Write an Employment Contract

An employment contract legally defines the relationship between the employers and the employees. Both parties have to sign and agree to the contract before the employee can start working. Writing an employment contract is a necessary part of hiring someone to work for you. A well-written contract clarifies expectations and protects you in case of termination, resignation, or wage disputes. It replaces any prior verbal agreements between you and the employee.

Steps

Preparing to Write the Employment Contract

1. Search for form contracts. Each industry uses different types of contracts. Look online to see if you can find sample contracts used by business like yours. These can help guide you.
2. Take out your job description. If you drafted a job description to advertise for the position, take it out now. It will serve as the skeleton of your employment contract. Look it over and see if you forgot to list essential duties.
   • If you didn’t use a job description, take an hour to sit down and write out the duties you want your employee to perform. Be as specific as possible. Assign a weight to each task: the more time you expect an employee to spend on a duty, the greater its weight.
   • The job description also should have included the target wage. You should consider whether or not you are paying a fair rate. If you don’t know, search online to see standard wages. Always be sure to pick a wage that your business can afford to pay.
3. Identify proprietary information your company owns. Trade secrets, patents, and copyrighted material have enormous value. This information is “proprietary” because only you have it, not the general public. You will need to think about whether the employee will have access to this information.
   • If you identify proprietary information such as patents or trade secrets, you can draft a separate non-disclosure agreement for the employee to sign. The non-disclosure agreement will outline what the employee can do with this information.
4. Consider what happens after the employee leaves. Do you want to limit your employee’s ability to work for a competitor? For what length of time?
   • Identify competitors in the same city or county as you. You may want to limit your employee’s ability to go work for them.
   • Also factor in how specialized the employee’s knowledge is. If you are hiring an unskilled employee to provide basic receptionist or janitorial duties, then your competitors would probably not gain an edge in hiring the employee away from you. In this case, you might not want to bother with trying to limit the employee’s ability to work for a competitor.
5. Consult with an attorney. A contract cannot require an employee to do anything illegal. It might be helpful to meet with an attorney before drafting to check about legal limitations on your contract.

