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Employment agreement: How-to guide

Having a good start to an employment relationship and making a positive first impression on a new hire is essential to establishing a productive, successful, and professional workplace. An important part of this process is creating an employment agreement.

There are many advantages to having a well-crafted employment agreement, the most obvious of which is the legal protection it provides to a company or business. By providing written employment terms that include details of compensation, position, employment policies, and at-will status, the company creates a legal document that, when signed, can prove valuable if disputes occur.

What is an employment contract?

Free employment agreement template by LegalZoom. Create and download agreements for free!

An employment agreement, commonly called an employment contract or employee contract, contains all the essential terms and conditions of the employment. From an employee agreement, an employee understands their duties towards the company. It also provides employees with information about the:

  • Company policy
  • Employee’s job title
  • Salary details
  • Probationary period
  • Sick leave, personal leave, and vacation time off
  • Date of joining
  • Confidential information that employees should keep a secret

A written employee agreement lists employment terms, limiting later confusion and disagreement about those provisions. Clearly drafted employment contracts not only eliminate ambiguities but also establish a better employer and employee-working relationship. Employment contracts are created in the best interests of the company and the new employees. It helps to build mutual understanding and promotes good faith.

Difference between an employment agreement and an independent contractor agreement

An employment agreement differs from an independent contractor agreement.

An employment contract hires an individual as a part-time or full-time employee. On the other hand, through a contractor agreement, professional experts are hired as independent contractors. An independent contractor doesn’t get any of the employee benefits like:

  • Paid vacation time
  • Personal leave and sick leave
  • Health insurance
  • Retirement plans and benefits
  • Monthly salary - An independent contractor is paid for the services rendered for the company they’re hired by
  • Employee’s job title    

Guidelines to create an all-inclusive employment contract

An image of a happy lady shaking hands with a man inside an office.

1. Clarify and reach a consensus before making the agreement in writing

A good employment agreement is one that captures the intentions of the parties accurately. It’s a good idea to clarify the potential employee’s job duties and responsibilities, and their compensation package, before writing them down.

2. Refrain from adding unmet promises in your contract

Don’t promise raises, bonuses, or other business perks if those aren’t guaranteed. Don’t include anything that isn’t an absolute. Many lawsuits are predicated on misunderstandings related to expected bonuses. If you have a simple bonus calculation applicable to this employee, include that information in the agreement.

3. Provide reimbursement details   

If the company will reimburse or provide funds for moving expenses, include that information here and make your language precise.

4. Avoid customizing legal clauses on your own 

Don't alter the at-will language or insert terms that conflict with that language (for example, references to long-term employment). Nothing in the contract should contradict your arrangement for at-will employment.

5. Add non-disclosure clause

A non-disclosure clause in which the employee agrees to keep the company’s private information private is effective from the beginning of the employment. A departing employee’s ability to use confidential information will continue to be effective, and you won't need to negotiate with a potentially hostile party to ensure this limitation.

6. Include non-compete clause

If you include a clause that limits a departing employee’s ability to compete with the company, make sure the scope and reach of this clause is reasonable. Although some states’ courts enforce these clauses as a matter of course, many others (including California) view them unfavorably and won't enforce them unless the restrictions are very narrow. There must be a correlation between the time period for the limitation and the need for the clause. In other words, this clause can only be for as long as it would take for an employer to overcome any potential competitive disadvantage.

7. Mention state law for dispute resolution

If you want a specific state’s laws to resolve any employment disputes, specify that state in the employment agreement. Courts will generally honor the parties’ choice of law if the state selected has a connection to the dispute.

8. Enforce obligations under the employee agreement

The provisions of an employment agreement will bind your employee strictly only if you follow them to the letter. In other words, you can enforce its terms against your employee if you don't violate your own obligations under the agreement. For example, your employee won't be bound by the terms of a non-competition clause if you try to end the agreement without giving the required notice or termination date.

9. Make the exit interview a part of the process

Nothing lasts forever, and this is certainly true of employment. At the end of an employment relationship, your company should conduct an exit interview, and you should consider putting this as a requirement in their employment agreement. At this meeting, the employee should be reminded of their continuing obligations to the company, including maintaining the confidentiality of information beyond the termination of the employment period. You can also use this time to resolve misunderstandings and smooth ruffled feathers, perhaps limiting later termination-related lawsuits.

