An employment contract is a legal document between an employer and an employee. Signed by both parties, it controls the rights and responsibilities of both the company and the employee.

As a general rule, employees aren’t required to enter into an employment agreement. Employers, however, may make signing a contract a condition of employment.

Find out:

  • Why you need them
  • The benefits and drawbacks
  • Where to find templates
  • What to do in case of a breach

What Is an Employment Contract?

You may have heard it called an employment contract, employment agreement or contract of employment. The terms are used interchangeably and accomplish the same thing by detailing a pact between the company and the worker.

An employment contract is an individual agreement between a company and a worker. It isn’t a blanket agreement that governs employment for all employees such as a union contract. As an individual agreement, it allows the two parties to negotiate terms and conditions.

It might include such items as:

  • Wages and Compensation
    This would enumerate salary or hourly rates, bonuses, incentives and other forms of compensation. For example, it may be specific predetermined salary increases on anniversary dates or other review periods.
  • Benefits
    A contract will explain the benefits provided by the company. These might include things such as health and dental insurance, paid time off, 401(k) savings programs or other defined benefits plans.
  • Term of Employment
    The contract of employment will specify the duration of the agreement and may include renewal terms or post-employment agreements.
  • Job Responsibilities
    The employment contract typically will include language specifying a job title or duties along with the general responsibilities expected as a condition of employment.
  • Confidentiality
    It likely will include some form of a confidentiality agreement or non-disclosure agreement.
  • Business Protection
    Most contracts will address ownership of work product and protection for a company’s proprietary information. Some agreements will contain provisions that govern what employees can do after leaving a company. Often called a non-compete agreement or restrictive covenant, a company might require an employee to refrain from doing business with clients or hiring away employees for a specified period after their employment ends.
  • Termination Conditions
    Some employers will list the specific items that will lead to termination, such as misconduct, insubordination, falsifying records, poor performance, theft or a variety of other offenses. It may include provisions about what happens to the agreement if there are company layoffs or if the business is sold.
  • Dispute Resolution
    The contract will likely contain a predetermined method for resolving disputes related to employment, such as mediation or arbitration. It may mandate that disputes are handled in specific jurisdictions.

Different employers may have industry-specific clauses. You aren’t limited to what needs to be in your agreement as long as it conforms with the law.

Different employers may have industry-specific clauses in their employee contracts.

Employment Contract Benefits

  • One of the key benefits for both parties is that the employment contract defines the job, responsibilities and benefits. It creates a clear expectation and avoids confusion about important issues.
  • For employers, it can help you with employee retention and protect your business. You may be sharing trade secrets that could hurt your business if disclosed. You provide training and improve employee skills as they get experience in your business. You want to reap the benefits of that investment.
  • It can prevent your competitors from stealing your best employees. Even if your worker leaves the company, you may be able to prohibit them from working with your clients or competitors for a defined time, depending on your state laws. It can also work to avoid disputes over things like copyrights, patents, or work product.
  • Employment agreements may help to attract key employees. Someone that is already established in another company may not want to risk coming to work for a new employer. A written contract can provide some assurances that may mitigate that risk.
  • By clearly defining terms and expectations, you can better manage the way your employees work. When it becomes apparent workers are not living up to their side of the agreement, it may make it easier to discipline or terminate an employee that is not meeting the standards.

Employment Contract Drawbacks

A contract of employment is a document between you and an employee. You have obligations to them as well. You are bound by these terms just as they are.

  • It may limit the flexibility of the employment arrangement. Depending on what it is in the agreement, you may need to renegotiate a contract if you need to make a material change.
  • An employee handbook may contain a statement that the employer reserves the right to make changes at any time without notice. An employment contract may prohibit the employer from changing the conditions during the term of the agreement. It also may limit an employer’s right to terminate an employee during the term of the agreement without cause.
  • There are ramifications for breaching a contract by either party. If you are found to have willingly and knowingly violated provisions of the employment agreement, you may also be guilty of acting in bad faith. This can carry additional legal consequences.

Written contracts are the best way to define the working relationship.

Where to Get Employment Contract Templates

For a simple employment agreement template, consider sites such as LawDepot and Legal Templates, which will guide you through a series of questions to fill in key provisions of the employment contract template.

Employers are subject to both federal and state laws governing the employer-employee relationship. As such, the legal form you use will need to address any state-specific requirements. Both LawDepot and Legal Templates allow you to pick your state to customize the agreement appropriately.

LawDepot is free to use. Legal Templates has a free trial period and then charges a $59.95 fee per form.

These are just two of the sites you can find online. They are plenty of others, including Legal Zoom, Rocket Lawyer and eForms. Some sites offer a free employment contract while others require payment.

Employment Contract Samples

Whichever standard employment contract template or employment contract sample you examine, keep in mind they provide basic templates. Check with a labor attorney to make sure you are doing things correctly.

Types of Employment Contracts

There are four types of employment contracts you should know about: written, oral, implied and at will.

  • Written contracts are the best way to define the working relationship so that both sides have a clear understanding of what’s expected. Written contracts may cover full-time or part-time employment, temporary employment periods or defined scope of work.
  • Oral contracts are enforceable as well, but can lead to misinterpretations and can be difficult to prove if they are called into question.
  • An implied contract isn’t a written agreement but may be inferred by employees based on promises made, job reviews or employee handbooks.
  • The majority of people in the United States work at will. They can leave their job at any time or be terminated for any legal reason or no reason at all. There are exceptions on a state-by-state basis. For example, Montana has a probationary period regulation that prevents employers from firing someone for no reason after they’ve completed a probationary period of six months on the job.

Breach of Employment Contract

What is a contract of employment? It’s a legal document. That means breaching the terms of the agreement has legal consequences. A written agreement can be used as evidence of such a breach by either party.

Most employment agreements will detail what happens if the agreement is breached and may spell out remedies. Some contracts include clauses that give either side what’s known as a “cure” period. This is a defined time that the breaching party has to cure — or fix — the breach.

What Can Happen in Case of a Breach?

If one party breaches the terms of the agreement, the other side can sue for damages. These damages might include financial harm caused by the breach.

For example, if a company fails to pay an employee the compensation it agreed to in the contract, an employee might sue. If an employee feels they have been wrongfully terminated, they might sue for reinstatement and back pay.

Employers have rights as well. They may be able to recover compensatory damages from employees if they do not live up to the agreement.

For example, if a contracted employee takes a job somewhere else before the term is up or if they are bound by post-employment provisions such as non-solicitation of clients and do so anyway, employers may be able to sue for loss of revenue.

Disclaimer: While this article discussed employment agreements in general legal terms, this shouldn’t be construed as legal advice. It is recommended you consult with legal counsel before entering into any employment agreement.

Get weekly business insights & expert advice to help grow your business.