Key Components of an Employment Contract

Employment contracts are a key component to business operations and workforce management, as they allow employers to define the terms and conditions of the employment relationship with certain employees. Despite their importance, all too often employers don’t seek legal counsel when cobbling together provisions they think should be included in the contract and employees are too eager to sign on the dotted line and being their new job.

Here are several essential elements employers should include in any employment contract and employees should carefully review and consider before signing:

Job description and responsibilities

A detailed job description is the cornerstone of an effective employment contract. It should clearly state the employee’s job title and outline the essential functions, duties, and responsibilities the employee is expected to perform. A well-drafted job description helps set clear expectations and will become a reference point for future performance evaluations.

Employment duration and status

Specify whether the employment is “at will” or for a fixed term, full-time or part-time, and whether the position is exempt or non-exempt under state and federal wage-and-hour protections. These designations can affect benefits eligibility, among other things.

Compensation and benefits

An employment contract must also detail the compensation package, including salary or hourly wage, commissions, and bonuses. If deferred compensation is part of the total compensation package, the deferred compensation plan (such as an incentive options plan, a restricted stock option plan, or the like) should be referenced in the contract and attached as an exhibit to the contract.

The contract should also outline any benefits to which the employee is or may be entitled or for which the employee is or may become eligible, such as health insurance, retirement plans, life insurance, paid time off, and other perks.

Working hours, overtime, and leave

Define the employee’s expected working hours, including start and end times, and any flexibility included in the schedule. Address policies on overtime compensation and specify leave entitlements, including vacation, sick leave, maternity or paternity leave, and any other types of leave your organization offers.

Restrictive Covenants

Include confidentiality and non-disclosure provisions that prohibit the employee from disclosing trade secrets and other confidential and proprietary information during and after employment.

Non-compete and non-solicit covenants can also be included to prevent employees from working for a competitor or starting a competing company, or from soliciting clients, after the employee’s employment ends. However, the scope and enforceability of such restrictions can vary significantly by jurisdiction and must be drafted carefully – to narrowly protect legitimate business interests – to ensure that can they withstand a legal challenge.

Termination conditions

Clearly outline the conditions under which either party can terminate the contract, including any applicable notice periods and any grounds for immediate termination.

Governing Law and Forum Selection

The employment contract should also specify which state’s law will govern the interpretation of the contract and, relatedly, which forum – state court, federal court, or arbitration – will decide any disputes between the parties. There are advantages and disadvantages, pros and cons, to dispute resolution in courts and in arbitration, and which one works best for any particular employer, in any particular industry, with respect to any particular employee or class of employees can vary.

Employment contracts are rarely a one-size-fits-all proposition. Indeed, different industries require different language and provisions. An employment contract for a physician with a private medical group, for instance, will be much different from a contract between a professional services provider and its chief financial officer. Both of these contracts will also be much different from the one prepared for a national or regional sales manager working under a monthly draw and commission schedule.

We help employers and employees alike navigate the careful drafting and negotiation of employment contracts. If you have any questions, or just want to connect, call us today or subscribe to our e-newsletter for more information!


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