Employment agreements establish a legal relationship between an employer and employee. They outline compensation, responsibilities, benefits, and other binding terms that provide clarity to both parties. This guide covers different types of agreements, best practices for hiring, and key sections to include when drafting contracts.
What is an Employment Agreement?
An employment agreement, also known as an employment contract, is a legally binding document that sets forth a business relationship between an employer and employee. It defines the employee’s job title, compensation, responsibilities, benefits, and other conditions that will govern the working arrangement.
1.1) Definition An employment contract recognizes the exchange of work for wages between two parties. The employee agrees to perform specific job functions laid out by the employer. In return, the employer agrees to provide payment and any other negotiated forms of compensation.
Employment agreements offer protections for both employers and staff. If any disputes arise regarding expectations, responsibilities, or compensation, both parties can reference the original written contract.
Employment Contracts by Type
There are several types of employment agreements suited for different work arrangements:
- At-Will Employment Agreement – Permits either party to end the employment relationship at any time. No long-term commitment is guaranteed.
- Independent Contractor Agreement – Used when hiring self-employed individuals or businesses to complete a project or provide services.
- Internship Agreement – Outlines an arrangement where interns work for little to no pay in exchange for training and experience related to their field of study.
- Non-Compete Agreement – Restricts employees from working for competing companies or starting competing ventures if they leave, for a set period of time after termination. Protects trade secrets and client relationships.
- Non-Disclosure Agreement – Requires staff to keep sensitive company information confidential during and even after employment. Breaching confidentiality exposes employees to potential litigation.
2. When to Use an Employment Agreement
While verbal agreements can be legally binding in some states, written employment contracts provide more legal protections and clarity for employers. Use agreements when:
- Hiring any type of new employee whether full-time, contract, or temporary roles. Spell out compensation rates, benefits, expected hours, etc right from the start.
- Bringing freelancers or independent contractors onboard. Define project scope, deadlines, payment terms, insurance requirements, etc upfront before work commences.
- Wanting new hires to sign NDAs, non-competes, or other restrictive covenants to protect company trade secrets.
- Offering equity like stock options or ownership stakes as part of compensation packages. Outline vesting schedules and conditions tied to equity grants.
Even in at-will employment states where companies can terminate staff at any time, putting agreements in writing still helps establish sound HR practices and documented ground rules upfront with new hires.
3. How to Write an Employment Agreement
Composing a detailed employment agreement upfront prevents potential misunderstandings down the road. Follow these key steps:
Step 1 – Identify the Parties Involved
Start by naming the employer and employee in the introductory paragraph. For example, “This employment agreement is entered into on [DATE] between [COMPANY NAME], located at [COMPANY ADDRESS] (hereafter referred to as “the Company”), and [EMPLOYEE NAME], residing at [EMPLOYEE ADDRESS] (hereafter referred to as “the Employee”)”.
Step 2 – Define the Job Position
The next section should outline the employee’s exact job title and high-level role. For instance, “The Company agrees to employ Jane Doe as a full-time Marketing Manager. Key duties will include managing social media campaigns, email newsletter creation, and tracking campaign performance metrics”.
Step 3 – Set Compensation Rates & Payment Frequency Specify hourly wages or annual salary figures, including any bonus or commission structures. Then indicate standard paydays, such as bi-weekly or monthly payroll distribution. For example, “For services rendered, Jane Doe will receive an annual salary of $65,000 paid out in 26 bi-weekly installments”.
Step 4 – Establish Employment Terms
Specify whether the arrangement involves at-will employment with no fixed end date, or a set contract term like 1-2 years. Outline any initial probationary periods such as 90 days where new hires’ fit is evaluated before they become eligible for company benefits.
Step 5 – Define Company Benefits
Explain medical/dental insurance coverage, retirement plan contributions, vacation day allotments, transportation stipends, and any other benefits the company extends to employees. Attach formal policies as appendices to the contract for reference.
Step 6 – Outline Termination Protocols Document how much advanced notice must be provided by either party to terminate the employment agreement. Outline if the employee will receive severance pay or payouts for unused paid time off upon termination. Specify what actions constitute termination for immediate cause versus no-fault layoffs.
Step 7 – Include Restrictive Covenants If requiring new hires to sign NDAs, non-competes, non-solicits or other restrictive covenants, add them here. Customize agreement durations and scope of activities limited appropriately. Have legal counsel review carefully to ensure enforceability.
Step 8 – Signature Fields Leave room for signatures from both the hiring manager and employee, along with dates of formal acceptance. Take contracts to notaries if desired for further authentication. Provide copies to both parties for future reference and dispute mediation if necessary.
5. Frequently Asked Questions
What are some key differences between employees and independent contractors? Employees receive W-2 tax forms, have taxes withheld by employers, and qualify for company benefits once past any new hire probationary window. Independent contractors receive 1099 forms, pay their own taxes, and are not entitled to benefits.
Are verbal employment agreements legally binding? While yes in some states, putting formal contracts in writing better establishes ground rules upfront and provides documented evidence if any disputes surface later regarding expectations or compensation.
Can employees negotiate employment agreement terms? Yes, offers made are not always final. Prospective hires can request higher pay rates, additional benefits, or modified employment terms before signing on the dotted line. Offers can be revoked altogether if negotiated terms prove unacceptable to employers.
When should someone have an attorney review an employment contract? Legal review helps maximize enforceability of NDAs, equity grants with vesting periods, non-competes, and other restrictive clauses. Also consider third-party evaluation for severance or bonus payouts over $10,000.
What information cannot be requested on job applications? Inquire only about qualifications directly related to job functions. Avoid discriminatory or unnecessary questions about age, race, pregnancy status, disabilities, marital status, arrest records, bankruptcies, religions, or other protected classes.