10. Provide ample time to review the employment contract

Allow the employee to spend time reviewing the agreement. This will reduce the likelihood, or at least the efficacy, of a claim that the employee didn't understand any terms or how those might affect the agreement as a whole.

Both parties should review the completed document carefully to ensure that all relevant points have been included. It is better to be over-inclusive than under-inclusive. Don't assume that certain expectations or terms are agreed to if they aren't stated expressly in the document.

11. Produce two copies of the signed employment agreement

Once the employee and employer agree to the terms of the employment, they can sign the agreement and make it official. The employer and the employee must sign two copies of the agreement, one is kept by the employer, and the other is given to the new employee.

If your agreement is complicated, it is always good to contact an attorney to help you draft a document that'll meet your specific needs.

12. Get the contract signed

Regardless of the nature of your arrangement, the employment agreement should be signed before the employee starts work.

Key elements of an employment agreement 

The following instructions will help you understand the terms of your employment agreement.

1. Introduction of parties

This part gives employer and employee details like their name and contact information. The employer is the party that'll be hiring the employee. While giving the employer details you can also mention what type of entity it is, e.g., corporation, limited liability company, etc.

You must also write the date on which the document is effective (usually when it is signed).

2. Recitals

Recitals are the “whereas” clauses that define the agreement's world and offer key background information about the involved parties. In an employment contract, this section includes a simple statement of the parties’ intent to enter an employment relationship.

In the background section, describe the employer’s business activities in detail. Note that this description could have a long-term impact on both parties.

There are also certain clauses in an employment contract that restrict the employee’s ability to compete with the employer in its industry after their employment ends. If the employer’s business is defined too broadly, the employee might not be able to find any employment at all! Make sure both parties agree on the business definition that is provided.

3. Employment

This section confirms the parties’ agreement to enter into an employment relationship. Note that the employment will be “at will.” This means that it can be ended by either party at any time for no specific reason.

4. Term

Enter the date on which the agreement starts. Note that there is no definite “term” for the relationship. Unless either party ends the agreement, it'll continue.

5. Compensation

Provide details of the employee’s salary and other benefits to be received in exchange for their work.

  • Base salary: Enter the employee’s annual salary and explain how they'll be paid (e.g., weekly, bi-monthly, monthly, etc.).
  • Non-salary benefits: This subsection allows you to list any other compensation the employee may receive. For example, if the employee will receive pension benefits or relocation expenses as part of their compensation, you can detail those here.
  • Vacation: Enter the number of paid vacation days the employee is entitled to in a given year.
  • Signing bonus: An optional provision requiring the employer to pay the employee a certain amount for agreeing to work at the employer’s offices. This may be included in an executive agreement as an additional incentive for accepting a job. If you include this section, enter the amount of the signing bonus that'll be paid and when it'll be paid. Note that if the employee stops working for the employer within a certain amount of time, they'll be required to pay back this signing bonus. You also need to mention what time period it would be.
  • Performance bonus: This provision rewards the employee for hitting certain specified performance goals. According to the terms here, the employee’s bonus compensation will be calculated according to the employer’s bonus plan. Note that most employment agreements don't include specific information about an employee’s bonus. However, if you want to add additional provisions about the employee’s performance bonus, feel free to do so here.
  • Stock options: This section allows the employee to participate in any stock option plan the employer has after a certain number of years. If you want to include this clause, enter the length of time it'll take for the employee to qualify for this plan.
  • Other benefits: A catch-all provision simply stating that the employee may receive other benefits of the sort that other employees of their position receive.
  • Withholding: States that the amounts that'll be paid to the employee may have deductions taken from them to satisfy tax requirements.

6. Responsibilities and duties

Describe what the employee is expected to do as part of their job. This should be as specific as possible for both parties’ benefit.

For the employee, it is important to know what is expected of them.

For the employer, defining the employee’s work duties will make clear, from an intellectual property perspective, what the employer can claim to own under the work-product doctrine (which states that things created in the course of the employee’s employment are owned by the employer).

