Contract Employment: Definition, Benefits, Disadvantages and an Example Contract

By Indeed Editorial Team

Published 27 July 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies hire workers for various positions and lengths of time. The specifics of an employee's position in the company can determine whether they are an internal employee or a contract employee. There are certain benefits for companies that choose to hire employees on a contract, depending on the work they require from the employee. In this article, learn what a contract employee is, how they compare to internal employees, what you need to hire them and how to create a contract.

Related: Breaking into Full-Time Work with a Contract Background

What is contract employment?

Employment on contract occurs when a company hires an individual, known as a contract employee, independent contractor, contract worker or freelancer, for a specific project or a certain timeframe. The company and individual agree to certain terms expressed in an employment contract. These employees work for a set amount of compensation based on the timeframe or scope of the position. Often, employers hire these professionals because of their expertise in a particular area, like writing or graphic design. Rather than hire a full-time, long-term employee with that expertise, a company hires a contractor for the duration of the project.

Related: What Is an Employment Contract?

What are the differences between a contracted employee and an internal employee?

There are a few key differences between a contracted and an internal employee. The main difference relates to the employment classification and how companies treat each type of employee. Here's a summary of these differences:

Work duties

While their daily tasks may resemble each other, there are foundational differences in their work duties. Internal employees perform a set of duties dictated by their company. However, contracted employees perform a specific task or role on a short-term project.

Training

The method used by human resources to train employees varies based on status. Internal employees receive broad training. Contract employees receive training and instruction only for their projects or the employer expects they know how to complete certain tasks already.

Work hours

Expected work hours change based on industry and position. Internal employees have set work days and hours. Contracted workers can typically choose the days and hours they work.

Pay

The administering of pay fluctuates based on the budget of the company or the project. However, internal employees receive pay on a set schedule. Contract employees receive payment after they complete a project.

Related: Pay & Salary

Travel

If the job requires travel, the company pays for an internal employee's travel expenses. However, contract employees usually handle their own travel expenses. Sometimes, contracted workers can complete work remotely, foregoing the need for travel.

Benefits

An employer provides benefits based specifically on status. Internal employees receive benefits like health and life insurance. Contracted workers rarely receive employment benefits.

Time off

Internal employees receive paid time off. They may also accrue more paid holidays throughout their time working for a company. However, contracted workers rarely receive paid time off.

Related: How To Write a Sick Leave Email Message (With Examples)

Benefits of hiring a contracted employee

While it's up to each company to decide what model of employment works best, there are several benefits of hiring an employee on contract. These benefits include:

  • Lower commitment: since these employees work for a set amount of time or a pre-determined project, there is significantly less commitment for both parties.

  • Low cost: paid time off and certain employee benefits typically cost an employer a lot of money, but these expenses don't exist when working with a contracted worker.

  • Specialised skills: instead of taking time to train an employee, hiring someone on contract allows you to find the right skill set to fit in with your company's needs, which saves time for the project.

  • More company resources saved: many workers on contract don't come into the office to complete their work, so they don't use resources such as computers, the printer or other office supplies.

Disadvantages of hiring a contracted employee

Similarly, there are also disadvantages of hiring someone on contract, which you should consider before moving forward in the hiring process. These disadvantages include:

  • Short-term work: the contract outlines the range of the employee's work and usually includes an end date. If the employer needs the worker's skills at a later date, the two parties must agree on a new contract.

  • Less availability: employees on contract may work on several projects with a range of companies at one time, making them less available to devote their full attention solely to your project.

  • Communication barriers: since the employee is likely working remotely, it may be harder to reach them to communicate details about the project or to receive updates on their progress.

  • Lack of reliability: many contracted workers forego the application process, so there is less certainty about how accountable or reliable they are. However, a contract with clear expectations may help resolve the potential issues.

Common contracted positions in Hong Kong

Contract employment is becoming increasingly popular. Many fields are moving toward a fully contracted workforce rather than hiring internal employees. However, each industry has specific needs which may restrict an employer's ability to use contract employment. Here is a list of a few common contracted positions:

  • Graphic designer

  • Web designer

  • Photography

  • Writing and copywriting

  • Customer service

  • Research

  • Paralegal

  • Sales associate

  • Administrative assistant

  • Receptionist

  • Social media marketing

  • Search engine optimisation

Related: How To Search For Remote Work on Indeed

What do you need to hire a contract employee?

This is what you need before hiring an employee on contract:

  • Employment agreement: it's important for the potential employee to see the terms of employment before moving forward with the process, to ensure they are aware of the expectations.

  • Application, resume or portfolio: assessing the candidate's past work experience shows their range of skills and qualifications. It's helpful for the employer to have a physical copy of these documents in case there is any question about their skills later on.

  • References: obtaining references from potential employees allows you to verify their skills before hiring them.

  • Contract: once you have gone through a screening process, draw up a contract with specific terms, employment dates, pay, expectations and the desired product. This eliminates any possible confusion during the length of employment.

  • Confidentiality agreement: depending on the industry, it's a good idea to have the employee sign a confidentiality agreement, particularly if they work with multiple companies in the same field at once.

How to write an employment contract

Follow these steps to write an employment contract:

1. Title the contract

Include a title at the top of the document so the employee understands what they are signing. This could be as simple as Employment Contract or Contract of Employment. The title should include your company name, too.

2. Identify the employee and employer

Make note of who the contract is for and the person administering it. Including both parties maximises clarity. For example, state [Company Name] agrees to enter this contract with [Employee Name].

3. Name the terms and conditions of employment

The next section outlines the terms and conditions of employment as laid out by the employer. This includes compensation, expected work hours or the duration of the contract.

4. Discuss the job duties

Be clear about what work you expect the employee to complete while under contract with your company. This may include one project or daily tasks that take place over the duration of the employment period. The new hire should know the expectations before they begin work.

5. Include details about compensation

Instead of simply listing the amount of pay the employee receives, include other relevant details about compensation. These details include overtime pay and time off policies, potential bonuses and method of payment. This eliminates confusion about the compensation process.

Template of an employment contract

Here is a template of an employment contract:

This employment contract, entered on [Day, Month] in the year [Year] by [Company Name] and [Employee Name], is an agreement of employment between the two parties. This contract is governed by the laws instituted in Hong Kong.

Both parties agree to the following terms and conditions:

1. Employment

The undersigned employee agrees to complete all work as detailed in this contract until the contract ends. They agree to comply with company policy and follow the details of the job description.

2. Position

The undersigned agrees to complete the duties of [Position Name] for the duration of the contract. [Company Name] may assign other relevant duties.

3. Compensation

[Company Name] agrees to pay [dollar amount] to the undersigned [per year/hour/month] before taxes. The employee shall receive the funds through direct deposit.

4. Paid time off details

[Company Name] agrees to provide [amount of holiday, sick or time off days] to the undersigned.

5. Termination

Either party may terminate this contract for any reason. The employer or the employee must give notice before annulling the contract. Otherwise, the contract expires on [date of expiration].