An employment contract is a written agreement documenting the shared rights and responsibilities between your company and a W-2 or 1099 contract employee. It’s typically used when bringing in higher-level management employees, short-term contract employees, or freelancers. As a document signed by both parties, an employment contract is enforceable in a court of law.
In this article, we will provide you with two different employment contract templates that you can customize for your business for free. We’ll also review what to include and what not to include in an employment contract.
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Please note that this article is for educational purposes only. You should consult with a lawyer before finalizing any agreement.
Here are two free employment contract templates you can adapt for your own small business.
The first employment contract template is best used for employees that you pay and issue a W-2 to. The second employment contract template is best used for workers such as freelancers who you will pay a gross amount without tax deductions and issue a 1099 at year-end instead.
Read more about the difference between hiring W-2 and 1099 employees here. You may download both employment contract templates from the links below:
- Employment Contract for W-2 Employee as a Google/Word Doc or PDF
- Employment Contract for 1099 Worker as a Google/Word Doc or PDF
What to Include in an Employment Contract
In addition to clearly describing your company and the details of the job that the contract employee is being hired for, the employment contract should also address compensation and employment terms. Also be sure to clarify whether the employee will be paid via W-2 like a regular employee where you deduct and pay taxes for them or via 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 sections to include in most contracts.
Terms of Employment
At will employment is another way of saying that an employer can terminate an employee for no reason as long as there is no discrimination. In addition, the employee can leave without reason and without notice. This provides protection to both parties.
The at-will employment clause should be included in any employment contract so that there are no questions as to whether an employee can be terminated. This allows the business owner to make the tough decision if the need arises as long as you don’t violate labor laws in doing so. The at-will clause also gives the employee the right to leave the job if a better opportunity arises.
However, if you and the contract employee agree in advance to terms like 30 days notice or severance payments, be sure to include that language in the contract instead.
Clearly defining job responsibilities in an employment contract sets expectations about an employee’s role at your company. This is essential to prevent miscommunication. Use the existing job description if you have one; if not, summarize the key responsibilities of the position.
Most employment contracts will have a line at the bottom that states “additional duties as assigned” or 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.
Note: If the employee is a freelancer or a 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 employee does the job at risk of violating IRS worker classification.
Compensation & Benefits
Include the compensation and benefits that the contract employee will receive and on what schedule. Other than compensation, most of these are optional for a 1099 contractor or freelancer worker.
- Compensation: Include the dollar amount and if it’s to be paid weekly, every other week, or twice a month.
Compensation 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.
Bonus example: 5% annual bonus paid if OSHA training audit at or above 95% (Employee must be employed with Company on date audit results are received).
- Health insurance benefits: List any and all of the benefits you will offer to the employee.
Health Benefits example: We offer medical, dental, and vision benefits, contributing 50% toward the ‘employee-only’ premium. See benefits enrollment form for more detail.
- Paid time off benefits: Outline how many days of paid vacation and/or sick leave the employee is entitled to take each year.
Paid time off benefits example: The employee will receive ten (10) days of paid vacation time, five (5) days of paid sick leave, and is eligible for up to two (2) days of bereavement leave after their first 90 days of employment. Paid time off rules are outlined in further detail in the employee handbook.
- Other benefits: List out any other employee benefits that the company offers and that the employee will receive.
Other benefits example: You will also have the option to enroll, at your own expense, in commuter benefits, Life Insurance and/or ADD benefits.
You are not required to withhold taxes for 1099 contractors or freelancers. In addition, compensation may be based on project deliverables or milestones rather than time worked. Adjust this section as needed to clarify how the contractor will be paid.
Breaking down all of the benefit and compensation details for your employees is one thing. Keeping track of them all is a different story. Gusto can help you manage compensation, bonuses, and benefits, including health insurance and PTO, for all of your employees and contractors. Try it free for 30 days.
Non-Disclosure and Non-Compete Clauses
Non-disclosure (NDA) or confidentiality agreements prevent employees from sharing confidential business information with anyone outside of the business. Non-compete agreements prevent employees from stealing your business’ clients when they end their employment with you, either to work on their own or with another company. Both are legally binding, except in California, where non-compete agreements tend not to hold up. You can include clauses in your contract like the ones provided in the templates above or attach separate documents to cover these two issues.
Note: If your principal place of business is in California, we recommend that you consult with your attorney and create a non-disclosure agreement and invention patent (IP) clause/contract instead of a non-compete agreement.
Only your attorney will know how best to protect you with an NDA or NCA. If you’re looking for affordable legal advice on NDA/NCA, check out LawTrades. They’ll connect you with a thoroughly vetted attorney, provide a flat rate quote, and you’ll never pay for overages as their work is guaranteed. Click here to get your first month free.
