What is a Contract Buyout?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 May 2020
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A contract buyout is a transaction that involves purchasing an existing contract from the current owner. This type of activity is found in a number of settings, with employment contracts being among the most common examples. Depending on the circumstances, the contract buyout may be initiated by an employee who no longer wishes to work with the employer, or by a prospective employer who wishes to secure the services of the employee even though he or she is under contract to a different company.

One of the more common examples of an employee contract buyout has to do with individuals who work for employment agencies. In many cases, qualified employees are sent to clients of the agencies to manage short-term needs in the workplace. Should those clients find that the temporary assignee is a good fit for the business, there is a chance that an offer of permanent employment will be extended. As part of the deal, the client will buy the employee’s contract from the temporary agency, usually for a set amount. Once the payment is made, the employee no longer has a contractual obligation to the temp agency and is free to work for the new employer under the terms of the new employment contract.

At times, the contract buyout has to do with the desire of an employee to severe the relationship with a given employer. In years past, it was not uncommon for entertainers who wished to pursue other opportunities to buy out their contracts with the movie studio or other entertainment company who currently had the entertainers under contract. Typically, this would involve the employee paying a set sum for each year remaining in the contract. Upon remittance of the agreed-upon amount, the contract was considered null and void, and the entertainer would be free to seek opportunities with other entertainment companies.

While the exact process to buy out an employee’s contract will vary, depending on the provisions of the contract and the specifics surrounding the buyout, the general anticipation is that all parties involved will benefit in some manner from the transaction. Employees are often free to pursue other opportunities, while employers are considered to have recouped their investment in those employees. Even in situations that involve a merger or hostile takeover of a business, the new owners may feel that engaging in a contract buyout of an employee contract will be less expensive in the long run, allowing the venture to increase its chances for success.

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