Employment Contract: Template, What to Include, and Pros & Cons
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Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
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. A strong employment contract should include terms of agreement, the employee’s responsibilities, compensation and benefits, and a nondisclosure agreement (NDA), among other items, and will help ensure all parties are aligned and all laws are followed.
We’ve provided a general employment contract template for you to download and use, as well as a California-specific template since the state has numerous laws and regulations that make creating contracts a bit more complex.
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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.
Note: If you need an agreement to use with an independent contractor (1099 worker), don’t use an employment contract since independent contractors aren’t employees and shouldn’t be referred to as such. Check out our article on hiring independent contractors and download our free independent contractor agreement for more information.
What to Include in an Employment Contract
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 is being hired for, the employment contract should address compensation, benefits, and employment terms. 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:
1. Terms of Agreement
The terms of agreement include information like company name, employee name, 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 language that directs the employee to follow all company procedures, rules, and regulations.
2. Worker 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. 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 responsibilities later should the need arise. Be aware this only applies to minor changes. If the job changes significantly, you may need to provide the employee with a new contract.
3. Compensation & Benefits
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.
- 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.
- Paid time off: Outline how many days of paid vacation and leaves 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.
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.
4. Non-disclosure & Non-compete Clauses
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. Note that some states specifically prohibit these agreements by law or have made them largely unenforceable through court decisions.
- 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 the following states where non-disclosure agreements are outlawed or restricted:
- Arizona
- California
- Hawaii
- Illinois
- Louisiana
- Maine
- Maryland
- Nevada
- New Jersey
- New Mexico
- New York
- Oregon
- Tennessee
- Vermont
- Virginia
- Washington
The following states have banned non-compete agreements or restricted the use for low wage workers:
- California
- Colorado
- Illinois
- Maine
- Maryland
- New Hampshire
- North Dakota
- Oklahoma
- Oregon
- Rhode Island
- Virginia
- Washington
- Washington, D.C.
5. At-will Employment
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. Because at-will employment is the default in the US and applies even without an employment agreement, if you have an employment agreement but do not include at-will language, it could restrict your ability to terminate the employee.
Montana is the exception to the at-will employment rule, as it limits at-will termination to just an employee’s probationary period—which is generally a year. Most states do allow further exceptions to at-will employment (often because of violations of public policy), although the states listed below do not have any exceptions to at-will employment:
- Alabama
- Florida
- Georgia
- Louisiana
- Maine
- Nebraska
- New York
- Rhode Island
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.
6. Sign
Both signatures—yours and the employee’s—are required for the employment agreement to stand up in court. A document that both parties do not sign is hard to defend, 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. 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.
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. |
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, typically during onboarding |
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 |
Employment Contract Frequently Asked Questions (FAQs)
Can I write my own contract?
You can, but we don’t recommend it. Employment contracts are ripe for mistakes that can lead to costly litigation and disputes. It’s best to use a template and have it reviewed by an employment attorney before using it.
Do I have to use an agreement for an independent contractor?
Do you have to? No. Should you always? Yes. Without a formal written contract, you won’t be able to hold the contractor accountable since it’s just your word against theirs. Plus, you won’t have any protections for your business.
I already have employee contracts. Can I use those for freelancers?
No. Employment contracts and freelance contracts are different beasts. Freelancers should receive your standard independent contractor agreement.
How do I know whether to use an employment contract or a 1099 contract?
If you’re hiring an employee, use an employment contract. If you’re hiring a contractor, use a 1099 contract. The distinction between an employee and a contractor can be tough to make. Review our five key areas of difference to give you a better idea.
Bottom Line
An employment contract is a useful document to have in the personnel file if you are hiring a manager-level employee or higher. 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.
