Employee contracts, also known as employment agreements, contracts of employment, employment contracts, and job contracts, are written legal documents that spell out binding terms between the employee and his or her employer. This document lists the rights, responsibilities, and obligations of both parties. It covers both W-2 and 1099 contract employees, and it is typically used when hiring high-level managers, freelancers, and short-term contract employees.

Sometimes these are formal written documents both parties sign. More frequently, employment agreements are implied by verbal statements or actions, through employee handbooks, or policies adopted while the employee is working for the employer. In some states, simply saying, "You'll be here as long as you sell above budget" is a binding employee contract.

Employment contracts are most frequently used to prove the employer's right to fire the employee is limited.

What Is Included in an Employee Contract?

An employee contract will differ based on whether the employee is working in the public or in the private sector. It typically includes:

  • Length of employment
  • Employee responsibilities
  • Benefits such as a 401K or health insurance
  • Sick day and vacation policies
  • Grounds for termination
  • Noncompeting agreements
  • Nondisclosure agreements
  • Ownership agreements
  • Assignment clauses (patents claimed by the employee during his or her employment belong to the company)
  • Methods of dispute resolution
  • Commissions
  • Bonuses
  • Profit sharing
  • Stock options

The contract also clarifies if the employee will be paid as a W-2 or as a 1099.

What Not to Include in an Employee Contract

While the contract can include the job duration, this is not recommended, as it can minimize your right to terminate the employee even in an employment-at-will state. Once you put a time frame in the contract, you establish an implied contract. You will be forced to pay the employee for the entire duration, even if he or she is terminated.

You may not want to include grounds for termination as well. This can minimize your rights even in an employment-at-will state. If you are sued for wrongful firing, the court may interpret this to mean an employee can only be fired with cause, such as behavioral issues.

Benefits and Compensation

Employee compensation should be included in an employee contract. This will establish what their pay is and if it is weekly, biweekly, or monthly. Dollar amount of bonuses and under what conditions they are acquired should also be listed. Health insurance benefits, if any, should be included. Also, paid time off, whether it is sick leave, vacation, or death of a family member, should be spelled out. All other benefits, such as life insurance or a 401K, should also be listed.

Advantages of Employee Contracts

One of the main advantages of employee contracts is the ability to keep your best employees. For example, you may want to limit the reasons they can leave the company.

Another advantage is the ability to require your employee to keep your trade secrets quiet. A confidentiality agreement would cover this, as would a noncompete agreement.

Having an employee contract can give you more control over how your workers do their jobs. If you list specific standards, you may have an easier time reprimanding or terminating an employee who is not meeting those standards.

Disadvantages of Employee Contracts

A good employee may be highly sought by companies offering a number of employee contracts, so you have to offer the best deal. Remember, an employee contract also applies to you — you have certain obligations. If the employee is not working out or your business's needs change, you may have to renegotiate the contract.

Another disadvantage is that once you sign the contract, you are bound to a "covenant of good faith and fair dealing." That means you have to act in good faith and deal with the employee fairly. If you violate this covenant, not only have you broken the contract, you have acted in bad faith and violated your legal duties, which may lead to further legal consequences.

Offer Letters Versus Employee Contracts

A job offer letter is an informal employee contract used in the private sector. This usually contains only the bare basics:

  • Benefits
  • Compensation
  • Paid time off
  • Title
  • Relationship reporting

Depending on the position, the employee may be required to sign nondisclosure and noncompete agreements, which are usually nonnegotiable signed documents.

Offer letters are extended to prospective employees, while employee contracts are extended to current employees. An offer letter is not as detailed as an employee contract, and it is not legally binding.

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