Employment Contract: Definition, Cost & More [+2 Free Templates]

An employment contract is a written employment agreement documenting the shared rights and responsibilities between your company and a W-2 or 1099 contract worker. 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.

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Disclaimer: Please note that this article is for educational purposes only. You should consult with a lawyer before finalizing and using any legal agreement.

Free Employment Contract Template

Here are two free employment contract sample templates you can adapt for your own small business. The first employment contract is best used for employees to whom you issue a W-2. The second employment contract template is best used for workers such as freelancers to whom you pay a gross amount without tax deductions and issue a 1099-MISC at year-end instead.

Read more about the difference between hiring W-2 and 1099. You may download both employment contract template 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

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 job 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.

An employment contract is more likely to be used when hiring contract workers or in high-tech or highly sensitive businesses that want some assurances that their workers will abide by a certain standard of behavior. It goes beyond what’s typically in an employee handbook, and includes things that protect your business, such as assurances of confidentiality or penalties for quitting before a project is complete.

How an Employment Contract Works

An employment contract works by documenting the shared rights and responsibilities of you, the employer, and the worker that you employ. Typically, there are two kinds: an employment contract for a direct hire employee, and an employment contract for a worker who freelances as an independent contractor. The contract itself becomes a legal document when signed by both parties.

Here are some examples of the kinds of businesses that will want to use an employment contract:

Businesses Hiring Senior Managers or Executives

If you’re hiring 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 (e.g., if you’re going to hire a marketing VP and you know they could do serious damage if they left on bad terms).

The noncompete and nondisclosure sections of your employment agreement may give you legal recourse and potential damages if the executive employee breaches your contract.

Businesses Wishing to Retain Highly-valued Project Employees

Sometimes you can’t afford for a highly-valued team member to leave without providing advanced notice due to business deliverables. 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. In it, you can offer incentives for project completion.

Businesses Working With Talented Professionals Who Require a Contract

Some employees won’t agree to work 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. The contract allows you to document perks 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.

Businesses Working With Independent Contractors & Freelancers

Whenever you’re working with a person as a freelancer or 1099 contractor, you will want to be crystal clear about job duties, dates, and deliverables. You often need to ensure they don’t violate confidentiality or market to your clients once they learn about your business model and trade secrets. A contract won’t protect you entirely, but may provide damages if they violate the terms.

Next, let’s take a look at where you can find one:

Employment Contract Template Providers

You can use our two employment contract templates above and customize them to your liking. Or, contact your local business attorney to see if they have a template you can use. Regardless, be sure to have a licensed attorney review your contact to ensure it will stand up in court based on your state and local labor laws.

Here are four other great places to look for an employment contract template:

1. Your Attorney

Your business lawyer may have a standard employment contract that they’ll provide to you as part of your business account. Often, they’ll be the ones most knowledgeable about employment law in your location and industry. It’s worth asking. However, if their price is too high, there are less costly options below.

2. A Legal Website

Legal websites provide standard contract templates and services. Some, like Rocket Lawyer, provide half a dozen versions of employment contracts and employee agreements. Many are available for a free download, and then they’ll review them for as low as $59 per consultation.

3. Membership Websites, Like SHRM

Membership websites, like the Society for Human Resource Management (SHRM), offer templates to their members. Or, you may be able to find samples at your local chamber of commerce or other business or industry groups you belong to.

4. Your HR or Payroll Provider

Many HR and payroll providers have downloadable templates and document examples to support their clients. If you’re currently working with an HR or payroll provider, you might inquire as to whether they have a downloadable employment contract template available.

Gusto is an example of payroll software that sports 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. Get your 30-day trial.

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What an Employment Contract Costs

You can often download a sample contract and modify it for free. But that may be risky. Alternatively, you might pay a document fee of as low as $39 to download a contract template from a legal website like Rocket Lawyer. In either case, after you customize it for your business, invest in a legal review (to ensure it will stand up in court). And lastly, if you ever have to enforce the contract, it’s good to factor those costs in as well.

The costs involved in managing employee contracts are:

• Write: $50 to $500 per hour to outsource it; otherwise, the only cost is your time
• Edit: $0 to $39 in addition to your time to edit or customize an employment contract template you’ve found or downloaded for your business
• Review: $50 to $500 per hour to have your employment contract reviewed by an attorney
• Enforce: $50 to $500 per hour to enforce your employment contract if it’s violated

The good news is that having a contract often saves you time and money by making the terms of employment clear from the get-go.

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, clarify whether the employee will be paid via a W-2 (like a regular employee where you deduct and pay taxes for them) or via a 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 the critical sections to include in employment contracts.

Terms of Employment

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. 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.

This allows the business owner to make the tough decision if the need arises as long as they 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.

Employee Responsibilities

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. However, for direct hire employees, you’ll want to include most of these.

• 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 any and 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 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 that the company offers and that the employee will receive. Example: Life insurance and/or ADD benefits are available.

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 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 paid time off (PTO), for all of your employees and contractors. Try Gusto for free.

Run payroll and manage benefits using Gusto’s intuitive dashboard.

