An employment contract serves as the cornerstone of a legally binding agreement between an employer and an employee. This document outlines crucial aspects such as compensation, responsibilities, benefits, and other terms that govern the employment relationship. In this blog post, we'll delve into the key takeaways of an employment contract, essential terms to include, compliance with IRS requirements, and the significance of restrictive covenants. Additionally, we'll guide you through the process of hiring an employee, ensuring a smooth and legally sound onboarding experience.

Table of Contents

• What is a Contract of Employment?
• Important Terms to Include in Employment Contracts
• Restrictive Covenants in Employment Contracts
• How to Hire an Employee?
• How To Write an Employment Contract
• Frequently Asked Questions
• Employment Contract Sample

What is a Contract of Employment?

A contract of employment formalizes the legal relationship between an employer and an employee, delineating their respective rights and responsibilities. Commonly referred to as an employment agreement, work contract, job contract, or contract of service, this document specifies crucial details such as the nature of work and agreed-upon wages. Before finalizing an Employment Agreement, it's advisable to request an Employment Verification Letter from the candidate to verify their income and employment history.

IRS Requirements:
For US companies hiring citizens and residents, adhering to IRS requirements is essential. This includes the completion of IRS Form W-4 by employees at the start of employment and IRS Form W-9 by independent contractors (if payment exceeds $600 for services or labor).

Employment Contract Key Takeaways:

A well-crafted employment contract is a legal agreement that establishes the foundation of the relationship between an employer and an employee. Here are the key takeaways:

1. Legal Agreement: An employment contract is a legally binding agreement between the employer and employee.
2. Outlines Responsibilities, Compensation, and Benefits: Clearly defines the roles, responsibilities, compensation, and benefits associated with the employment.
3. Types of Employment Contracts: Different types of employment contracts cater to various work statuses, ensuring flexibility in employment arrangements.

Important Terms to Include in Employment Contracts

A comprehensive employment contract should encompass the following essential elements:

• Employee and Employer Information: Clearly states the names of the employee and employer.
• Position and Responsibilities: Specifies the employee's job title and role responsibilities.
• Compensation: Details the payment structure, including hourly, weekly, or monthly rates, bonuses, commissions, and the compensation schedule.
• Start Date and Term: Specifies the commencement date and whether the employment term is fixed or indefinite.
• Benefits and Probationary Period: Outlines details about benefits, vacation, sick days, and any probationary period.
• Termination and Work for Hire Clause: Clarifies reasons for termination and emphasizes that work created during employment belongs to the company.
• Agency Provision: States that the employee cannot enter into contracts on behalf of the employer without written consent.
• Reimbursement Provision: May include reimbursement clauses for job-related expenses.
• At-Will Employment: Clarifies the at-will nature of employment unless stated otherwise.

Restrictive Covenants in Employment Contracts

To safeguard business interests, consider including additional clauses:

1. Confidentiality: Specifies non-disclosure of trade secrets and sensitive information.
2. Non-compete: Prohibits the employee from working for competing companies after leaving the current employer.
3. Non-solicitation: Restricts employees from recruiting co-workers or soliciting clients after leaving the company.

(Note: In some states, restrictive covenants are not allowed, such as California, Montana, North Dakota, and Oklahoma.)

How to Hire an Employee?

Efficiently hiring an employee involves several key steps:

1. Research Pay and Position:
   Clearly outline job responsibilities, hours, pay, benefits, and time off.
2. Job Listing:
   Craft a detailed job posting that includes expectations and compensation.
3. Review Applications:
   Filter applications based on essential requirements.
4. Interview Process:
   Conduct interviews to assess candidates' fit for the company.
5. Reference Checks:
   Verify applicants through reference checks.
6. Prepare Offer Letter:
   Draft a comprehensive offer letter for the selected candidate.

How To Write an Employment Contract

Here’s a step-by-step to writing an employment contract:

Step 1 – Initial Details

a) List the date this agreement is being made.

b) Provide the full name of the employee and the full name of the company or individual employing the employee.

c) Provide the employee’s job title or position.

d) Choose whether the employee will be employed part or full-time.

e) Describe the job duties the employee will be responsible for.

An example of where to include initial details in our employment contract template

Step 2 – Term and Probationary Period

a) Choose whether the employment will be fixed, at will, or probationary:

• Fixed term if there is a specific end date to the agreement and employment.
• At will, unless there is no end date to the agreement, so unless otherwise stated, either party can terminate the contract without notice.

b) Choose whether or not there will be a trial period where an employee may be released if they cannot meet the job requirements. This typically lasts for three to six months.

An example of where to include employment term and probation period details in our template.

What is a Typical Probationary Period for a New Employee?

