An employment contract (or employment agreement) defines the terms of a legally binding agreement between an employee and employer, such as compensation, duration, benefits, and other conditions of the employment relationship.
Employment Contracts By State
Types of Employment Contracts (10)
There are various types of employment contracts to accommodate the different employment statuses of individuals:
What is a Contract of Employment?
An employment contract recognizes a legal business relationship between an employer and an employee. The employment contract outlines the rights and responsibilities of both parties for the duration of employment.
For example, the functions an employee will perform and the wages the employer agrees to pay in return.
As a reference, people also refer to an employment contract as:
- Employment Agreement
- Work Contract
- Job Contract
- Contract of Employment
- Contract of Service
Before issuing an Employment Agreement, you should request that the candidate provide an Employment Verification Letter to verify their income and employment history.
IRS Requirements
If you’re a US company hiring citizens and residents, there are IRS requirements you need to follow:
- IRS Form W-4 – To be completed by employees at the start of employment.
- IRS Form W-9 – To be completed by independent contractors at the start of employment (if more than $600 is to be paid for services or labor).
Important Terms to Include in Employment Contracts
An employment contract will identify the following essential elements:
- Employee: Name of person being hired to work.
- Employer: Name of the company hiring the employee.
- Position: Title and description of employee’s role/s and responsibilities.
- Compensation: Amount paid per hour, week, or month, including overtime, bonus(es), commission, and the compensation schedule.
- Start Date: When the employee will start working for the employer.
- Term: Indefinite or fixed amount of time the employee is expected to work. For example, you may have all new employees sign a 1-year employment contract with an option for extension upon review.
- Benefits: Details about disability protection, health insurance, vacation, sick days, paid time off (PTO), maternity leave, and other benefits.
- Probationary Period: The employee is essentially “on trial” and may be terminated if deemed unsuitable.
- Termination: The reasons why the employment relationship may be ended.
- Work for Hire Clause: Anything created by the employee at work belongs to the company.
- Agency Provision: Clarifies that the employee does not have the authority to enter into a contract on behalf of the employer unless there is written consent.
A contract of employment form may also include a reimbursement provision stating that the company will pay the employee back for job-related expenses like a cell phone, business travel, or relocation.
Additionally, an employment contract can require employees to give a certain amount of notice before quitting, so they can help hire or train their replacements.
Furthermore, documenting clear expectations, job responsibilities, and employment agreements allow employers to discipline and fire employees who do not meet work performance standards.
An at-will employment contract is usually implied without a written employment agreement form. In other words, the employee is free to quit at any time, and the employer is free to fire the employee at any time – as long as the basis of dismissal is not deemed as wrongful termination.
An employment contract offers legal protection to both an employee and an employer. If a dispute arises, both parties can refer to the original terms agreed to at the beginning of the working relationship.
By drafting an employment contract today, avoid mistreatment and legal repercussions for both parties.
Restrictive Covenants in Employment Contracts
You may want to include additional clauses to help protect business interests:
- Confidentiality: A non-disclosure agreement or confidentiality agreement specifies that trade secrets, client lists, and sensitive information cannot be shared while working for this employer or future employers.
- Non-compete: A non-compete agreement prohibits the employee from working for competing companies or competing with the employer if they leave, including misusing confidential information.
- Non-solicitation: Employees may not recruit other co-workers to join them when they leave the company. Furthermore, the employee cannot ask the company’s clients or customers to follow them to their new company. However, if you live in California, Montana, North Dakota, and Oklahoma, restrictive covenants are not allowed, and employees are allowed to work for competitors.
How To Write an Employment Contract?
Here’s a step-by-step to writing an employment contract:
Step 1 – Initial Details
a) List the date this agreement is being made.
b) Provide the full name of the employee and the full name of the company or individual employing the employee.
c) Provide the employee’s job title or position.
d) Choose whether the employee will be employed part or full-time.
e) Describe the job duties the employee will be responsible for.
Step 2 – Term and Probationary Period
a) Choose whether the employment will be fixed, at will, or probationary:
- Fixed term if there is a specific end date to the agreement and employment.
- At will, unless there is no end date to the agreement, so unless otherwise stated, either party can terminate the contract without notice.
b) Choose whether or not there will be a trial period where an employee may be released if they cannot meet the job requirements. This typically lasts for three to six months.
What is a Typical Probationary Period for a New Employee?
A probationary period is between three and six months. This is usually a good time to see if a new employee fits your company.
Step 3 – Compensation
a) List the employee’s salary here and how the payment will accumulate.
b) Check the frequency at which the employee’s salary will be paid.
Step 4 – Overtime and Additional Compensation
a) If the employee will receive overtime compensation, choose this option and list how much will be paid and describe what frequency constitutes overtime.
b) Choose this option if the employee will not receive overtime pay. Be sure to check federal and state laws to determine whether or not overtime is mandatory in your situation.
c) Choose this option and explain any commission received for services rendered under this agreement.
d) Choose this option and explain any other commissions received for services rendered under this agreement.
