If you are thinking of hiring a second in command, manager, or another high-ranking employee, you may have found yourself wondering if you need something to protect yourself and your business, like an employment contract. You’ve come to the right place.
In this article, we will provide you with a Free Employment Contract Template that you can customize for your small business.
Have you thought about how to handle payroll? A DIY approach can lead to headaches and trouble with the IRS, but if you choose the wrong provider you could end up paying $1000s more than you have to. We recommend Gusto as a low cost software that can greatly simplify payroll for your business. Click here for a free trial.
Please note that this article contains general information, and we suggest consulting your own legal professional before providing an employee with an employment contract.
Free Employment Contract Template
Here’s a free employment contract template that you can adapt for your small business. Following the template, we’ll explain in detail what to include and what to avoid in your employment contract so that you can customize it for your own business. You may also access it here as a Word Doc and here as a PDF.
THIS CONTRACT is made as of the ______day of__________________, 20__ , between Company Name (Insert DBA or Common Name), a corporation [or other business type] incorporated under the laws of (insert state) and having its principal place of business at (insert address) (the “Employer”); and [Employee Name], of [City, State] (the “Employee”).
WHEREAS the Employer desires to obtain the benefit of the services of the Employee, and the Employee desires to render such services on the terms and conditions set forth.
IN CONSIDERATION of the promises and other good and valuable consideration, the parties agree as follows:
The Employee agrees that s/he will at all times faithfully, industriously, and to the best of his/her skills, experience and talents, perform all of the duties required of his position. In carrying out these duties and responsibilities, the Employee shall comply with all Employer policies, procedures, rules and regulations, both written and oral, as are announced by the Employer from time to time. It is also understood and agreed to by the Employee that his/her assignment, duties and responsibilities, and reporting arrangements may be changed by the Employer in its sole discretion without causing termination of this agreement.
2. Position Title
As a [Job Title], the Employee is required to perform all of his/her necessary job functions and duties, and all other duties that may be assigned to Employee from time to time by Employer.
As full compensation for all services provided, the employee shall be paid at the rate of _______________ dollars ($__________) per hour/annually and will be subject to [CHOOSE APPLICABLE PERIOD: annual/quarterly/or describe other review period] review. Such payments shall be subject to normal mandatory deductions by the Employer (i.e. federal & state taxes, Social Security, Medicare).
In addition, the Employee will be eligible to participate in bonuses and other employee benefit plans established by the Company for its employees from time to time. The Employer currently offers (insert benefit list, i.e. We offer a medical PPO, a dental PPO, and a vision plan. We also offer life insurance. You would still leave out exact prices.) and more details on these benefits will be provided under separate cover. The Employee is eligible for our company benefits after (insert time frame, must be less than 90 days after start date for health insurance).
5. Probationary Period
It is understood and agreed that the first 90 days of employment shall constitute a probationary period. During this probationary period, the Employee is not eligible for paid time off or other benefits [adapt this according to your business’ needs].
Though termed a probationary period, the Employer retains the right to exercise at will employment at any time and may terminate the Employee at any time.
6. Paid Time Off
The Employee shall be entitled to Vacation Time in the amount of XX weeks per annum, which equals XX days or XX hours. Sick Leave is provided in the amount of XX weeks, which equals XX days or XX hours per annum. The Employer also provides Bereavement Leave if needed.
The Employee is not eligible for any kinds of leave until the 90-day probationary period has been passed successfully. Please see the Employee Handbook for more information and for appropriate use/ policies regarding all time off and leave (include this only if you have one).
The Employer reserves the right to change or otherwise modify, in its sole discretion, the preceding terms of employment.
7. At Will Employment
While we look forward to a long and profitable relationship, you will be an at will employee of the Employer, which means the employment relationship can be terminated by either of us for any reason, at any time, with or without prior notice and with or without cause. Any statements or representations to the contrary (and, indeed, any statements contradicting any provision in this letter) should be regarded by you as ineffective.
The Employee may at any time terminate this contract and his employment by giving not less than two weeks written notice to the Employer. The employee agrees to return any property of the Employer at the time of termination.
