Employment Agreement

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What Is an Employment Agreement?

An employment agreement is a binding document between an employer and an employee, freelancer, independent contractor, or subcontractor. The agreement should include the terms of employment and ensure that parties to the agreement understand what is expected of them.

An employment agreement may also be called:

  • Employment contract
  • Contract of employment
  • Employee contract
  • Job contract

What Information Should an Employment Agreement Include?

Though the specific details included in the employment contract you use will depend on the specifics of the role and your company, there are some common clauses employment contracts typically include:

  • At-will and termination: This clause explains if an employer must have a reason to dismiss an employee. It will also include information about policies regarding termination, like returning company property.
  • Benefits: An employment agreement should include information about benefits, such as:
    • 401(k)
    • Dental insurance
    • Health insurance
    • Vision insurance
    • Disability insurance
    • Life insurance
    • Paid time off
    • Vacation time
  • Employment duration: The contract will detail the length of time an employee agrees to work for a company. Some employment agreements cover an ongoing period of time. Other agreements can be for a specific time duration. Still other agreements set out a minimum duration with the possibility of later extending that period.
  • Good faith clause: This clause is sometimes referred to as "best efforts." It will require an employee work to the best of their ability. The clause may also have information about severance.
  • Information about communications: If the employee will fulfill a role that involves communications such as email, social media, or websites, the employment agreement could include a statement that the company will retain ownership and control over communications.
  • Responsibilities: An employment agreement can include a list of the tasks and duties an employee will be expected to carry out while employed in the position.
  • Schedule: An employment agreement can include the days and times an employee will be expected to work.
  • Wage/salary information: An employment agreement should state-specific wage details, including whether the employee is paid hourly or salaried, if there is any information about commissions, etc. The agreement will likely include payroll schedule information as well.

Employment agreements may also include special clauses regarding sensitive intellectual property, confidential information, etc. that could cause a company to lose employees, clients, or trade secrets. Examples of these clauses include:

  • Confidentiality and/or non-disclosure: An employment agreement can specific information that must be considered confidential. This clause using states how long an employee is expected to maintain confidentiality. Confidentiality agreements or NDAs can cover information like:
    • Customer lists
    • Designs
    • Inventions
    • Pricing
    • Processes
    • Products
    • Trade secrets
  • Non-compete/non-competition: This type of clause will prevent an employee from working with a competitor for a specified amount of time after employment ends. These clauses usually have to include reasonable requirements, such as limiting the geographic area to which they apply, to be enforceable.
  • Non-solicitation: This kind of clause will prevent an employee from encouraging customers, clients, or other employees to move to another service provider or company. Non-solicitation clauses are typically for a set period of time and must also meet certain restrictions to be valid.

These types of clauses must be fair, reasonable, and legal to be enforced in a court of law. A company may also ask an employee to sign separate NDA or other agreements that go into greater detail beyond the clauses included in the employment agreement.

For further information, here is an article about non-disclosure agreements, an article about non-compete agreements, and an article about non-solicitation agreements.


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When Do You Need to Use an Employment Agreement?

Generally speaking, you should use an employment agreement if you are paying or receiving money for any kind of completed work. An employment agreement is a legally enforceable document, so it protects all parties to the agreement.

Some common examples of when you will want to use an employment agreement include:

  • You're hiring a new employee and want to make sure they fully understand the terms of employment and business relationship.
  • You're hiring a new employee and need that employee to sign a confidentiality agreement.
  • You need a way to officially communicate to a new employee that their employment is "at-will."
  • You have so far only used verbal agreements and need to create formal agreements for current employees.

Benefits and Drawbacks of Using an Employment Agreement

Both benefits and drawbacks exist when using employment agreements. Because employment agreements are legally binding, there are consequences if anyone breaks the terms of the contract.

Advantages of employment agreements include:

  • Defining benefits and duties: An employment agreement leaves no ambiguity as to job responsibilities, pay, or benefits.
  • Protecting both parties: Employers and employees are both covered under an employment agreement.
  • Providing stability: Both the employee and employer know what they can expect for the foreseeable future once a contract is in place.

Disadvantages of employment agreements include:

  • Limiting flexibility: Once someone is hired under a contract, it is more difficult for the employee to leave and for the employer to let them go if they are no longer needed.
  • Difficult to change: An employee agreement can only be altered through renegotiation. Both sides would need to agree to any changes to the original contract.

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Different Types of Employment

An employment agreement will include information about whether the employee is considered a full-time or part-time employee, and will differentiate between employees and independent contractors. It is important for small business owners to understand the differences between these types of employment.

Full-Time vs. Part-Time Employees

While there are no federal laws defining what is considered full-time work aside from laws governing overtime requirements for work beyond 40 hours in a workweek, there are general conventions. Employees who work from 30 to 40 hours per week usually qualify as full-time employees.

Employees vs Independent Contractors

The major difference when hiring employees and independent contractors is that an employer must withhold state and federal taxes from the pay of an employee. An independent contractor, on the other hand, is responsible for paying their own state and federal taxes.

Employees:

  • Have taxes withheld by their employer
  • Complete IRS Form W-4
  • Paid salary or hourly
  • Work for the employer's business
  • Employer obtains unemployment insurance

Independent Contractors:

  • Do not have tax payments withheld by the client
  • Complete IRS Form W-9
  • Paid per task or per project
  • Work for their own business
  • The client does not obtain unemployment insurance

What Is a Probationary Period?

Many employers want to make sure the employee they have chosen for a job really meets the expectations they have when they offer employment. As a result, many businesses include a probationary period at the start of employment.

An employer evaluates the new employee during the probationary period to see if the employee has the skill set to perform their job duties and ensure they are a good cultural fit in the company. Probationary periods are often structured to allow an employer to terminate an employee for any reason, without needing to provide compensation or reasonable notice, during the probationary period.

If you are hiring new employees for your small business, you will want to make sure you structure your employment agreement appropriately to protect your business. Working with an experienced lawyer can help you create an employment agreement that contains the right clauses and language for your unique situation.

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