Step 3 – Compensation

a) List the employee’s salary here and how the payment will accumulate.

b) Check the frequency at which the employee’s salary will be paid.

An example of where to include compensation details in our employment agreement template.

Step 4 – Overtime and Additional Compensation

a) If the employee will receive overtime compensation, choose this option and list how much will be paid and describe what frequency constitutes overtime.

b) Choose this option if the employee will not receive overtime pay. Be sure to check federal and state laws to determine whether or not overtime is mandatory in your situation.

c) Choose this option and explain any commission received for services rendered under this agreement.

d) Choose this option and explain any other commissions received for services rendered under this agreement.

An example of where to include overtime and additional compensation details in our employment contract template.

Step 5 – Expenses and Work Location

a) Check if the employer will reimburse an employee for the expense(s).

b) Check all expenses that the employer will reimburse the employee for.

c) List the full address where the employee will perform their duties under this agreement.

d) List the required work days and hours.

Where to detail expenses and work location information in our employment agreement template.

Step 6 – Time Off

a) This option lists specific paid time off days allowed.

b) Choose this option to default to state and local law requirements for paid time off.

c) This option lists a certain number of paid sick days allowed.

d) Choose this option if the employee is not provided any sick leave.

e) This option lists a certain number of paid personal days allowed.

f) Choose this option if employees are not provided paid personal leave days.

g) List any other benefits provided.

h) Check if there is an employee handbook to refer to that will provide additional information about the employer’s leave policy.

Where to detail time off information in our employment contract template.

Step 7 – Disability

a) List how many days that employee cannot perform their duties that constitute consideration for disability benefits.

b) Specify the amount of compensation due to the employee.

A screenshot of where to detail disability details in our employment contract template.

Step 8 – Non-Compete and Confidentiality

a) Initial here if you want to include this clause. Otherwise, cross it out.

b) Choose if the non-compete will remain in force for the entirety of the employment agreement and will end when the agreement is terminated or if the non-compete will stay in power beyond the termination of employment and list how many months it will be will remain in force beyond termination.

c) Check which activities are prohibited by the non-compete.

d) Choose this option if the employee is not exposed to sensitive information unknown to the general public.

e) Choose this option if the employee can access competitively sensitive information unknown to the general public.

Step 9 – Termination

a) Choose this if the employer can terminate the employment without cause.

b) Check if notice by the employer to the employee is required and list how many days’ notice is required.

c) Choose this option if the employee may terminate this agreement at any time but with written notice. List how many days’ notice is required.

d) Choose this option if the employee can terminate this employment agreement anytime and for any reason.

Step 10 – Severance

a) Choose this if the employee will be entitled to severance if terminated for reasons other than cause.

b) Choose this option if the employee is not entitled to severance after termination.

c) Check all applicable documents that set forth the rights and obligations of the parties.

An example of where to outline severance details in our employment contract template.

Step 11 – Miscellaneous

a) List the state laws governing this agreement.

b) Choose this if litigation is a dispute resolution option and list the state where the dispute will be resolved.

c) Choose this if parties agree that the prevailing party will be entitled to recover its expenses incurred with any action taken regarding this agreement.

d) Choose arbitration if disputes will be resolved by a neutral third party selected by the parties, who evaluate the argument and determines a settlement. The decision by the arbitrator is final and binding.

e) Choose mediation if disputes will be resolved by using a mediator, a neutral third party selected by the parties who tries to facilitate a compromise and agreement. The decision by the mediator is non-binding.

f) Choose this option if you wish to mediate first, and then if a resolution is not found, the arbitration will be pursued.

Crafting a meticulous employment contract and following a systematic hiring process not only ensures legal compliance but also sets the foundation for a successful employer-employee relationship. Whether you are an employer drafting an agreement or an employee reviewing one, understanding the nuances of employment contracts is crucial for a harmonious work environment.

Frequently Asked Questions

What is a Contract of Employment and why are alternative terms used?

A Contract of Employment is a formalized legal document between an employer and employee. It is often referred to as an Employment Agreement, Work Contract, Job Contract, or Contract of Service interchangeably.

How can employers ensure a smooth and legally sound hiring process?

Employers can follow a systematic hiring process, including researching pay and position, crafting detailed job listings, reviewing applications, conducting interviews, checking references, and preparing comprehensive offer letters for selected candidates.

Why is it advisable to draft and maintain employment contracts?

Drafting and maintaining employment contracts offer legal protection to both employers and employees. In case of disputes, both parties can refer to the agreed-upon terms, preventing mistreatment and legal repercussions. It establishes clear expectations, responsibilities, and standards for the employment relationship.

Employment Contract Sample