The Importance of an Employment Contract

By Will Elton, Updated: 2023-05-24 (published on 2019-01-08)

An employment contract is a contract that is signed between the employee and the employer. Employment contracts are important for both employees and employers. It bonds both parties to do their duties and responsibilities. For example, The basic duty of an employee is to work for the employer and the Employer should pay the employee according to work within certain time frame.

An employment contract is Legally definition that states the relationship between two parties as Employer and employee. An employment contract will create a strong basis for protecting both your party’s interest and the employee’s specific role in the company.  It will hold details such as the employee’s responsibilities, their health insurance policy, sick days, annual leave days, reasons for why their employment may be terminated, and much more.

Generally, contracts of employment are poorly drafted and inadequate and in many cases, there is a verbal agreement that means there is no written terms and condition. Such a scenario may bring difficulties for parties. Hence one to know the importance of an employment contract. Here are the top 5 most sensitive points that make you feel the importance of an employment contract.

Employee contract

1. Job security for Employees and Labor certainty for employer.

This is most important purpose of employment contract. A employment contract includes the time frame about how long an employee is contracted to stay with the company – for example, two or five years.

This ensure the job guarantee for employee where as Employer can be positive about staff dropping off job,  as long as they do not violate the terms of the contract.

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 behaviors are against company policy and will result in dismissal.

Condition for termination maintain ecosystem in between both employee and employer to be honest and genuine with each other. So in sense violation of  term might lead to termination of employee, but employee can feel job security if both parties has signed employment contract.

2. Understanding of duties (Employee and Employer)

The very fundamental things a employment contract will have is position and duties of the employee. This will assure employee about his/her day to day task or the his/her ultimate goal.

Contract also helps employer to expect good performance from employee.If an employee is consistently underperforming and not meeting the agreement set out in their contract, their employer will have reason to take action

Employer also have responsibility to pay to employee, facilitates with different incentives, bonus or benefits. The pay rates, income, benefits bonus etc should be clearly mention in contract and employer should follow accordingly as a duty.

3. Key to Protect Employee Right

The employment contract is a right savior for employee. Basically contract should be drafted according to Employment Act, different countries follows different Act.

For an 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. so this things are mandatory for drafting employment contract in Singapore.  

Contract determines you wages and how often you will be paid and again it also includes about overtime and many other dimension. As an employee you should know about your right and make sure the contract covers it. But you should always find some time  to know about Employment act in your place before signing contract.

4. Employment contract is a best way to Maintain trade secret or Confidentiality for employer.

Employer have to provide access to  confidential company information and data and even the trade secret formula. So including confidentiality terms in employee is best way to protect them With this clause in place, employees are prevented from disclosing sensitive or confidential information to others. This can include being released to the media or public, shared on social media, or being used for any other purposes. If an employee was to breach their contract in this way, their employer is able to take legal action against them.

Employer may include different restrictive clauses like the non-competition, non-solicitation, non-dealing, and non-poaching clauses.

5. Staff Leave

Why is a contract of employment is important for employee??

Employee might need holidays, get sick  maternity leave, or bereavement leave.Having a contract means you can make sure that the procedure for taking holidays, sick days, and more is covered legally. Employees can always refer directly to the employment contract for guidance on this topic. The contract will also clearly define any payments staff will receive when they take days off work, for whatever reason.

This limited employee to take limited leave mention in the contract. So this create the environment for employer to take action against employee if they ask for extra leave or leave beyond the contract. Employer can set generally idea regarding leave so that employee leave does not affect day to day activity of company.

For Example: Employer can mention that employee can’t take continue leave for a month. So to maintain regular flow of work in company.

6. Dispute Resolution

Another Purpose of contract of Employment. is to dispute resolution. A good employment contract reduces the disputes between two parties that minimize time and expense of a courtroom battle that neither party can afford. Contract bond employee and employer in certain boundaries that minimize the chances of disputes. Dispute Resolution can be another importance of employment contract.


Talking generally, employment contract gives good basis for better relationship between employee or employer. Both parties have idea about expectation from each other.  For employees,  they will be entitled, as well as the money that they can expect to earn. In the event of an employment tribunal, if a business is found to have not issued a complete contract then it could be fined up to a month’s pay.

Contract management is an integral aspect of businesses, whether for employers or employees. There are a number of clauses that can be inserted into a contract in order to protect a business’s interests. The purpose of contract management in employment is to prevent employees from setting up rival organizations, poaching your staff, stealing valuable trade secrets, reclaiming accidental overpayments, and effectively managing contractual obligations.

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