Dispute Resolution Process
Most work contracts should also include what will happen should litigation arise, 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 the state in which your business is located.
Both signatures are required for the document to stand up in court—yours and the contract employee’s. You should keep a copy of the signed document, as should the contract employee. It’s best practice to have both parties sign and date the contract before work begins to avoid potential issues.
What Not to Include in an Employment Contract
The following two items should not be included in an employment contract as they may undermine your ability to leverage the at-will clause in case of a termination:
Duration of the Job
Putting in a timeline or job duration (e.g. we will employ you for at least one year) can minimize the protection you get from at will employment. Once you put a time frame into a contract, it becomes an “implied contract” under the at-will doctrine. That may result in you being forced to pay the worker for the full-time frame listed, even if you terminated them prior to the contract’s end date.
Grounds for Termination
Putting in reasons that an employee can be terminated can also undermine any protection you get from the at-will employment doctrine. If the worker sued for wrongful termination, the court might interpret that the employee can only be terminated for cause or behavioral issues.
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When Do I Need an Employment Contract?
In most cases, hiring an employee doesn’t require you to write an employment contract. After accepting a verbal or written offer, most employees show up on the first day for orientation, complete new hire paperwork, sign your company policies or employee handbook, and get to work. The job description and the employee handbook provide most of the initial details a new employee needs to know about their employment with your company.
However, there are four situations in which an employment contract can come in handy:
- The employee is a high level manager who will be given access to proprietary information. You may want to clarify their role while preventing them from stealing your trade secrets or customers; for example, if you’re going to hire a marketing VP and you know they could do serious damage if they left on bad terms. The non-compete and non-disclosure sections of your employment agreement may give you legal recourse and potential damages if the executive employee breaches your contract.
- The person is a highly valued employee, and you can’t afford for them to leave without providing advanced notice. For example, let’s say you’re working on a huge IT project and bring resources in to help. Although you don’t know exactly when the project will end (and therefore shouldn’t put exact dates in the contract), you do know that you’ll need advance notice if one of the programmers chooses to quit so that you can replace them and keep the project on track. That’s a good time to use an employment contract.
- The person won’t agree to work with you or for you unless you guarantee some specifics in writing. This often happens with highly sought after professionals, like a sales manager, media talent, or a website builder, who ‘negotiate’ for extras — things that aren’t offered in the employee handbook, such as an extra week of vacation, a company-provided luxury car, or a guarantee that some amount of severance will be provided if you terminate them.
- The person is a freelancer or 1099 contractor and you want to be crystal clear about job duties, dates, and deliverables, as well as ensure they don’t violate confidentiality or market to your clients, once they learn about your business model and trade secrets.
Employment Agreements vs. Employment Contracts
You might be wondering if there’s any difference between an employment agreement and an employment contract. In everyday speak, the terms are often used interchangeably.
From a legal standpoint, however, an employment agreement tends to be verbal or more casual than a contract and may not be enforceable in all states. For additional clarification, here’s what attorney Kimberlee Gee says:
“An agreement is common parlance used to describe any meeting of the minds. A contract is a more formal agreement with specific terms/provisions/clauses that outline what is expected from both parties as a result of the agreement. What will be binding are the actual terms of the agreement/document, no matter what you call it. However, as a legal term of art, a “contract” requires “consideration”—an agreement for the parties to provide something in exchange for something else. If the business wants to be more formal, I would recommend they call it a “contract”.
— Kimberlee Gee, Esq., Founder & Legal Consultant, Kimberlee Gee Legal
To err on the safe side, we recommend using the term contract and consulting with your attorney before formalizing your agreement into a written employment contract. Find a business lawyer near you.
Offer Letters vs. Employment Contracts
There are three main differences between a job offer letter and an employment contract that may be confusing to new business owners or their employees:
- Timing — an offer letter is the first thing you give to someone you want to hire. You would provide an employment agreement or an employment contract only after someone accepts the offer.
- Detail — an offer letter shouldn’t provide much more detail than listing the position, salary, job status (full or part time) and proposed start date. An employment contract is more detailed. Check out our sample job offer template to see the difference.
- Legally binding — 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 legally enforceable.
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The Bottom Line
An employment contract is a good document to have in the personnel file if you are hiring a manager-level employee or above or need to confirm terms with a contractor or freelancer. Use our templates as a starting point to protect your business and yourself, as well as set clear expectations on the role of the worker.
Don’t forget to check out Gusto, which lets you create, customize, and send offer letters, contracts, handbooks, and forms to new hires for e-signature and stores them securely online. You can also get access to HR experts who can answer your employment contract questions. Click here for a free trial.