Drafting the Employment Contract

1. Title your document. You can give it a simple title, e.g., “Employment Agreement.”
2. Identify the parties. Begin by including the name of your company and the name of the employee. Specify where your business is located.
   • Also note how the parties will be referred to in the rest of the contract. For example, “This Agreement is between Acme Corp. (“the Employer”) and Susan Smith (“the Employee”)…”
3. Explain the benefit and consideration. All contracts require that both parties give up something in exchange for something else. Without benefit and consideration, there is no contract. Here is some sample language:
   • “Whereas the Employer desires to obtain the benefit of the services of the Employee, and the Employee desires to render such services on the terms and conditions set forth. In consideration of the promises and other good and valuable consideration, the parties agree as follows:”
4. Specify how long the contract is valid. If you want the contract to be in force for a set period of time, specify the dates. Otherwise, the contract will continue for the life of the employment.
5. Describe the duties of the position. Using your job description as a template, flesh out the main duties of the job. Assign a percentage as best you can.
   • For example, an administrative assistant might spend 50% of his time answering the phone and greeting people, 20% filing and performing records management, 20% taking dictation, and 10% performing “other administrative duties.”
   • For the sake of clarity, you should list the job duties using an outline form.
   • Also establish guidelines for who the employee should approach with questions or problems that arise during the course of employment.
6. Explain how compensation is calculated. Will the employee be paid hourly? Will she be salaried? Or will payment be based on commission? You should have discussed this with the job candidate at the interview. Now memorialize it in writing.
   • Specify how overtime will be paid. Include how overtime pay is calculated. For example, sometimes employees will get time and a half (1.5 their base pay). Other employees are paid straight base pay.
   • Also explain how the employee will be paid on public holidays. For example, some employers pay time and half for work on public holidays.
   • If overtime is not allowed, be sure to include specific language to this effect. Make sure there is no confusion on this issue.
   • Also add a clause explaining when compensation will be re-evaluated. Including this language does not commit you to giving a raise. Rather, it simply clarifies when and how you will consider one.
7. Explain how compensation will be paid. Compensation is regularly paid by check, direct deposit, or through PayPal.
8. List benefits. If you are offering vacation time, sick leave, and health or dental insurance, describe those benefits here. Specify how the employee will qualify for each.
   • For example, employees sometimes accrue vacation and sick leave for each pay period. If you want to give an employee 80 hours vacation time a year, then the employee might earn a set number of hours with each monthly paycheck. Divide 80 by 12, and the employee will earn 6.67 hours a month.
   • If the employee must contribute to a benefit (such as health insurance), specify the amount and how the employee must pay. Often, the money is simply deducted from the paycheck.
9. Explain how performance will be reviewed. If you wish to review at set intervals, specify those in the contract.
   • Also be sure to clarify what consequences flow from the evaluation. For example, raises or bonuses may depend on a positive evaluation. Be sure to explain this in detail.
10. Limit the employee’s use of proprietary information. If your business uses trade secrets or patents, you want to clarify that the employee cannot share this information with others.
    • Also, if you are hiring someone to create original works that could be patented or copyrighted, clearly define who will own the intellectual property rights to that work. You might assume that, as the employer, you do; but the law can sometimes be unclear.
    • Additionally, if you are giving your new employee the responsibility to handle your social media accounts (such as Facebook, Twitter, Pinterest, etc.), then you should note that in your employment agreement and assert ownership over the work product.
11. Place limits on use of company email. Some workers may see company email as a personal account. If you want to limit use of company email, then specify that it is only to be used for work purposes.
    • You can include a similar limitation on use of the company’s computers, laptops, mobile phones, fax machines, and telephones.
12. Clarify termination procedure. The law will assume that all employment is “at will,” meaning that the employee can be dismissed for any reason. If you want to limit termination to “just cause,” then you will need to lay out the reasons that can lead to termination.
    • Leaving a contract as “at will” employment is often the easiest.
    • The contract can also set out policies for suspension. Include examples of conduct that would warrant suspension, as well as the method of notifying the employee. Also include the length of the suspension or reserve the right to come up with a reasonable suspension based on the seriousness of the employee’s conduct.
13. Define non-competition terms. You should explain any limitations on the employee’s ability to work for competitors after she leaves your employment. The law strictly limits your ability to contract for non-competition guarantees.
    • In many states, a non-compete clause is flat-out illegal. They are illegal in North Dakota and Oklahoma.
    • Where allowed, they must be “reasonably limited” in duration and geographic scope.
    • An indefinite time limitation will not be “reasonable,” but a two-year limit often is.
    • Similarly, the geographic scope cannot be unlimited. However, courts have upheld a limitation on competition within a 100 mile radius of a former place of employment.
    • Check your state law on what qualifies as a “reasonable” non-compete clause. This will vary by state.
14. Specify which state law controls the contract. If your business is located in a specific state, then list that state.
15. Describe the sexual harassment policy. If your policy is detailed, you can reference any manual or hand-out created. At a minimum, you should clarify what types of conduct is prohibited, as well as who the employee should report to.
    • A sample sexual harassment clause may read: “No manager or supervisor shall threaten or imply that an employee’s refusal to submit to sexual advances will adversely affect that person’s employment, compensation, advancement, or any other term or condition of employment. Sexual joking, lewd pictures, and any conduct that tends to make employees of one gender ‘sex objects’ are prohibited. Employees who have complaints should report such complaints to their supervisor. If this person is the cause of the offending conduct, then the employee may report this matter directly to [specify various officials, such as Director of Human Resources or the President of the company.]”
16. Include legal boilerplate. Each contract should include language specifying that the contract is complete and that it merges prior discussions between the parties, oral and written.
    • Sample language could include: “This Agreement contains the entire agreement between the parties, superseding in all respects any oral or written agreements or understandings pertaining to the employment of the Employee by the Employer and shall be amended or modified only by written instrument signed by both of the parties.”
17. Include signature line and date. Identify each party underneath the signature line.

Revising the Contract

1. Ask an attorney to look over the document. If you did not get an attorney’s input at the planning stage, you may want one to look over the draft that you have.
2. Share the contract with a family member. Ask him to read the contract and point out anything that is unclear or unfair. If a contract appears unfair, your prospective employee might be offended and not want to work for you.
   • An example of an unfair contract is a clause demanding that disputes be resolved only through expensive arbitration.
3. Go over the contract with the employee. Before the employee starts to work for you, take an hour to go over the contract. Prod the employee to raise any concerns she might have.
   • If the prospective employee has questions about vague language, be prepared to go back and re-draft the contract. Do not expect that your verbal agreement will trump the written contract.
   • Handshakes are a good way to close the deal on a used car. They are not acceptable methods of starting an employment relationship.
4. Give yourself enough time. If you do have to redraft, leave yourself enough time to finish the contract before the employee starts working. Don’t have the employee start working without a contract.

Tips

• Always avoid vague language. Unclear contract terms open the door for legal disputes.
• Keep a copy for yourself and give your employee a copy.

Warnings

• Understand an employment contact is a legally binding contract between two parties. It is recommended to have an attorney review your employment contract before it is signed.

Related Articles

• Write Contracts
• Use a Non Compete Agreement
• Know When to Give an Employee a Written Warning
• Resolve a Conflict at Work
• Be a Better Trainer for Your Employees
• Fire an Employee

Sources and Citations

See also

• Create a Productive Working Environment
• Be Appointed to a Board of Directors
• Become a Better and Effective Team Leader
• Set Up an Employee Assistance Program (EAP)
• Retain Good Employees
• Be an Artist Manager
• Build a Management Team
• Use an In Basket
• Write an Employee Handbook
• Plan an Employee Retreat

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