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Nondisclosure & Noncompete Clauses

A nondisclosure agreement (NDA), also known as a confidentiality agreement, prevents employees from sharing confidential business information with anyone outside of the business. A noncompete agreement (NCA) prevents 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 noncompete agreements tend not to hold up. You can include clauses in your contract similar to 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 nondisclosure agreement and invention patent (IP) clause or contract instead of a noncompete 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 your contracts, 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. 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 which state laws apply to the contract (usually the state where your business is located).

Signatures

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. In fact, it’s a 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 period listed, even if you terminate them prior to the contract’s end date.

Grounds for Termination

Putting in reasons that a contract 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 those listed causes or issues. Some employers request both employees and contract workers to abide by the employee handbook instead of listing specific reasons for termination.

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:

Kimberlee Gee, Esq., Founder & Legal Consultant, Kimberlee Gee Legal

“An agreement is common parlance used to describe any meeting of the minds. A contract is a more formal agreement with specific terms, provisions, and 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 document, no matter what you call it. However, as a legal term, 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 recommend they call it a “contract.”

To err on the safe side, we, therefore, recommend business owners use the term “employment contract” and consult with an attorney before formalizing any verbal agreement into a written employment contract.

Pros & Cons of Using an Employment Contract

To help you consider your options, here are a few pros and cons that you may want to review before you implement an employment contract with your workers.

Pros of Using an Employment Contract

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. Here are the three primary benefits:

• Expectations are clear: It’s less likely you’ll have issues with the work or the worker.
• Legally binding: If signed and dated by both parties, it will likely stand up in court.
• Remedy is available: If a breach of contract occurs, you may be able to request damages.

Cons of Using an Employment Contract

On the downside, consider these points:

• Could damage employee trust: It may make your employment relationship feel too formal.
• Needs to be maintained: If you don’t update it periodically, it may do you no good if work terms change from year to year, or your original contract was good for only a year.
• Costly: Having your contract reviewed and updated on a regular basis costs money.

4 Alternatives to Using an Employment Contract

If an employment contract feels too formal for your small business, or you prefer to reserve written employment agreements for your higher level staff, consider alternatives that may accomplish the same basic objectives.

These four alternatives to a formalized employment agreement may be easier to implement and manage:

Offer Letter & Job Description

An offer letter and a job description are the more common ways that businesses clarify the employment relationship with direct hire employees. In the offer letter, they specify the hire date, pay rate, and job title. They typically include or attach the job description that clarifies the job duties and expectations.

Employee Agreement

An employee agreement is a simpler, less formalized document that clearly states what the worker is hired to do and how the employer will compensate them. It can also include attachments such as an NDA, but doesn’t need to rise to the level of a contract. In fact, many employers choose to emphasize the at-will doctrine, which implies that either employee or employer can end the relationship at any time.

Employee Handbook

An employee handbook is the most common way to clarify employment rules and ensure your employees abide by your work expectations. Using the employee handbook in addition to providing an employee with a job description is a lower-cost way to ensure your employees do what’s expected. In fact, an employee handbook is the most common document used to clarify the employment relationship and workplace rules for W-2 direct hire employees.

Performance Management

Having an employee performance review process that clearly states work expectations is a great way to manage your workers without resorting to a formal employment contract for each and every staff member. Employees set goals with their managers and then meet periodically to review those goals. That ensures managers and their team members are on the same page with regards to expectations.

Frequently Asked Questions (FAQs) About Employment Contracts

Small businesses owners may be concerned about getting things right when drafting and implementing an employee contract. Here are answers to common questions; if you have a question in addition to what’s below, post it on our forum. You’ll typically get a reply within one to two business days.

Who benefits most from an employment contract—employer or employee?

Both employer and employee 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 including a statement about at-will employment. Or, if relevant, you can specify the amount of advanced notice you need to receive from the worker if they resign (in order for them to be eligible for bonuses or severance). That way, you protect your business.

How can I break my employee contract agreement?

To break a contract, you need to do little more than notify the employer of your planned end date in writing. In most states, the at-will employment doctrine will apply. That means you can leave your employer at any time. However, look at your contract to see what you might lose. For instance, if you leave without providing advanced notice, you may lose any promised severance pay, 401(k) match, or bonus payout.

Can an offer letter serve the same purpose as an employment contract?

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:

1.  The timing of when you provide the document: An offer letter is the first thing you give to someone you want to hire. You would provide an employment contract only after someone accepts the offer.
2. The level of detail included within the document: An offer start date. An employment contract is typically much more detailed.
3. How legally binding the documents are: An offer letter is not a legally binding contract and would not be held up in court. A correctly drafted and signed employment contract is legally enforceable, similar to a signed NDA or noncompete agreement.

Is a written employment agreement the same as an employment contract?

If it’s written and signed by both parties, it’s more likely to be considered a contract regardless of what you call it. A document that’s not signed by both parties is hard to defend in court, as the person who didn’t sign it can claim they didn’t know about it.

Bottom Line

An employment contract is a good 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 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. Get a free 30-day trial.

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