8. Non-Competition Covenant & Confidentiality
***Non-competition covenants do not hold up in California court. If you believe you need a non-compete and your principal place of business is in California, we recommend you consult your attorney and create a non-disclosure agreement & invention patent (IP) clause/contract***
It is agreed that following termination of the employee’s employment with the Employer for any reason the Employee shall not hire or attempt to hire any current employees of (insert name of company). It is further acknowledged and agreed that following termination of the Employee’s employment with the Employer for any reason, the Employee shall not solicit business from current clients or clients who have retained the Employer during the prior 12 month period.
As an employee of the Employer, you will have access to certain confidential information of the Employer and you may, during the course of your employment, develop certain information or inventions that will be the property of the Employer. To protect the interests of the Employer, you will need to sign the Employer’s standard “Confidentiality and Intellectual Property Assignment Agreement” as a condition of your employment (keep this if you have one). We wish to impress upon you that we do not want you to, and we hereby direct you not to, bring with you any confidential or proprietary material of any former employer or to violate any other obligations you may have to any former employer.
During the period that you render services to the Employer, you agree to not engage in any employment, business, or activity that is in any way competitive with the business or proposed business of the Employer. You will disclose to the Employer in writing any other gainful employment, business, or activity that you are currently associated with or participate in that competes with the Employer. You will not assist any other person or organization in competing with the Employer or in preparing to engage in competition with the business or proposed business of the Employer.
More details will be provided in the Employer’s “Confidentiality and Intellectual Property Assignment Agreement” under separate cover (keep this if you have one).
This contract contains the entire agreement between the parties, superseding in all respects any and all prior oral or written agreements or understandings pertaining to the employment of the Employee by the Employer and shall be amended or modified only by written instrument signed by both of the parties hereto.
10. Authorization to Work
Please note that because of employer regulations adopted in the Immigration Reform and Control Act of 1986, within three (3) business days of starting your new position, you will need to present documentation demonstrating that you have authorization to work in the United States.
11. Severability of Contract
The parties hereto agree that in the event any article or part thereof of this contract is held to be unenforceable or invalid, then said article or part shall be struck, and all remaining provisions shall remain in full force and effect.
12. Choice of Law
This contract shall be governed, interpreted, and construed in accordance with the laws of the State of (insert state name).
This contract will remain open until [Date]. If you decide to accept this contract, please sign the enclosed copy of this letter in the space indicated and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this agreement and the attached documents, if any.
IN WITNESS WHEREOF the Employer has caused this contract to be executed by its duly authorized officers and the Employee has agreed as of the date first above written.
SIGNED, SEALED, AND DELIVERED in the presence of:
Name of Employee Date
What Needs to be Included in an Employment Contract?
In addition to clearly describing the job an employee is being hired for and the salary you are going to pay the employee, the employment contract should also address the following:
At will employment
At will employment is the fancy way of saying that, in all states, an employer can fire an employee for no reason (as long as there is no discrimination). There are some exceptions to at will employment, which you can read about here. Every state upholds at will employment, but Montana has the most exceptions (so be cautious if you are one of our readers from there).
At will employment should always be included in an employment contract, so there are no questions as to whether or when an employee can be terminated. This works in the favor of the business owner, like you, so you can make the tough decision to terminate, worry-free, in the future if the need arises.
The employee’s responsibilities
Laying out the job responsibilities in the contract sets the expectations on what an employee’s role is at your company. This is essential to prevent miscommunications. Think back to your job description when you posted the job, but the responsibilities should be laid out with even more detail in the employment contract if possible. Need help writing a job description? Look here.
Salary and benefits the employee will receive
Include the salary the employee will receive and on what schedule (e.g. annual, hourly, etc.).
List out what benefits the company has available, like medical, dental, and vision insurance (although you don’t need plan details like premium costs–those will be provided by the insurance company). If applicable, include how much each month you will contribute to their premiums (or what percentage).
You’ll also want to outline how many days of vacation, sick leave, bereavement leave, or other paid time off (PTO) you are going to provide. You don’t need to outline the whole policy, but rather give an overview like:
The employee will receive 10 days paid vacation time, 5 days paid sick leave, and will be eligible for up to 4 days bereavement leave (if needed) once the first 90 days of employment is over. All paid time off is outlined in further detail in our employee handbook.
Noncompetition and nondisclosure clauses
A noncompete/noncompetition agreement (sometimes called an NCA) is a legal agreement, usually between an employee and an employer, that the employee cannot start a competing business or use knowledge learned from the employer for a certain period of time (usually 1-5 years). Sometimes it’s called a Covenant Not To Compete (CNC), and sometimes a radius of miles is also included (i.e. for a spa, it might make sense to include a 10 mile radius so that a stylist doesn’t “steal” clients upon opening her own spa).
