The employer/employee contract is seldom as straightforward as it used to be, with many employees now required to sign nondisclosure or noncompete agreements alongside workplace dating disclosures, incentive pay formulas, and mandatory arbitration clauses. Research from the University of Pennsylvania highlights how these contracts harm employers and employees alike.

“Imposing contracts with their rigid and explicit requirements on employment, which is an open-ended arrangement built on mutual obligations and exchange relationships, is something we refer to as ‘contract-lite’, the researchers explain. “It represents situations where employees are governed both by the rules of regular employment and by explicit contracts or relationships that act as legal contracts imposed by management.”

Workplace conflict

This creates a clear conflict between the relational aspects of employment and the contractual aspect that is complicated by the fact that both operate at the same time. It’s a situation that is believed to affect around 62% of workers in the US, with a whopping 93% in the UK.

“The employment relationship is a really distinct and quirky arrangement, and it gives employers all kinds of rights that they don’t have with contractors. It’s amazing how few people understand this except for lawyers,” the researchers explain. “If you’re not an employee, you’re a contractor. There’s nothing really in between.”

Contracts are often imposed in an attempt to achieve short-term cost savings while also simplifying the management of the workforce. While this has an element of truth to it, it also runs the risk of putting off employees who have their pick of employers.

“On the finance side, you can easily see the cost savings, but you don’t see the lost opportunities,” the researchers explain. “So what if there’s a call to the office at 5:01 p.m., but employees don’t answer and walk out because they’re just following the rules; aren’t they not looking after the interests of customers or clients? What’s the cost of that?”

Clear limits

There are clear limits to what can be achieved when you combine employment and contracting. For instance, in law and public policy, the biggest reason to ensure a clear separation between contracting and employment is to ensure that employers don’t get the benefits of employment but avoid the responsibilities. Yet this is what happens when people are employed like contractors but supervised like employees.

“While client organizations may do background checks on contractors (criminal records) and may evaluate their skills, the criterion used to engage a contractor is otherwise limited to the ability to perform the job,” the authors explain. “Client organizations are not permitted to use the tests and selection practices associated with employment with contractor candidates, such as personality tests and whether the contractor is a good fit with our culture.”

They’re also not allowed to do things like conduct performance appraisals. If there is that temptation, then the relationship slips into one of employment as far as IRS regulations are concerned, and the company will then be liable for the same tax obligations of employers.

“While contractors cannot be treated like employees without them being turned into employees, nothing in the law per se prevents employers from treating their employees as contractors or imposing legally binding contractual arrangements on them (contracting-lite system),” the authors conclude. “This is the contract-lite phenomenon.”