Provide the location where the employee will provide their services, which may simply be the employer’s main place of business.

7. Other employment

This section clarifies that the employee isn't allowed to work for other companies during the employment period. However, they can invest in other companies if they don’t require the employee’s help to operate.

8. Working amenities

An optional provision indicating that the employee will be given certain extras to create a more comfortable work environment (e.g., a private office, personal computer, etc.).

9. Expenses

If the employee pays their own money to cover any reasonable expenses relating to official employer business (e.g., travel expenses, client dinners, etc.), the employer promises to reimburse that money. The employer agrees to provide proof of payment of these expenses to the employer’s satisfaction.

10. Confidentiality

During the employment period, the employee isn't allowed to give any private information to outside parties without the employer’s consent. “Confidential information” includes any information about the employer not generally available to the public.

11. Non-solicitation

This provision is meant to prevent the employee from luring away key employees or customers from the employer if he/she stops working for the employer. According to this, the employee shouldn't ask or lure any such individuals to accept positions as employees or clients of the employee.

This provision lasts only for a certain time after the employment period ends. Enter the amount of time this restriction will last. Make sure this is a reasonable time period: courts may overturn a provision that is for too long or for too large an area.

12. Non-competition or non-compete clause

An optional provision providing that the employee won't enter any business that competes with the employer for a certain period of time after the end of the agreement.

This clause is subject to very specific state guidelines. Please conduct additional research to ensure that the language is drafted very narrowly and according to state law.

In addition, non-compete clauses may be unenforceable for certain professions (e.g., in Delaware and Massachusetts, non-compete clauses for doctors are generally not allowed).

You also need to mention the time period for which this non-competition restriction runs.

13. Fidelity bond

A fidelity bond protects employers from losses they might experience because of their employees’ bad behavior (e.g., theft of company property).

14. Termination

Details the circumstances under which the agreement may be terminated. If the agreement is for “at will” employment, either party can end the agreement simply by giving the other party notice. You need to mention the notice period that must be given.

If the employer asks, the employee will continue to work during this notice period and will continue to receive salary payments until their last day of work.

There is also an optional clause where the employer can offer the employee a severance package. If the employee owes any money to the employer, the employer is given permission to deduct this amount from the pay offered.

15. Return of property

This is an extremely important provision, and although it may seem obvious to you that company property should be returned after an employee’s termination, it may not be as obvious to your employee. It is thus essential to communicate your return policy in the agreement (and reiterate it in your employee handbook, exit materials, and severance agreements), stating specifically that employees must return all company property before leaving your employment.

16. Disability

This section states that if the employee can’t perform their duties for a certain period of time because of an injury or illness, the employer can reduce their salary by a specific percentage. 

Enter this amount of time (in weeks or months) and the percentage by which the salary would be decreased. Note that the employee will be entitled to full salary once they return to work full-time.

The employer can end the agreement entirely if the employee’s absence lasts longer than a certain period. Mention the maximum time period that would lead to terminating this agreement.

17. Death during employment

This provision states that if the employee dies during the employment period, the employer will pay their salary to the employee’s relatives until the end of the month in which the death occurred. The employer also promises to pay a certain additional amount, which the parties have agreed upon.

18. Arbitration

A commonly used optional provision that requires the parties to resolve any disputes in arbitration (rather than in the courts). Arbitration can be quicker and cheaper than litigation for both parties. However, there may be local restrictions (or limitations in your industry) about using these clauses, so it’s a good idea to review laws governing arbitration in your area and in your field.

19. Notice

Lists the addresses to which all official or legal correspondence should be delivered. Write a mailing address for both the employer and the employee.

20. Successors and assigns

In the life of a company, there may be mergers, acquisitions, or sales of business divisions. On such occasions, the company may assign its agreement to a surviving entity or affiliate without obtaining the employee’s consent. Simply put, if the employer is purchased, the new company won't need to renegotiate this agreement: it'll continue to be effective as is.

21. No implied waiver

Explains that even if one party allows the other party to ignore or break an obligation under the agreement, it doesn't mean that party waives any future rights to require the other party to fulfill those (or any other) obligations.

