This article is part of a larger series on Hiring.
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.
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:
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
Type of Document
Can be as simple as an email to the candidate
A formal document that is signed by both parties
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
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.
|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.|
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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