Let's suppose a employer, via a third party, signs a contractor to work for them full-time on a 1 year basis.
What is the point of the 1 year basis agreement if both the employer and employee can terminate the contract at any point?
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You have a plan, the company has a plan, plans often work out and sometimes they don't.
With a three month contract, we know the plan is that I will work and get paid for three months. Anyone intelligent will understand that after two months I'll look for something else. And things may not go as planned, it may turn out that the work is nine months, so we may agree that I stay longer. But the plan is for three months, and we all act accordingly.
With a twelve month contract, we know the plan is that I will work and get paid for twelve months. Anyone intelligent will understand that I will not work without interruption but have some holidays in that time. And after 11 months I'll look for something else. It may turn out that the contract gets cancelled after six months, depending on circumstances. Both me and the client should be prepared for that, but the plan is for 12 months, and we all act accordingly.
So the contract is not a 100% guarantee, but there is never a 100% guarantee in life. The correct contract makes a good outcome more likely.
There are quite a few different types of contracts that can be involved here. My answer will not be true for every situation.
If the employer signs a contract with a contracting agency for a certain type of expert to work for them, the contracting agency may be obliged to find a replacement worker if the first worker quits. This may require the contracting agency to spend large amounts of money on paying other available contractors overtime to fill the gap.
In addition, the contracting agency may be required to provide a degree of oversight or quality control over the work conducted. The contracting agency may ensure government standards and reached, and that only properly licenced workers are offered.
The contracting agency may be able to navigate employment law more easily that would otherwise be possible, which may give them the ability to work in jurisdictions that may otherwise have been inaccessible.
I'm sure there are lots of other reasons, but I also want to point out that there may be a contract between the contracting agency and the contractor too that may have a notice period specified, meaning that its unlikely the contractor will quit suddenly and without notice.
(To make things more clear, let us explicitly say that there is an Employer, a third-party Recruiter, and an individual doing work as a Contractor.)
What is the point of the 1-year basis agreement if both the Employer and
employeeContractor [and/or Recruiter] can terminate the contract at any point?
You are correct that contracts have the potential to be broken unilaterally by any party involved in the contract; you are incorrect in assuming that there are zero repercussions for doing so. (More on that later...)
What is the point of a contract time period?
The point is that a contract with a reasonable time period can actually be fulfilled; in which case both parties should have received what they have bartered for and can both move on without requiring suits, counter-suits, or arbitration of any kind getting involved.
An unreasonable time period put into contract, however, is essentially dooming the contract to fail by some eventual unforeseen breach. Whether lawyers get involved will depend upon the extent to which damages can be won that would offset their cost. Nonetheless, it is a more open-ended and less-graceful process than simply fulfilling a contract and moving on.
Basically, something like "We'll pay you $X/hr, to work between 30-60 hours per week, for the next 3-months, with opportunity for contract renewal at any point during the second month of said 3-month period." and "We'll pay you $X/hr, to work between 30-60 hours per week, for the next 200-years." are mostly indistinguishable if the biweekly checks keep coming, the job survives those 200 years, and you survive those 200 years. However, if either the checks stop coming or you stop working... then what? In the short-term-with-renewal case, then it's probably just a matter for small-claims court no matter who breaks first. If it's the 200-year case, then potentially there are upwards of 600,000 man-hours on the line quoted at $X/hr (which is presumably enough to justify some big fancy expensive lawyers getting involved - generally to the detriment of the 'little guy').
Either way, whether you are the Employer or Contractor it is generally not advisable to garner a reputation for breaching contracts as it will likely hurt your negotiating positions moving forward.
What is the point of the "1-year" basis agreement... ?
Generally speaking, specificity helps both sides guarantee/warranty things when they are negotiating the specifics of a contract. Different timescales will have differing pros/cons from both the Employer and Contractor perspectives.
Relatively speaking, "1-year" is quite stable compared to something like a "3-month" or "10-minute" contract. Knowing this, a Contractor might find the prospect of not needing to client-hunt every "3-months" to be worth a slight hourly-rate discount. Similarly, an Employer might value the ability to "lock-in" a certain stable price-point when estimating the future costs of a long-term project. In either case, the ability to specify a long-term contract in order to reasonably guarantee a certain amount of stability can be worth losing some dollar amount in negotiation to achieve.
On the flipside, an Employer that is laser-focused on short-term growth might actually appreciate a contract that entails smaller upfront obligations/investments. In which case, an extremely short-term contract with a massively-inflated short-term-cheap hourly-rate might be preferable to a low-cost long-term-stable alternative cost.
But, any way you split it, a "1-year" contract is basically a long-term commitment to a specific price-point that both sides have agreed to follow.
(Technically, you did not explicitly ask this question... though some sort of "third-party" is invoked in your original post).
[Why would a third-party "middle-man" Recruiter be involved?]
The answer (as per usual for any economics problem involving a 'middle-man') is "Someone, somewhere, discovered an arbitrage potential."
Pooling talent, just like as is seen in labor-Unionization, offers a multitude of ways to increase the collective saleable potential for individuals among the talent-pool (to say nothing of increasing their market-rates overall). Firstly, pooling resources means that each "statistically-identical-Contractor" has access to a larger stable of lawyers and is therefore less likely to be personally "strong-armed" during negotiations by any large-Employer's pool of lawyers (therefore upping the statistical-average-value of labor across the board). Secondly, (though perhaps most importantly) having a large "talent pool" means that any single Recruiter is essentially able to proffer "hot-swap-able" talent in such a way that individual Contractors could not individually offer (a kind of service that generally comes at a substantial premium).