For example, say the agreement requires the employee to work 45 hours a week, but the employer only requires the employee to work 40 hours a week. Later, the employer could tell the employee to work 45 hours a week, as required in the agreement. If the employee claims that this right was “waived” because the employer didn’t enforce it, the employer can point to this section: its failure to enforce the provision at one point doesn’t mean it can’t enforce it later.

22. Governing law

Employees may work in one state and their employers in another. A governing law provision allows the employer to choose the state laws that will be used to interpret the agreement.

23. Counterparts; electronic signatures

This section says that even if the parties sign the agreement in different locations, or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement.

In a modern world where signing parties are often not in the same city - much less the same room - this provision ensures that business can be transacted efficiently without sacrificing the validity of the agreement as a whole.

24. Severability

Protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law prohibits arbitration clauses, it won't undo the entire agreement. Instead, only the section dealing with arbitration would be invalidated, leaving the remainder of the agreement enforceable.

This part also discusses the non-competition and non-solicitation clauses. Because these clauses are delicate and run the risk of being termed too broad or overreaching, this subsection allows a court to limit the reach of these clauses rather than delete them altogether.

25. Entire agreement

The parties’ agreement that the document they’re signing is “the agreement” about the issues involved. Unfortunately, the inclusion of this provision won't prevent a party from arguing that other enforceable promises exist, but it'll provide you some protection from these claims.

26. Headings

This part mentions that the headings at the beginning of each section are meant to organize the document. Any interpretation of the agreement shouldn't be based on the headings.

Employment agreement template: Helping both the employer and the employee in the hiring process

Employment agreements are pretty long and exhaustive documents. Drafting them is often cumbersome and time-consuming. You must be careful while including various legal clauses in your agreement and shouldn't leave room for misinterpretation. You also need to ensure that all important terms and conditions are included. For instance, you need to check whether certain important documents and clauses are included, like:

  • Non-disclosure agreement (NDA): Most employers include this document along with the employment agreement. A basic NDA makes the employee agree not to disclose information regarding the company. It asks its employees that during the time of employment and after resigning, they shouldn't divulge any trade secrets or such confidential information to any third party.
  • Non-compete clauses: A non-compete clause is nothing but a mandate where the employee agrees not to work in another company that is from the same industry and is your direct competitor. You can either include a clause or even have a separate agreement specially created to include this provision.
  • Confidentiality clauses: In a confidential clause, you need to mention what your company considers confidential and part of intellectual property.
  • Non-solicitation clause: A non-solicitation clause restricts an outgoing or former employee from using the company’s client and customer information for personal gains. It prohibits the former employee from poaching or convincing the current employees to leave their jobs to join the new company.

The above clauses are some of the critical clauses of an employment contract. There might be other important clauses that you might want to include in your contracts. To avoid any misses in your employment contract, having a template handy with you can be helpful.

LegalZoom offers a comprehensive employment agreement template, making the contract creation process much easier. You can use our template by simply answering some guided questions, further editing the document suiting your professional needs, and downloading the completed document at an affordable price. 

In case you are in search of other employment-related or professional agreement forms, LegalZoom has them covered for you. From your job offer letter to termination forms to independent contractor agreements, LegalZoom offers a vast array of agreement samples for your requirements.

Frequently asked questions

What's an employment agreement?

Give your new employees a clear understanding of hiring terms from day one. By providing employment terms such as compensation details, position title, and at-will status in a written employment agreement, your company creates a legal document that defines specifics for you and those who work for you. Additionally, a written agreement that lists employment terms may help prevent confusion or help resolve any later disputes. This could also offer some basic protections for you as an employer.

What information is required to complete a basic employment agreement?

Here's the information you'll need to have handy to complete your employment agreement:

  • Who it's coming from: Determine if a business or individual is sending the document and have the name and contact information ready
  • Who it's going to: Know who this document is going to and have the individual name and contact info ready
  • Which state will govern it: Specify the state so it's clear which state's laws apply to the document
  • Subject matter: Have a summary of the general nature of the new employee's job ready (e.g., design services for your marketing department)
  • Dates: Be clear about when this agreement takes effect
  • Compensation: Know the expected salary, frequency of payment, and any bonus they may be eligible for, as well as any additional benefits
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