Although the majority of employees in the U.S. work under at-will agreements, some employers choose to have their employees work under legally binding employment contracts. Before determining if employment contracts are right for your business, it is important to know what type of details they include, how they differ from at-will employment, and what their advantages and disadvantages are.
What is an employment contract?
An employment contract, also known as an employment agreement or a contract of employment, is an agreement between an employer and an employee that outlines the working relationship between the two parties. An implied employment contract can be enforceable, but a written employment contract provides each party with more clarity and legal stability. Employment contracts are tailored to each specific employment relationship. However, there are a few standard details that employment contracts typically cover.
"An employment contract often lists the employee's start date, the salary the employee would earn, and any terms around length of employment or dissolvement of the contract," Alison Pearson, head of human resources for Hal Waldman and Associates, told business.com.
Employment contract vs. at-will employment
Most employees work under at-will employment, which means the employment relationship can be terminated by the employer or employee at any time, for any reason – as long as that reason is not illegal (e.g., discrimination or retaliation). Employers often have at-will employees sign a document that acknowledges this type of relationship, like an offer letter or employee handbook acknowledgment.
Employment contracts are essentially the opposite of at-will employment. They set forth guidelines and restrictions about the employment relationship that are legally binding.
What is typically included in an employment contract?
Since every employer/employee relationship is unique, the specific contents of an employment agreement are also unique. They will match whatever employment relationship is being formed.
"There is no standard employment agreement, so each one should be tailored to the specific situation facing the employer and the employee," said Jeffrey Siegel, employment law attorney and partner at Morgan, Brown & Joy. "Employers and employees can negotiate what is important to each side."
With that said, there are 10 different aspects that are typically defined in each employment agreement.
1. Duration of employment
The employment contract should clearly state for how long the employer agrees to retain the employee. This includes the start date and end date. This is one of the most basic pieces of information that every employment contract should address.
2. Employee position and responsibilities
Although an employment contract doesn't need to be so granular as to define every single task an employee must perform, it should serve as a clear guideline for what the employee's general position and responsibilities are. These must be carefully defined because employment contracts are legally binding. If the employer wants to change the employee's primary responsibilities before the employment contract ends, they will have to renegotiate the contract with the employee.
3. Employee schedule
The contract can outline what the employee's work schedule will look like. It can include details like what days and hours they work, when they take breaks, how long their breaks are and what holidays they have off.
4. Employee compensation
Every employee contract should include information about how much money the employee will be paid. Employee compensation details can include the employee wage amount, whether the employee is hourly or salaried, what their bonus structure looks like and equity options.
5. Employee benefits
Another form of employee compensation that a written employment agreement should outline is employee benefits. You are legally required to provide employee benefits like family and medical leave, health insurance (if you have 50 or more full-time employees), unemployment insurance and workers' compensation insurance.
You can also offer benefits like dental and vision insurance, health savings accounts, retirement savings plans, life insurance, commuter benefits, and more. However, it is important that you only agree to provide benefits you know you will continue to offer, as you are on the hook for providing them to the employee for the duration of their contract.
6. Intellectual property ownership
When an employment relationship is terminated, employees are armed with a lot of company knowledge that most employers don't want shared. An employment agreement can remedy this by including a clause that addresses the ownership of intellectual property (i.e., patents, copyrights, trademarks, and trade secrets).
7. Termination guidelines
An employment agreement can outline what type of employee actions or behaviors are grounds for termination. A termination provision can be especially helpful for employers who want to end an employment relationship with an unmanageable employee under an employment contract.
8. Severance payments
One aspect that makes employment contracts an attractive option for employees is the promise of severance pay. A severance package is additional compensation provided to an employee after the employment relationship has ended. It can include benefits such as extended life and health insurance coverage, stock options and employee retirement account funds. You are not obligated to offer severance pay to employees, but it can entice employees to commit to employee contracts.
9. Dispute resolution procedures
Contracts can include details about how to resolve employee disputes. For example, most agreements require employees to agree to mandatory arbitration as a way to resolve issues.
10. Post-employment obligations
When your employee agreement expires and the employment relationship is severed, there is little to nothing stopping that employee from taking your sensitive and private company information to your competitors. To protect your business, you can have the employee agree to details about post-employment obligations. Siegel said these can include noncompetition, nonsolicitation and nondisclosure of confidential information clauses. You may also have employees sign separate noncompete agreements.
Who needs an employment contract?
There are no laws that require any business or employee to provide or agree to employment contracts; however, that does not mean it can't be beneficial to have one. For example, you may want to use employment contracts when hiring employees who handle very confidential or sensitive information, or when bringing on employees who will be working with very specific timelines or have certain performance demands. They can also be used when trying to attract highly skilled workers in a field where they are scarce.
Conversely, you might not want to require employment contracts if your business is constantly growing and changing or you think you may have to breach the contract at any time. In general, Pearson said that small business owners rarely need written employment contracts – instead, they employ people under implied contracts.
"Often, the terms of the employment contract are dictated by the market and the relevant bargaining position of the parties," said Siegel. "For that reason, we see employment contracts more frequently with executive-level employees."
What are the pros and cons of using employment contracts?
Employment contracts can be extremely useful when applied to the right scenarios, but they also come with a few limitations to take note of.
Pros of employment contracts
Siegel said employment contracts offer employers the following advantages:
- They make the job offer more attractive to top talent by promising employment for a specific period of time and/or severance at the conclusion of employment.
- They establish clear work rules and expectations, and consequences for employees who fail to meet those standards.
- They ensure employees have a contractual obligation not to disclose trade secrets or compete after leaving employment.
- They ensure ownership of intellectual property.
Employment contracts can be advantageous for employees as well. They offer employment stability, job clarity and legal protection.
Cons of employment contracts
Predetermined contract length and clearly defined job requirements can be positive or negative, depending on how you look at it. For example, if an employment contract has a short time frame, it does not offer the employee job security. If the contract outlines very specific job requirements, it may be too restrictive, not allowing the employee to grow in the position. If an employer wants to end or change the employment relationship, it can be very difficult and expensive.
"Although sometimes necessary to attract talented employees, an employment agreement also imposes administrative burdens on an employer, such as notice provisions before terminating the employment relationship and renewal provisions before extending the relationship," said Siegel.
Employee contract templates
Employment contracts are governed by state law, so Siegel advises employers to be mindful of the law of the jurisdiction in which they operate.
"For example, states have differing approaches to noncompetition, nonsolicitation and nondisclosure agreements as well as arbitration clauses, and a good employment agreement will be designed to comply with applicable law," he said.
Although you should always work with legal counsel to tailor an employment agreement to your specific situation, you can reference an employment contract template to get started.
- Betterteam has an employment contract agreement template that can be easily downloaded into a Microsoft Word document.
- eForms has an employment contract builder that is customizable by state. Your agreement can be saved as a PDF, Microsoft Word document or ODT.
- LawDepot lets you create a free employment agreement in just five minutes by filling out a few questions.
- RocketLawyer lets you build an employment agreement that follows your state guidelines.