Step 5 – Expenses and Work Location
a) Check if the employer will reimburse an employee for the expense(s).
b) Check all expenses that the employer will reimburse the employee for.
c) List the full address where the employee will perform their duties under this agreement.
d) List the required work days and hours.
Step 6 – Time Off
a) This option lists specific paid time off days allowed.
b) Choose this option to default to state and local law requirements for paid time off.
c) This option lists a certain number of paid sick days allowed.
d) Choose this option if the employee is not provided any sick leave.
e) This option lists a certain number of paid personal days allowed.
f) Choose this option if employees are not provided paid personal leave days.
g) List any other benefits provided.
h) Check if there is an employee handbook to refer to that will provide additional information about the employer’s leave policy.
Step 7 – Disability
a) List how many days that employee cannot perform their duties that constitute consideration for disability benefits.
b) Specify the amount of compensation due to the employee.
Step 8 – Non-Compete and Confidentiality
a) Initial here if you want to include this clause. Otherwise, cross it out.
b) Choose if the non-compete will remain in force for the entirety of the employment agreement and will end when the agreement is terminated or if the non-compete will stay in power beyond the termination of employment and list how many months it will be will remain in force beyond termination.
c) Check which activities are prohibited by the non-compete.
d) Choose this option if the employee is not exposed to sensitive information unknown to the general public.
e) Choose this option if the employee can access competitively sensitive information unknown to the general public.
Step 9 – Termination
a) Choose this if the employer can terminate the employment without cause.
b) Check if notice by the employer to the employee is required and list how many days’ notice is required.
c) Choose this option if the employee may terminate this agreement at any time but with written notice. List how many days’ notice is required.
d) Choose this option if the employee can terminate this employment agreement anytime and for any reason.
Step 10 – Severance
a) Choose this if the employee will be entitled to severance if terminated for reasons other than cause.
b) Choose this option if the employee is not entitled to severance after termination.
c) Check all applicable documents that set forth the rights and obligations of the parties.
Step 11 – Miscellaneous
a) List the state laws governing this agreement.
b) Choose this if litigation is a dispute resolution option and list the state where the dispute will be resolved.
c) Choose this if parties agree that the prevailing party will be entitled to recover its expenses incurred with any action taken regarding this agreement.
d) Choose arbitration if disputes will be resolved by a neutral third party selected by the parties, who evaluate the argument and determines a settlement. The decision by the arbitrator is final and binding.
e) Choose mediation if disputes will be resolved by using a mediator, a neutral third party selected by the parties who tries to facilitate a compromise and agreement. The decision by the mediator is non-binding.
f) Choose this option if you wish to mediate first, and then if a resolution is not found, the arbitration will be pursued.
Employment Contract Sample
The standard employment contract sample below defines all necessary terms of an employment relationship — terms that become legally binding when signed by the employer and employee.
You can also download our free template in PDF or Word format and fill it out independently.
Employment Contract Example
The employment agreement example below details an agreement between the employer, Susan C Clarke, and the employee, Rudolph M Hettinger. Susan C Clarke agrees to employ Rudolph M Hettinger as a Personal Assistant.
This sample letter of agreement between employer and employee Susan C Clarke and Rodolph M Hettinger will become legally binding once both parties sign.
Note: You should use an Independent Contractor Agreement if hiring a business or self-employed person to accomplish a short-term project or task.
Read More: Independent Contractor vs. Employee
How to Hire an Employee
Before hiring an employee to fill a position, you must identify exactly who you’re looking for. What skills should they have, what experience, and how much will you pay them?
The best way to hire an employee is to follow these simple steps:
Step 1 – Research the pay and position: Outline the responsibilities of the job, the number of hours to work per week, the pay, benefits, and time off. Look at similar job descriptions and compare salaries to determine precisely what you want.
Step 2 – Place a job listing: Make an employment posting that details precisely what is expected of the individual and the job’s compensation.
In some states, you must disclose the pay range in job postings and learn more about pay transparency laws.
Step 3 – Review applications: Filter through the received job applications, narrowing down the ones that meet the job’s essential requirements.
Step 4 – Start the interview process: Set up interviews with the top candidates. You need to know the person behind the application and whether they will fit your company well.
Step 5 – Check references and verify the application: Checking references is a great way to verify applicants and gain additional insights into their work experience and qualifications.
Step 6 – Prepare an offer letter: Once you’ve chosen the perfect candidate, send them an employment offer letter.
Step 7 – Notify rejected candidates: Send an employment rejection letter to inform unsuccessful applicants of the bad news respectfully.
Step 8 – Complete and sign the employment contract: Finalise the employment by performing any background checks, negotiate the terms of the employment, and then have both parties sign the employment contract.
Ensure the employee reads the contract, as most American employees do not read their employment contracts.
Read More: Do Americans Read Employment Contracts?