If you’re a small business owner hiring an employee — maybe your first — you might be confused about what you should include in your employment contract. Here are some of the basic components:
1. Job Title and Description: What are you hiring your employee to do? Though you don’t need to (and shouldn’t) include an exhaustive list of the employee’s tasks, a simple job description will help keep employees accountable when they are not meeting their end of the contract.
2. Salary and Benefits: In most cases, it’s not enough to say “Company X will pay John $40,000.” Will payments be made on a weekly or bi-weekly basis? If you plan to pay the employee in equity (i.e. shares of the company), when will that equity vest? What benefits will the employee receive (e.g. healthcare insurance, vacation days, sick leave)?
3. Term of Employment: How long will the employee work for your company? If you hire an employee “at will,” you won’t need to define the length of the employment term. However, if you hire an employee for a fixed time – say, for one year – you will want to be very clear about the contract renewal process after that term ends. If you continue to employ the person after that year without expressly renewing their contract, many courts will find that you implicitly renewed the contract for the next year.
4. Grounds for Termination: If you hire your employee at-will, you can dismiss them for almost any reason. However, if you do not hire your employee at-will, you will want to be clear about what constitutes “just cause” for termination. This serves two purposes: First, courts will dismiss wrongful termination lawsuits against the company when the company has evidence that the employee met one of the grounds for termination in their contract. Second, by clearly spelling out the grounds for termination in an employment contract, you communicate to employees right from the start what they can and can’t do in the workplace.
5. Confidentiality Agreement: If you want your employees to keep quiet when it comes to trade secrets and other confidential matters, then you should have them sign a confidentiality or non-disclosure agreement. This agreement can be included as part of their employment contract or can be a separately-signed agreement.
6. Assignment Agreement: If your employee invents something using the company’s resources, does the company get to keep that invention? By including an assignment agreement, you make clear that the company belongs anything that your employee invents during the course of his or her employment.
7. Non-Compete Clause: Can your employee work with a competitor while employed by your company? How about after they leave your company? Non-compete agreements, while widely unpopular among employees and generally unenforceable in California, are nonetheless common. They may be incorporated into the primary employment contract or signed as a separate agreement.
8. Dispute Resolution: Many companies include an arbitration clause in their employment contracts, which prevents an employee from filing a suit in court without first going through binding arbitration. Avoiding court can help save on legal fees.
9. Choice of Law: While you certainly want to avoid the courts, you might end up there if the employment relationship turns sour. In the employment contract, you can decide which state’s laws will govern the contract by including a choice of law provision. These provisions help a company predict the outcome of legal disputes based on the state’s employment law.
Being on the hiring end of an employment relationship means it’s your responsibility to make sure that the company has a clear employment contract. As always, it’s a good idea to talk with an attorney, but being familiar with the basics will help you focus that conversation.