer where a policy or handbook has been distributed to the employee, and the employee, knowing the terms of the policy or handbook, has opted to continue working for the employer.

Many states also recognize that a verbal statement by an employer, such as "you'll be here as long as your sales are above budget," may create a binding contract of employment.  The enforceability of such verbal contracts is limited, however, by a legal doctrine known as the "statute of frauds," which provides that any verbal agreement that cannot be carried out in less than one year is invalid.  So, in the above example, because the employee conceivably could have fallen below budget and been fired within one year, the agreement would be enforceable, even if the employee was not actually fired. A verbal contract must also be specific in order to be enforceable.  A statement such as "You'll have a job here as long as you like" generally will not be enforced. 

Finally, a few states recognize an implied contract of employment where an employer has engaged in a "course of dealing" over a period of years, for example, by keeping employees on as long as they maintained certain standards of performance.  As a result, an employee may claim that he or she may not be fired as long as he or she continues to meet those standards.

Employment Contracts: Other Considerations

Employment contracts, whether written or implied from employee handbooks or policies, may also provide the terms and conditions of:

• Health benefits;

• Vacation and sick leave;

• Employee grievance procedures;

• Employee behavior after termination of the employment relationship

In terms of governing an employee's behavior after employment has ended, employment contracts can limit the ways in which an employee may use confidential or proprietary employer information, or restrict the employee's right to compete with the employer. Such non-competition agreements are particularly difficult to enforce, however, and many states have enacted statutes specifically limiting their effectiveness.  In general, the scope of such an agreement, whether the geographic area covered or the length of time that it lasts, must be no broader than necessary to protect the employer's business.  In addition, while a covenant not to compete may typically be imposed on a new employee as a condition of employment, if it is imposed on an existing employee it must be supported by some independent consideration beyond a simple promise of continued employment, such as a raise, a bonus payment, or improved commission terms.