Employment Agreement

What is an employment agreement?

An employment agreement, sometimes called a work agreement, is a document used to hire someone to do work in exchange for monetary compensation. This forms the basis of an employment relationship between an employer and an employee.
Employment agreements allow both employers and employees to be protected in case there is a disagreement later on about something that may have been unclear between the parties. To get further information about the details that should be considered before creating the document, please refer to the guide Important Considerations for your Employment Agreement.

What is the difference between an employment agreement and a service agreement?

The main difference between these two contracts is the nature of the relationship created between the parties. Using an employment agreement creates an employee and employer relationship between the parties. The employer exerts much more control than in a service agreement, dictating the employee's hours, tax withholdings, and pay schedule. The employee typically receives employment benefits and their work is broader.

With a service agreement, the entity providing services is usually an external service provider. They control their own work schedule, finances, and taxes. They are not entitles to receive employment benefits, such as health insurance or a retirement account. The work they do is typically on one specific project or service.

For more information on this, please refer to the guide What's the Difference Between an Employee and an Independent Contractor.

What is the difference between an employment agreement and an employee offer letter?

Though both documents are used when bringing on a new employee, they are used at different points in the process. The employee offer letter is used by the employer to let the potential employee that they are being offered a job. It may contain details of the benefits that come with the job, but does not include the full terms of the agreement.

An employment agreement is used once the employee has accepted the position and has negotiated the terms of their agreement with the employer. The employment agreement outlines the full scope of the responsibilities that come with the job.

Is it mandatory to have an employment agreement?

No, it is not mandatory to have an employee agreement. However, it is highly advisable as it makes sure that both the employee and employer have a clear idea of the scope of the employee's position responsibilities and the terms under which these will happen. It acts as protection for one or both of the parties in case there is a problem or future dispute related to the arrangement.

What is a "probationary period"?

The probationary period is a period of time during which the employee will settle in at work and the parties will decide if the employment relationship is a good fit before completely committing.

What is a "non-compete clause"?

A non-compete clause restricts the employee from working for competitors or starting a competing business in the same industry. This restriction is typically limited to a specific geographic location. It remains in force for a specified period of time after the employee leaves the employer's company.

What is not allowed in an employment agreement?

Although non-compete clauses are allowed to be in employment agreements, non-compete clauses that are judged by a court to be too restrictive, either in geographic scope or time frame, may be determined to be unenforceable. If the employment agreement contains a non-compete clause, the following elements should be considered:

• Scope of the clause: It's best to narrowly define the scope of the non-compete to a very specific industry or competitor. The employee should still be able to find work after leaving the employer.
• Geographic limitations: Non-competes must be reasonable in their geographic limitations. The employee must not be so restricted by the geographic limitations that they need to move to another state or country to find employment.
• Time limitations: The amount of time the employee is restricted by the non-compete clause should be limited. Most non-compete clauses that last for longer than one year are considered unenforceable in most states.

For more information about the enforceability of non-compete clauses, please refer to the guide "What is the Enforceability of Non-Competes in my State?"

What are the prerequisites of an employment agreement?

Before the signing of the employment agreement, a formal offer of employment should be made to the employee. This is typically done using an employment offer letter.

Who is involved in an employment agreement?

An employment agreement is made between an employee and an employer. The employee is an individual person that must be 18 years of age or older. The employer can be either an individual person or a company.

What can the duration of an employment agreement be?

The duration of an employment agreement can vary depending on the nature of the job and the needs of the employer. The most common term of employment is known as at-will employment. In this arrangement, there is no specified end date to the employment relationship and can be terminated by either the employer or employee at any time.

What should be done once the employment agreement is finished?

When the employment agreement is written and all the relevant information has been included, the document should be printed out and signed by both the employee and employer. Both parties should keep a copy of the document for their own reference in case of future misunderstanding or dispute.

What must an employment agreement include?

A valid employment agreement must include at least the following mandatory clauses:

• Identifying information: The employment agreement includes the name, address, and contact information for all the involved parties, including the employee and the employer.
• Position details: The employment agreement specifies the name of the position the employee is being hired to fill and the scope of their duties in the course of their employment.
• Compensation: The employment agreement outlines the compensation the employee will receive in exchange for working with the employer and when and how that compensation will be given to them.
• Vacation and holidays: The employment agreement will describe any of the vacations and holidays for which the employee will be eligible.
• Term and termination: The employment agreement will specify the length of time the employee will be working for the employer, whether that be for a fixed or indefinite period of time. The agreement will also describe the circumstances under which the employee may be terminated from their position.
• Confidentiality: The employment agreement includes a basic clause forbidding the employee from sharing any trade secrets or any of the employer's other confidential information. For a more comprehensive confidentiality agreement, please refer to the Non-Disclosure Agreement.

In addition to the above mandatory clauses, the following information may also be included:

• Probationary period: The employer has the option of requiring the employee to work for a set probationary period, during which their performance will be evaluated before the full terms of the agreement take effect.
• Bonuses and benefits: The employment agreement can describe any bonuses or benefits, such as health insurance or retirement accounts, that the employee may receive.

What laws are applicable to employment agreements?

Employment and employment agreements in the United States are subject to both federal laws and specific state laws. For example, the federal Fair Labor Standards Act (FLSA) covers wages and overtime pay for certain sectors. State laws, however, may define and restrict how employers can protect themselves if an employee tries to take their clients or use confidential information. The FLSA also sets wage, hours worked, and safety requirements for minors (individuals under age 18) working in jobs covered by the statute. The rules vary depending upon the particular age of the minor and the particular job involved. As a general rule, the FLSA sets 14 years old as the minimum age for employment, and limits the number of hours worked by minors under the age of 16.

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