Employment Contract: Template, Definition & What to Include

An employment contract is a written employment agreement documenting the shared rights and responsibilities between your company and a W-2 employee or 1099 contract worker. It’s commonly used when bringing in upper-level management, short-term contract employees, or freelancers.

Using an employment contract template to create an employment agreement between your company and workers will ensure you use the correct verbiage and follow the law. Be sure to list all the terms of employment, along with responsibilities, compensation and benefits, and a nondisclosure agreement (NDA).

We’ve provided two employment contract templates for your use, one for W2 employees and one for 1099 independent contractors.

You can simplify the onboarding process by having your employees fill in their information with Gusto. Gusto is an all-in-one payroll, benefits & HR tool that’ll make bringing on your new employees a breeze.

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What to Include in an Employment Contract Template

An employment agreement template works as a fill-in-the-blank document. You add your company name and logo plus the worker’s name along with dates and payment info. The benefit of starting with an employment contract template is that much of the wording is boilerplate. You only need to change details specific to your business and any agreements made with the worker.

Beyond describing your company and details of the job that the employee or independent contractor is being hired for, the employment contract should address compensation and employment terms. For example, you’ll need to clarify whether the employee will be paid via a W-2 (like a regular employee where you deduct and pay taxes for them) or 1099 (like a freelancer where they have to pay their own taxes). In addition, it’s helpful to include a clause to ensure confidentiality and clarify how disputes will be resolved.

Here are six critical sections to include in employment contracts:

The terms of employment include information like the employer, the employee, the contract start date, and so forth. Our template provides fill-in-the-blank placeholders with subsections for you to provide these basics.

In addition, your contract should include verbiage that directs the employee to follow all company procedures, rules, and regulations.

Clearly defining job responsibilities in an employment contract sets expectations about an employee’s role at your company. This is essential to prevent miscommunication. It’s often easiest to attach an existing job description if you have one; if not, summarize the position’s key responsibilities within that section of the template.

Many employment contracts and job descriptions will state “additional duties as assigned” or something similar. This leaves you free to adjust the employee’s or freelancer’s responsibilities later should the need arise. If the job changes significantly, you may need to provide the employee or freelancer with a new contract.

If the worker is a freelancer (1099 contractor), you should describe the job requirements in terms of what the contract employee is to do. However, you may not direct how the contractor does the job or you will risk violating IRS worker classification laws.

Include the compensation and benefits, if any, that the worker will receive and on what schedule. The primary categories are included in the template, but you could add others, like relocation assistance if you offer it. Other than compensation, these sub-sections are optional for a 1099 contractor or freelancer worker.

Compensation: Include the dollar amount and how often it’s to be paid. Example: You will receive $22 an hour paid every other week on Wednesday.
Bonus: Include the dollar or percent to be received and under what conditions. Example: 5% annual bonus paid if OSHA training audit at or above 95%.
Health insurance benefits: List all of the benefits you will offer to the employee. Example: We offer medical, dental, and vision benefits, contributing 50% toward the “employee-only” premium. See the benefits enrollment form for more detail.
Paid time off: Outline how many days of paid vacation and leave the employee is entitled to take each year. Example: The employee will receive ten (10) days of paid vacation time and five (5) days of paid sick leave per the employee handbook.
Other benefits: List any other employee benefits the company offers that the employee will receive. This is where you might add life insurance or profit-sharing.

Keep in mind that you are not required to withhold taxes on compensation paid to 1099 contractors or freelancers. In addition, their compensation may be based on project deliverables or milestones rather than time worked. Adjust this section as needed to clarify when and how the contractor will be paid.

Gusto can help you manage compensation, bonuses, and benefits, including health insurance and paid time off (PTO), for all of your employees and contractors. Try Gusto free for 30 days; you don’t need a credit card to sign up.

To protect the confidentiality of your business, you can include clauses in your contract similar to the ones provided in our employee agreement templates. Another option is to attach separate documents that cover these two issues.

