What to include in an employment agreement

The terms of employment are important whether you are a small business owner or a soon-to-be employee. Like most contracts, employment agreements often include state-specific provisions. That said, there are universal elements that should be negotiated and included in an employment agreement regardless of where you call home. Here are the some of the major employment terms:

Employment Classification. Before going through the effort of drafting a thorough employment contract, is the person you are hiring even an employee? Deciding if the new hire is an employee or contractor is the first and one of the most important steps in the hiring process. If it is determined that your new hire is a contractor then an independent contractor agreement should be used instead of an employment agreement.

Compensation and Benefits. Often one of the most uncomfortable terms to negotiate, compensation is also likely the most important. Specifics like how often you will get paid, whether it will be hourly or salary, and if you are eligible for bonuses and raises must be discussed and listed in the employment agreement. Other non-salary compensation such as stock options and equity grants might be relevant especially if you’re working for a big company or a startup. Benefits such as medical insurance, vacation and retirement funding must be paid attention to as well.

Term and Termination. Nowadays, the term for an employment agreement is usually “at-will” meaning an employer can terminate the arrangement for any non-discriminatory reason. At-will employment usually means unpredictable job security. The types of employees who typically have more rights are those protected by a union or in an executive role. Regardless of the type of position, an employment agreement will often include steps that employees must take before resigning, such as the amount of notice that must be given and the materials that must be returned to your employer.

Protection from Liability. Depending on the employee’s position, liability protection may be important. An employee may want to negotiate protection mechanisms which cover the employee’s conduct within the scope of his/her employment. This is often embodied in an indemnification clause, which limits the liability of an employee from being personally sued. It often includes the advancement of legal fees from the company as well.

Confidentiality. Sensitive information regarding an employer’s inner workings are often shared with employees. This knowledge can cause problems when an employee is terminated or resigns. That’s why it’s important to include a confidentiality clause (also known as a non-disclosure agreement) in an employment agreement. A quality confidentiality provision should define exactly what is considered confidential, or a “trade secret,” and what is not. Depending on the line of business and the state that you are located in, this provision may have a time limit or run indefinitely.

IP Ownership. Similar to trade secrets, companies expect that any inventions or business ideas developed by the employee related to the company’s business during the employment period will be owned by the company. IP ownership is typically accounted for in an invention assignment clause, which shifts ownership from the employee to the company. This clause can be controversial as it often includes inventions that were worked on by employees with the employers’ tools or at the workplace despite the employee working on the side project during off-hours or the invention being unrelated to the person’s employment position.

Post-Employment Limitations. Employers will often include a non-compete and a non-solicitation clause in an employment agreement. A non-compete agreement restricts a former employee from opening up a competing business or working for a direct competitor. Importantly, this clause must be tailored to your specific state as some states limit the duration and geographic territory of a non-compete. A non-solicitation clause restricts former employees from “poaching” former colleagues and/or customers of the company.

As you can see, an employment agreement includes many considerations. Need an agreement drafted or reviewed? Use our Get Started Form to talk with an attorney.