What Terms Should Be Included in an Employment Contract?

Client considering contract terms before signing

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Most employers require administrative, professional, and executive employees to sign an employment agreement or contract. While employment contracts are not required except in specific cases they can protect both the employer and employee.

This article reviews the terms and conditions of a typical employment contract.

Key Takeaways

  • An employment contract sets out the duties of the employee and employer and provides the employer with the opportunity to clarify the relationship.
  • Employment contracts are used primarily for executives, managers, professionals, and other key employees.
  • Most contracts include agreements that restrict employees from competing with the employer, soliciting customers, and disclosing trade secrets.
  • Employment contracts should includes processes for terminating the contract and handling disputes.

When Do You Need an Employment Contract?

You should have an employment contract for executives, managers, professionals, and for other key employees who have control over sensitive, private information of your company.

Hourly employees typically do not have written contracts, but terms of employment might be spelled out in an employee handbook or other company policies and procedures. 

Employment contracts are subject to state employment laws and are usually tried in state courts.

Specific Contract Terms To Include

Although the specific terms or articles required in an employment contract vary by state and by type of employment, the following terms and conditions are usually included in these types of agreements.

  • Identification: The parties must be identified completely, including full name, address, and other information. 
  • Effective date: The effective date is the date both parties have signed.
  • Pay and benefits: Give details of pay rate, pay dates, and benefits provided by the company.
  • Full-time employment: The employee must agree to devote their best efforts to the company's business, not doing work for anyone else during work hours without prior approval.
  • Duties: Include a description of the employee's duties and describe requirements to maintain professional licensing and results of not performing duties.
  • Extent of services: Describe the hours and days when the employee must be at work.
  • Work for hire: Include a statement that the employee's work products are the property of your business.
  • Benefits: Benefits provided to the employee may be specific, or they may be referred to an employee handbook or benefits listing for all employees.
  • Termination: Describe the circumstances under which either party may terminate the relationship and the notice required from each party.
  • Disputes: The process for settling disputes must be described, including the option for arbitration.
  • Applicable law: The applicable law section is a statement about the state in which the contract is effective. This is the state that has jurisdiction for the particular case.

Restrictive Covenants in Employment Contracts

A restrictive covenant is a clause in a contract that that restricts one of the parties from doing something during the term of the contract or afterward. These clauses are usually placed in an employment contract by an employer intending to protect them from actions of an employee.

Restrictive covenants may be elements in an employment agreement, or they may be separate agreements. These covenants are not found in all employment contracts but depend on the type of employment and level of employment. For example, executives, corporate officers, salespeople, or employees working on sensitive technology information may be asked to sign a restrictive covenant.

Non-Compete Agreement

A non-compete agreement restricts an employee from competing with the employer during the term of the employment contract and a time after the employee leaves the company. This agreement includes a specific area and time period within which the employee can't set up a competing business.

Non-compete agreements must be worded carefully to make sure they can be upheld by a court. Having too broad an area or too long a time can result in a court disallowing the agreement because it violates state restraint of trade laws.

Non-Solicitation Agreement

A non-solicitation agreement (NSA) is an attempt to stop employees from hiring other employees away from the company or taking customers away. This type of agreement is often used by businesses for salespeople or customer service employees and in businesses with repeat customers.

Confidentiality Agreement

A confidentiality agreement, sometimes called a non-disclosure agreement (NDA), is an agreement in which the employee agrees to keep trade secrets, financial information, potential new products, and other private company information confidential. The NDA should include a comprehensive list of all possible company information to be included in the agreement.

If you want to prepare an employment contract for an employee, you should get an attorney to help you, or at least to review the contract. State laws are always changing, and each business situation is unique.

Frequently Asked Questions (FAQs)

How can you get out of an employment contract?

The process of getting released from an employment contract is determined by the wording in your agreement. Some agreements include a specific expiration date that can be extended if both parties agree. Otherwise, the contract should include a clause that describes how either party may terminate the contract and what type of notice is required.

Some contracts state that they are "at-will," meaning that the agreement is for an indefinite period of time and may be terminated at any time by either the employer or employee.

State laws may modify this rule with restrictions. For example, California law includes exceptions to the at-will rule for contracts that require "good cause" termination, and Montana has completely eliminated the at-will rule.

What happens if a business or employee breaches an employment contract?

"Breaching a contract" means that one party does something that breaks their terms of the contract. For example, if the terms of the agreement state that the employer must pay severance pay for an employee who is terminated for reasons other than for cause, and severance isn't paid, that's a breach.

If an employee feels that their employer had beached the contract, and this breach has resulted in harm to the employee (loss of pay, for example), the employee must take their case to court. That means getting an attorney and filing a lawsuit to recover damages.

An employer has another remedy to stop an employee who is causing harm by breaching the contract. This happens most often when an employee breaches a non-compete agreement or non-solicitation agreement. In these cases, the employer can ask a court for an injunction requiring the employee to stop the action that is harming the employer. However, this may be a temporary injunction while the case goes through the process.