A non-disclosure agreement (NDA): An NDA (also known as a confidentiality agreement) prevents employees from sharing confidential business information with anyone outside of the business.
A non-compete agreement (NCA): An NCA prevents employees from stealing your business’ clients when they end their employment with you to work on their own or with another company.

Both are legally binding per most state laws, except in California, where non-compete agreements tend not to hold up. Therefore, if your principal place of business is in California, we recommend you consult with your attorney and create a more specific non-disclosure agreement and invention patent (IP) clause instead of a non-compete agreement.

An at-will employment clause should be added to any employment contract so that there is no question as to whether a worker can be terminated. This protects both parties consistent with US labor law.

If you and the employee agree in advance to terms like 30 days’ notice or severance payments, be sure to include that language in the contract itself. Our template includes standard language you’re welcome to modify as part of the employment terms.

Both signatures are required for the employment agreement document to stand up in court—yours and the employee or contractor. A document that both parties do not sign is hard to defend in court, as the person who didn’t sign it can claim they didn’t know about it.

You should keep a copy of the signed document, as should the employee or contractor. It’s best to have both parties sign and date the employment contract before work begins to avoid potential issues or misunderstandings.

Tip: Be sure your contracts do not violate any labor laws, especially non-discrimination laws, as these could result in legal issues.

Employment Contract vs Job Offer Letter

Different from an employment contract, a job offer letter is a more common way that businesses clarify the employment relationship with direct-hire employees. In an offer letter, you specify the hire date, pay rate, and job title and spell out any other pertinent agreed-upon information such as a hiring bonus or extra paid time off.

The differences between a job offer letter and a more formal employment contract are:

	Job Offer Letter	Employment Contract
Type of Document	Can be as simple as an email to the candidate	A formal document that is signed by both parties
Timing	Provided to a candidate once completed the recruiting process	Provided only after an offer has been accepted
Level of Detail	Includes a start date, pay rate, and work location	Provides detail that includes terms of the employment, employee responsibilities, compensation and benefits, and an NDA or NCA; also includes signatures
Legality	Not a legal contract; therefore not enforceable	Legally binding contract when correctly drafted and signed; therefore enforceable

Pros & Cons of Using an Employment Contract

Both employers and employees can benefit from an employment contract. However, it’s in your best interest to write the employment contract in a way that preserves your rights as an employer, such as by specifying the amount of advanced notice you need to receive from the worker if they resign (for them to be eligible for bonuses or severance).

Using an employment contract can go a long way toward eliminating confusion from the start; however, it can also create more work for you and is sometimes costly. The primary benefit of documenting your employment agreement in a written contract is that it clarifies expectations all around and provides you with an assurance that work will be done as expected.


PROS	CONS
Expectations are clear: It’s less likely you’ll have issues with the work or the worker.	Could damage employee trust: It may make your employment relationship feel too formal. For entry-level roles, an employee handbook is often enough.
Legally binding: If signed and dated by both parties, it will likely stand up in court.	Needs to be maintained: If you don’t update it regularly, it may work against you. Work terms may change from year to year, or your contract may have expired.
Remedy is available: If a breach of contract occurs, you may be able to request damages.	Costly: Having your contract reviewed and updated regularly costs money.
Protects your businesses: A signed contract protects your business trade secrets, client list, and prevents employees from disclosing sensitive information.	Might violate the law: If contract terms don’t meet legal requirements the document may be unenforceable, or worse, subject you to a labor law violation.

Bottom Line

An employment contract is a useful document to have in the personnel file if you are hiring a manager-level employee or need to confirm terms with a contractor or freelancer. Use our free downloadable templates as a starting point to protect your business and yourself, as well as set clear expectations about the role and compensation of the worker.

Gusto is an example of payroll software that offers features like e-signature and document storage as part of their payroll processing. Once you hire a worker, whether a 1099 contractor or W-2 employee, Gusto can process their payroll and store their signed contract documents online. Start with a 30-day free trial.

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Employment Contract: Template, Definition & What to Include

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What to Include in an Employment Contract Template

Employment Contract vs Job Offer Letter

Pros & Cons of Using an Employment Contract

Bottom Line

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About the Authors

Charlette Beasley

Jennifer Hartman