The Difference Between Business Policy & Contract

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A business policy and contract are both formal methods of communication that impact a business, its employees and customers. However, a business policy provides a framework for employees to follow to consistently treat various decisions and situations. A contract is a legally binding document outlining the terms and conditions of an agreement between the business and an employee or a client.

Policy Basics

Companies have polices that cover employees and business unit operations. Employee-related policies are spelled out in a company handbook or manual. Operational policies are also commonly indicated in a handbook as well as during training. Customer-centric organizations also communicate policies, such as returns and exchanges, to customers through in-store signage, emails and memos. Policies indicate the way in which an employee is supposed to treat a given circumstance in selling to or servicing a customer.

Effective Policies

Effective policies are specific and clear enough to help an employee understand the right approach in making a decision. In some cases, though, they should be flexible enough to allow an employee to use discretion if customer service is a priority. Policies should fit within legal and ethical parameters, meaning that a policy shouldn't direct an employee to break the law or engage in unethical behavior. Internal policies should be consistent to avoid the appearance of favoritism or discrimination in employee treatment.

Contract Basics

A contract is a legally binding document that spells out terms and conditions agreed to by the signing parties. Employers often have employees sign work contracts, which spell out pay, work conditions and status, and basic expectations to earn the pay. Companies also use contracts with some business transactions. Car dealers have buyers sign contracts indicating acceptance of price and terms and agreement to repay loans. A rental business typically has customers sign contracts indicating agreement to return the items by the agreed upon time, or risk a fee.


A policy is intended as more of a behavioral guide, though a policy sometimes is considered an informal contract in that managers may implement consequences for employees violating policies. A contract is intended to provide specific, actionable requirements and legal protection for the company. If another party breaches a contract, you have legal recourse to sue the person or business to recover damages or to receive promised goods or services.

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