Do I Need to Use an Employment Contract?

When someone new joins your team, the last thing you want to do is to smack them with a bunch of legal jargon about your budding working relationship. However, for many employers, that legalese is an essential way to establish and protect that golden employee-employer relationship. Put simply, an employment contract is a written agreement that outlines the bounds of the relationship between you and your employee. It doesn’t matter if your company has five people or 50, we’ll help you decide whether wielding a contract is the right step to take after extending a job offer letter.

Who uses employment contracts?

Well, not everyone. The details of most roles are often talked about in person, and it’s assumed by both parties that reasonable notice will be given when someone leaves on their own or because of the company’s decision. The majority of jobs are called “at-will,” meaning the employment relationship can end without cause. Most likely, you live in a state which allows employers to do this unless the reason falls into retaliation and discrimination territory.

Alternatively, some companies use employment contracts to explain exactly why they can let someone go for cause, which erases that at-will status. As a result, it gives certain employees a deeper sense of job security, because they know they cannot be terminated “at-will.” A lot of roles that require training, like attorneys and physicians, use employment contracts. Often, these careers involve a slew of resources and training classes, so it makes sense for the employer to want to protect everyone involved.

The important question: Do you need to gives new hires employment contracts? It really depends. Contracts can be handy for both parties, but some small businesses decide that using formal agreements is too much of a hassle. In the next section, we’ll walk you through the nuts and bolts of an employment contract, along with advice on whether you need to get one afloat. Depending on the type of roles and the length of service, you may also be legally required to put the agreement in writing. Be sure to consult your state’s laws to confirm.

What’s inside an employment contract?

An employment agreement is a document which outlines the bounds of the relationship between you and your employee. Although they can look different based on their structure and the terms of employment they contain, most basic ones cover the following topics:

  • Job title and job description: What is your new employee’s official title and what job duties are they expected to manage?
  • Compensation: How much will they get paid? Will they have a salary or are they an hourly worker? When will they be paid? Are there bonuses? If so, what is the structure?
  • Employee benefits: Do they receive health insurance? What about financial savings benefits?
  • Paid Time Off (PTO): How much vacation time does your new hire get? Are there any specifics on when they can take the time and how they should notify you? What about sick leave? Check your state’s laws on what is mandatory to provide.
  • Employment type and duration of employment: Are they an independent contractor or a full-blown employee? Is this part-time or full-time employment? Is there an end date when the contract will terminate, or does it automatically renew? This correlates to the different types of employment contracts, which include:
At-will contractsEmployment can end without cause or notice.
Permanent part-time contractsEmployment has no end date and requires cause for termination.
Permanent full-time contractsEmployment has no end date and requires cause for termination.
Fixed-term contractsEmployment ends on a specified end date.
  • Probationary period: Is there one? For what period of time?
  • Confidentiality requirements: Will your new hire be handling sensitive and confidential information that you want to keep safe?
  • Intellectual property protection: Is your employee’s work considered your intellectual property or theirs?
  • A non-solicitation and non-compete clause: If your new hire leaves, do you have any rules about whether they can take clients or if they have to stop engaging in your type of business for a certain amount of time? You may choose to add clauses about this in the employment contract or create a separate non-compete agreement. (Restrictive covenants are not enforceable in California, so also check your state laws.)
  • Termination of employment information: If you decide to fire your new hire, do you need to take any specific steps? If they decide to quit, do you want a specific notice period? Do you want to maintain the at-will employment nature of your relationship?
  • Dispute resolution: This would cover arbitration by a neutral party to render a decision in the case of a dispute.

As you can see, contract terms tend to turn into comprehensive listicles of the rights and responsibilities of both employee and employer. Now that you know what they cover, let’s talk about whether you might actually need one.

While it’s always a good idea to set out everything about your relationship in writing, there aren’t typically hard and fast requirements to have a formal agreement in place. Here a few situations where it would be a huge mistake not to skip this particular human resources step:

You really need an employment contract if…

1. You’re in an industry with a lot of confidentiality needs

If your space contains mountains of trade secrets or confidential formulations, you will likely want to get your hands on an employment contract and a confidentiality agreement, aka a non-disclosure agreement (NDA). This will give you room to outline exactly what your employee must keep confidential along with any repercussions if they spill the beans.

2. Your specific company produces a lot of intellectual property

Do you create a lot of intellectual property, like products, music, or art? If that’s the case, you’ll want an employment contract to clearly spell out who owns what.

3. You’ve invested a lot of resources in your new hire

Let’s say you’ve spent weeks training your new hire. Plus, you also plan to pay for professional development (like continuing legal education for attorneys or paralegals, or skill development classes for marketers). You may want an employment contract to ensure you’ll get some notice if they decide to leave.

4. You want a lot of control over employee responsibilities

Fuzzy duties are no fun. If you want to outline your employee’s duties clearly, put it in writing.

5. You have any doubts about the employee

If you think a potential employee could debate or renegotiate elements of an informal agreement or (gulp) be litigious, it’s good to make sure everything is spelled out. Bottom line, minor disputes can arise with any employee if expectations aren’t clearly defined and written down.

6. You’re legally required to do so

Check both federal and state laws to confirm whether the type of employment you’re offering must be in writing. For example, if you will be employing someone for over a year it must be in writing.

Employment contract templates

Yes, there are some cons to contracts but there are a lot more pros. Having a written employment contract is a great idea in most situations, but it requires time, effort, and organization that a lot of small businesses have a hard time with. But when a dispute arises, having things in writing can make a huge difference.

Do your homework, put together a formal agreement, and pretty soon it’ll be even easier to usher in every new, incredible person to your team. These resources will help you get started:

AlabamaIndianaNebraskaSouth Carolina
AlaskaIowaNevadaSouth Dakota
ArizonaKansasNew HampshireTennessee
ArkansasKentuckyNew JerseyTexas
CaliforniaLouisianaNew MexicoUtah
ColoradoMaineNew YorkVermont
ConnecticutMarylandNorth CarolinaVirginia
DelawareMassachusettsNorth DakotaWashington
FloridaMichiganOhioWashington D.C.
GeorgiaMinnesotaOklahomaWest Virginia
IllinoisMontanaRhode Island

Here is an example of an eForm employment contract for New York.

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