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Updated: March 27th, 2020
An employment agreement is a legal contract that establishes a formal employment relationship between an employer and an employee. In most states, an employee who is hired without a written employment agreement for a definitive period is considered an “at-will employee.” An “at-will employee” can be terminated “at-will,” or at any time with or without cause. “Cause” is often more than just not being the right fit, but rather is something more negative such as an act of dishonesty, fraud, theft, or a material breach of a employment contract, employee handbook, or general corporate policy.
Having an employment agreement allows both an employer and employee to establish an understanding regarding the most important terms of employment such as job duties, length, compensation, termination, and general expectations. As for any contract, ensure that the contract spells out the offer, acceptance, and consideration. The following paragraph is an example of a preamble that covers those areas:
THIS EMPLOYMENT AGREEMENT (“Agreement”) made and entered in to on ______ day of _________, 20__ , between [name of employer] a corporation incorporated under the laws of the [jurisdiction], and having its principal place of business at [employer address] (“Employer”); and [name of employee], residing at [employee address] (“Employee”).
WHEREAS the Employer desires to retain the services of the Employee, and the Employee desires to render such services on the terms and conditions set forth in this Agreement.
IN CONSIDERATION of the mutual covenants and agreements contained herein, and other good and valuable consideration (the sufficiency and receipt of which are hereby acknowledged), the parties agree as follows…
Here are some general provisions that should be included in any employment agreement:
An employment agreement should clearly state the position and title that the employee is being hired for, and the specifics of the job duties expected for the employee to perform. If a job description was used for recruitment purposes, be sure to go over those terms carefully and include them in the employment agreement.
Compensation is often heavily negotiated and any agreements should be put in writing, including any fringe benefits promised during the course of negotiation. An employment agreement should include details regarding compensation (e.g., pay rate, bonuses, raises, expenses, etc.) and benefits (e.g., paid time off, health care, retirement, etc.).
Arguably, the most important provisions of any employment agreement will deal with termination (an area that is most often litigated). Any employment agreement should address the nature of the employment relationship – whether the relationship is an independent contractor, “at-will,” or for a specific term (if so, will there be a probationary period?). An employment agreement should also address how often performance reviews will be conducted and what will result from the reviews. Finally, an agreement should include a termination clause detailing how much notice is required by each party to terminate the employment agreement, in what circumstances employment can be terminated (i.e., with cause or without cause), and what happens after termination (e.g., surrender of all laptops, issuance of severance pay, etc.).
A small business may wish to include certain provisions in an employment agreement to protect the company’s business such as an confidentiality agreement (provision that limits the dissemination of confidential information), exclusivity agreement (provision restricting an employee from working for any other employer concurrently), non-competition agreement (provision that limits a former employee from working for competitors under certain terms and conditions), and non-solicitation (provision that limits a former employee from soliciting a current employee to leave for a certain period of time).
Most contracts, employment or not, should include provisions that address legal issues that may arise. These provisions include: entire agreement (provision limiting the entire agreement to the written contract to the exclusion of any oral agreements that may have been made prior), severability (provision that states that other remaining provisions will remain valid and enforceable if any provision is found invalid or unenforceable), choice of law (provisions that addresses which state law is applicable), choice of venue (provision dictating where any lawsuits will be litigated), arbitration (provision determining whether litigation will be in courts of law or arbitration), attorney’s fees (provision determining who will bear the costs of litigation).
Here are some templates of employment agreements available online:
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.