Employment Contract Essentials: What Every Employer and Employee Needs to Know

Employment Contract Essentials: What Every Employer and Employee Needs to Know

Whether you are hiring your first employee or starting a new job, the employment contract sets the foundation of the working relationship. A well-drafted contract protects both parties — and can prevent expensive legal disputes down the road.

What Is an Employment Contract?

An employment contract is a legally binding agreement between an employer and an employee that outlines the terms and conditions of employment. It can be written, verbal, or implied, but written contracts are always the safest option.

Key Clauses Every Employment Contract Should Include

1. Job Title and Description Clearly define the employee's role, responsibilities, and who they report to. Vague job descriptions lead to scope creep and disputes over duties.

2. Compensation and Benefits Specify the exact salary or hourly rate, pay frequency, bonus structure, and benefits (health insurance, PTO, retirement contributions). Ambiguity here is one of the top causes of workplace disputes.

3. Start Date and Work Hours State the official start date, standard working hours, and any expectations around overtime or remote work.

4. Duration of Employment Is the position permanent, temporary, or for a fixed term? This determines what protections apply if the employment ends.

5. At-Will vs. Cause Termination Most U.S. states are "at-will" employment states, meaning either party can end the relationship at any time, for any non-discriminatory reason. If your contract departs from this — requiring "cause" for termination — state it clearly.

6. Confidentiality Clause Employees often have access to sensitive business information. A confidentiality clause prevents them from sharing trade secrets, client lists, or proprietary data with competitors.

7. Non-Compete Provisions (Where Enforceable) Non-compete agreements restrict employees from working for competitors after leaving. Enforceability varies dramatically by state — California effectively bans them, while others enforce them broadly.

8. Intellectual Property Assignment Any work created by the employee during their employment — code, designs, content — should be owned by the employer. A clear IP assignment clause prevents future disputes.

9. Dispute Resolution Should disputes be handled through arbitration, mediation, or the courts? Many employers now include mandatory arbitration clauses.

10. Termination and Severance Define the notice period required from both sides, exit interview processes, and any severance pay offered.

Common Mistakes Employers Make

• Using generic templates without customizing for their state's laws
• Forgetting to have employees sign before their first day of work
• Not updating contracts when job duties, pay, or terms change
• Including unenforceable clauses (like non-competes in California)

What Employees Should Watch Out For

• Overly broad non-compete clauses that limit future career options
• "Clawback" provisions that require repayment of bonuses under certain conditions
• Mandatory arbitration that waives your right to sue the employer in court
• Vague performance review or termination criteria

At-Will Employment and Exceptions

Even in at-will states, employers cannot terminate employees for illegal reasons:

• Discrimination: Race, sex, age, religion, disability
• Retaliation: Filing a workers' compensation claim, reporting workplace violations (whistleblowing)
• Breach of Contract: If a written or oral contract specifies a term or requires cause for termination

Getting It Right

A well-drafted employment contract is worth far more than the time it takes to create one. Use iRunDocs to generate a professional, customizable employment contract in minutes — complete with all the essential clauses tailored to your state and industry.