What is a Labor Contract?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2019
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Also known as a labor agreement, a labor contract is a binding legal agreement that establishes the rules and regulations that will govern the relationship between an employer and an employee. The terms of the contract include both the rights and the responsibilities of each party, and the opportunities to seek redress or remedy in the event that one party fails to live up to the obligations stipulated within the contract terms. A labor contract may be an individual agreement between an employee and an employer or a collective agreement that is arranged through a labor union with a group of employers.


A number of different issues are addressed within the provisions of any type of labor contract. One of the most important has to do with the wages or salary of the employee. Many contracts will identify the beginning pay scale and also provide at least some details on how merit and cost of living increases are made over time. Along with pay issues, the terms of the contract will also cover other benefits extended to the employee, such as sick leave, the accrual of vacation time, and access to health coverage and retirement benefits. Typically, the terms will also identify the obligations that must be met in order to obtain and keep those benefits. For example, the terms of the labor contract may call for employees to work a minimum number of hours each week in order to be classified as full-time and be eligible for participation in any group insurance coverage or retirement plans that are offered through the employer.

A labor contract will also establish specific covenants that the employer is making with the employee. This typically includes a commitment to maintain a work environment that complies with any governmental regulations relating to safety issues. At the same time, the employer covenants to observe local jurisdictional laws as they relate to continued employment, including the process for dismissal and any type of severance benefits that the employee would receive as a result of that termination. Provisions of this type help to define what is expected of each party, and also provide a basis for evaluating how well both the employee and the employer are living up to those expectations.

In times past, a labor contract would sometimes require employees to refrain from joining any type of trade union at some point after the beginning of their employment. Sometimes known as a yellow-dog contract, this type of agreement is now considered illegal in many places around the world. In addition, terms that could possibly contradict governmental regulations or in some manner unfairly restrict the rights of employees are also often considered grounds for dismissing the contract or imposing penalties on any employer who requires a commitment to a contract containing those types of provisions.


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