The Importance of an Employment Contract

By Will Elton, Updated: 2023-11-30 (published on 2023-06-30)

An employment contract is a contract signed between the employee and the employer and is important to define both parties’ duties and responsibilities.

For example, an employee’s primary duty is to provide work for which the employer must compensate within a specific time frame.

Further details include the employee’s responsibilities, health insurance policy, sick days, annual leave days, and termination rules.

If employment contracts are poorly drafted or exist only as verbal agreements, the terms and conditions may be undefined or missing.

Such scenarios bring difficulties for parties. Here are the top 5 reasons to implement a proper employment contract.

1. Job security for employees

This is the most important purpose of an employment contract and will state how long an employee is contracted to stay with the company, for example, one, two, or five years.

The employment contract should also specify exactly what actions can result in termination. Including this information ensures that each employee knows which activities are mandatory to their role and which actions or behaviours are against company policy and will result in dismissal.

Conditions for termination maintain the ecosystem between employee and employer and encourage both to be honest and genuine. 

2. Understand the duties of the employee and employer

Defining the employee’s role, position, and duties lays out what they are expected to work on and the goals they are expected to reach.

Stating this information also helps the employer to evaluate employee performance.

If an employee consistently underperforms and does not meet the agreement in their contract, the employer has documented reason to act.

In return for the work, the employer is responsible for compensating the employee and may offer additional incentives, employee training and development opportunities, bonuses or benefits

Pay rates, benefits, and bonuses should be clearly mentioned in the contract.

3. Protect employee’s rights

An employment contract should adhere to the national Employment Act, which may differ between locations.

For example, employees earning below SGD 2,000/month in Singapore are provided additional protection (concerning “Rest Day, Hours of Work and Overtime, Public Holidays, Annual Leave, Sick Leave, Retrenchment Benefits, Retirement Benefits, Annual Wage Supplement and other variable payment”) under Part IV of the Employment Act.

As such, including them when drafting an employment contract in Singapore is mandatory.

The contract determines wages and how often they are paid, as well as information and rules on overtime.

As an employee, you should check a contract covers your rights before you sign it. 

4. Maintain trade secrets and confidentiality for the employer

Employers must often provide employees access to confidential company information, data, and trade secrets. So including confidentiality terms or an NDA in the employee contract is the best way to protect them.

With this clause in place, employees cannot disclose sensitive or confidential information to others. This can include being released to the media or public, shared on social media, or used for other purposes.

If an employee was to breach their contract in this way, their employer could take legal action against them.

Employers may include additional restrictive clauses like non-compete, non-solicitation, non-dealing, and non-poaching.

5. Staff leave

Employees might need a break from work for many reasons, including holidays, sickness, pregnancy, or bereavement.

Having a contract means you can ensure that the procedure for taking leave is covered legally.

Employees can always refer directly to the employment contract for guidance. The contract will also clearly define any payments staff receive when they take days off work, for whatever reason.

The employer can also set rules for leave so that it does not affect day to day activity of the company. For example, the employee may cap leave days to no more than a week at a time. All things considered, you can always pick payroll software for small business requirements that can help you manage all the hassle.

6. Dispute resolution

A good employment contract reduces the disputes between two parties, minimising the time and expense of a potential courtroom battle that neither party can afford.

The contract bonds employees and employers to behave within certain boundaries, setting clear rules for unacceptable behaviour.


An employment contract sets the groundwork for a better relationship between employee and employer.

Both parties know the rules of the employment, the expected results, and all compensation owed.

In case of a breakdown in the relationship, the employment agreement protects both parties from potential legal recourse.

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