A nondisclosure agreement (NDA or confidentiality agreement) is a legal contract that focuses specifically on the knowledge learned, materials made/acquired during employment, and items of that nature. It is typically between an employee and employer, but it could also be between companies, to a vendor or consultant, or with someone who works with your business on a regular basis, like an accountant.
NDAs can be especially important in creative fields (think writers, photographers, graphic designers, architects, and the like), where there can be an issue of who owns the work created. For example, if your employee creates a page layout for a landing page, and then wants to use the same one for a client she has on the side, is that allowed? The answer is generally yes unless you are crystal clear that any work done while working under your company’s time or with your company’s budget belongs to the company. So, if your graphic designer is working on your watch, you want to make it clear in your employment contract that you “own” the products that they are creatively making.
While you might have a longer, separate confidentiality agreement or noncompete depending on your industry (especially if you make a unique technology, exclusive client list, trade secrets, or a secret method for, say, social media analytics), you will want to put in a noncompete clause and a nondisclosure clause in your employment contract. If you do business in California, use a nondisclosure clause because noncompetes are unenforceable there.
For 1099’s or freelancers, you’ll want a separate agreement entirely that covers work product and confidentiality since you won’t be providing them with an employment contract.
We recommend consulting your own attorney to have them draft a full NCA or NDA for you and your business. Only your attorney will know what you need to protect you the most. Click here for help in finding a business lawyer.
A method for resolving any disputes that arise (i.e. legal fees, jurisdiction)
Most agreements also include what will happen should litigation arise from it, such as where legal proceedings will take place and who will pay for the costs. You should also specify the state law that will apply to the contract, which is usually (but not always) the place where the business is located.
The employee’s signature & date, along with your (the business owner’s) signature & date
This helps the contract to be more official and you should keep a copy, as should the employee. It also aids in enforcing the contract legally, if push comes to shove, although there are conflicting statements out there on if you truly need both signatures to enforce it. It is best practice to have both parties sign and date the contract BEFORE work begins to avoid any issues as much as possible.
Both parties can sign the contract digitally if you use an electronic signature software, like DocuSign. Click here for a free trial.
What To Avoid Putting in an Employment Contract
The following is a list of items NOT to include in an employment contract and why:
Duration of the job
Putting in a timeline or job duration (e.g. we will employ you for at least 1 year) can chip away at the protection you get from at will employment. Once you put any sort of timeline into a contract, it becomes an “implied contract,” which gives you less leverage to let go of an employee before this timeline is up. Several states uphold implied contracts, and this could impede on your rights as a business owner to terminate an employee, so leave it out!
Grounds for termination
Putting in reasons that an employee can be terminated can also eat away at the protection you get from at will employment. It can be interpreted that an employee can only be terminated for cause or behavioral issues. This could also create an “implied contract.”
Employment Agreements vs. Employment Contracts
You might be wondering what the difference is between an employment agreement and an employment contract. In everyday speak, the terms are often used interchangeably. However, there is a legal difference. Basically, a contract is legally enforceable, and an agreement is not (however, that’s not to say that an agreement will never be enforced in a court of law).
An agreement tends to be more verbal and casual than a contract as well. If you were to do an employment agreement, you might be the only one to sign it (over having the signature and date of both you and the candidate), or perhaps only the candidate would sign it.
To err on the safe side, we recommend consulting with your attorney and using the phrase “employment contract” versus “employment agreement.” Click here to find a business lawyer near you.
Offer Letters vs. Employment Contracts
There are 3 main differences between job offer letter and an employment contract:
- An offer letter is not a legally binding contract and would not be held up in court. An employment contract that’s properly drafted and signed by both parties is enforceable.
- An offer letter is the first thing you give someone you want to hire. You would provide an employment agreement or an employment contract only AFTER someone accepts the offer!
- An offer letter shouldn’t provide much more details than the official offering of a position and its salary. An employment contract is more detailed. You can read more about offer letters here. There, we have an offer letter template and you can see the difference.
The Bottom Line
An employment contract is a good idea to have in place if you are hiring a manager level and above. They protect your business and you, as well as set clear expectations of the role for the employee. Better safe than sorry!