You're confusing domains of law. * Contract law does not require arm's length. A contract for $1 is okay. * Tax law may require arms length. * I've never hea

You're confusing domains of law. * Contract law does not require arm's length. A contract for $1 is okay. * Tax law may require arms length. * I've never heard of arm's length in employment law, but there are laws which lead to what you describe (e.g. mandatory overtime pay, minimum wage, etc.). In some jurisdictions, there are limitations on how much an employer can change the terms of employment. If you hire me for $100k, and after I quit my old job a week into the new one, you give a pay cut to $80k and otherwise change the terms of the deal, that might not be okay.