When you hire a new employee for your small business, it is important to have the employee sign an employment agreement. An employment agreement is a contract between your company and the employee that discusses both the employee's and your company's responsibilities and rights.
Elements of an employment agreement
An employment agreement provides the full and complete agreement between your company and your employee, explaining the rights and obligations of each party. Some provisions that an employment agreement or employment contract may include are:
- Name and address of employer and employee
- Salary (including bonuses or commissions) and how often it is paid
- Payment for expenses, if covered
- Benefits (including health insurance, life insurance, 401(k), education assistance, and flexible spending accounts)
- Time off (including holidays, personal time, vacation days, and sick days)
- Job title
- Job description (including responsibilities and requirements of the position)
- Full- or part-time status
- Schedule (days and times to be worked, as well as shift, if applicable)
- Confidentiality clause (this prevents an employee from sharing confidential or proprietary information with anyone else)
- Conflict of interest clause (prohibiting the employee from undertaking any other work that conflicts with working for the company while employed there)
- Noncompete clause (preventing the employee from working for a competitor for a certain period of time after leaving)
- Nonsolicitation clause (preventing the employee from seeking business from the company's clients or hiring its employees after leaving)
- Exclusive employment clause (stating the employee won't work anywhere else while working at your company)
- Statement of no agency (a legal provision that makes it clear the employee is just an employee and cannot enter into contracts on behalf of the company)
- Termination of employment (this section includes the reasons the employer can terminate the employee, as well as the notice the employee must give when leaving)
- A statement that ownership of materials and inventions created by the employee for the employer (including social media) belongs to the employer
- A statement that the employee is to use their best efforts to fulfill their job responsibilities
- Probationary period (if required, this should be explained and described)
- Arbitration clause (this requires that the parties use arbitration if there are any disagreements regarding the contract or employment, instead of going to court)
- Choice of law (this states which state's laws apply to the contract)
- A description of the employer's procedures and policies, or reference to a separate employee handbook that provides these
Advantages and disadvantages of an employment agreement
An employment contract can be useful because it clearly states all the requirements of the job and all the obligations the employer is entering into. It clarifies the agreement between the parties. A solid employment agreement can help protect both parties in the future, if confusion or disputes should arise between the employee and the employer.
An employment contract has disadvantages as well. It legally obligates you as the employer to do certain things and to provide the stated salary and benefits. If you want to change these later, then you will have to renegotiate the employment agreement.
When to use an employment agreement
While, in the past, employment agreements were used primarily for executives and professional staff, an employment agreement should be used for all of your full- and part-time employees. If you hire interns, you should have an employment agreement for these positions as well. If you are hiring an employee on a temporary basis, you will want to use an employment agreement that specifies the nature of the temporary employment and the length of the position.
To help ensure you don't miss addressing any important issues, it's wise to develop an employment agreement template you can use for all of your employees.
