The Essential Components Every Employment Contract Should Include

Written by: Jesse White

February 21, 2020

10 minute read

A new job offer is an incredibly exciting event. Whether this new opportunity allows you to leave your current job or call it quits on the stressful and tedious process of job hunting, you’re likely ready and willing to sign on the dotted line and get started. When either a hiring manager or HR representative sends over an employment contract to sign, it may be tempting to sign on the dotted line without a second thought. But without doing your due diligence, you could sign away substantial rights extending beyond your time with the company.

Before you sign your name, let’s take a closer look at employment contracts and the provisions they may include.

What are employment contracts?

An employment contract is a legal document between the employer and employee that defines the rights and responsibilities of each party. Each party signs the document voluntarily and deliberately, making it legally binding on both sides.

A contract involves two parties agreeing to provide something of value to one another. In this case, the employer agrees to pay the employee in exchange for specific work-related tasks. But the agreement does not become an actual contract until one side formally makes the offer and that offer is accepted. The employer prepares the agreement, usually based on an employment contract template, and the employee agrees to the terms as a condition of his or her employment.

There is no standard employment contract. The terms and provisions vary widely based on the nature of the company’s business, the company’s internal policies, and the position offered. For example, an employment contract for a senior-level executive will likely be far more extensive than an agreement for an entry-level position.

Despite the many variations, some fundamental provisions typically appear in most employment contracts. Here are a few of the most standard clauses you can expect to find in an employment contract.

Typical Employment Contract Components - Infographic

Terms of employment

Terms of employment generally refer to the length of time of the job you accept. For many positions, the term of employment is indefinite, but other short-term positions often state clear beginning and end dates.

Employee responsibilities

The only way to know whether you are fulfilling your duties as an employee is to know precisely what those duties entail. Typical employee responsibilities include the primary location and hours of employment, a description of the services or work the employee will provide or perform, who the employee reports to within the management structure, and any applicable requirements to maintain the employee’s professional license(s).

Depending on your position, the list of responsibilities in your employment contract can vary in specificity but should be clear enough to know whether or not you are meeting them. One of the quickest ways to falter at a new job is to misinterpret what management expects from you. Just as important, you need to know what tasks fall outside your area of responsibility so you don’t get stuck with work outside the scope of your position.

Performance expectations and requirements

In many jobs, especially in fields such as sales, companies set clear-cut performance goals they expect employees to meet. In addition to the bare minimum requirements, you may also be expected to achieve other specific goals. For example, your primary job responsibility may be to perform certain tasks, but you may also be expected to bring new clients into the business as well. Or you may be expected to participate in charitable or community service projects the company undertakes, with the idea being that positive public relations are integral to the company’s overall success.

Whether your company measures your expectations and requirements in dollars and cents or other tangible specifications, you need to know precisely what results your employer expects from you at the outset. For example, if you are brought in to improve a specific area within the company, your division could still lose money in the short-term, regardless of how well you perform. But if you come up with new ideas that will eventually right the ship, you could exceed expectations even though the balance sheet says otherwise. Failing to establish these parameters as part of your employment contract could make it difficult for you to justify a raise or promotion—or to simply retain your job.

Employee benefits and premiums

Your benefits package is often equally, if not more important, than your salary. A standard benefits package for a full-time employee will likely include health insurance, life insurance, disability, and retirement plan contributions. Some companies also offer stock options and profit-sharing as part of their benefits package.

Understanding the extent of your benefits as an employee is critical. For example, if the health insurance plan has an annual deductible, that’s money you will pay out of pocket every year. Are dental and vision coverage included? What are the copays for doctor visits? What limits are there for out-of-network care? These are essential questions that will impact you and your family if you choose from one of your company’s health plans, so you need to know the answers up front.

What is typically included in an employment benefits package - infographic

Employment absence

Although it may not seem important at the outset, not all days off are created equally. Companies structure their employee absence policies differently. Some give their employees a set number of sick days, personal days, and vacation time per year, while others give employees a block of unspecified paid time off (also known as PTO) days per year.

If you are one of those people who rarely miss work, you need to find out if unused days off accumulate and roll over for future use. Some companies allow you to roll over a specific number of days per year, some enable you to roll over days per quarter, and some don’t let you roll over any days at all. Alternatively, some companies will pay you for unused days. Make sure to nail down the specifics about time off before you start.

Dispute resolution

Let’s face it, not every working relationship ends with cake in the break room and a gold watch. If a conflict arises between you and your employer, a dispute resolution clause will dictate the procedure by which that conflict will be handled.

There are three likely options for resolving disputes. For minor issues or conflicts within lower levels of management, the company may have an in-house policy to address and resolve them, at least as a preliminary first step. For more serious disputes, the company will either utilize an arbitration process to keep the matter out of court or indicate a specific jurisdiction where all legal claims must be filed and litigated.

It should also be noted that signing away your rights to certain legal actions against the company to an arbitration clause can be a legal gray area. For example, the right to file a sexual harassment claim against your employer may be limited by an arbitration clause. The benefit for employers is that claims are resolved in secret, protecting the company from negative publicity. Arbitration also circumvents the possibility of a large jury verdict against an employer that may result from litigation.

Non-disclosure agreements

Also known as an NDA, a non-disclosure agreement restricts the employee from revealing sensitive or valuable information about the company. Common examples of such information include business data, client lists, internal processes and procedures, and trade secrets.

Non-disclosure agreements can vary in length. If there is a finite time limit listed in the employment contract, the provision will likely be enforceable. But if the contract is silent regarding the length of the NDA, then it is presumed to be indefinite, which is a formal way of saying it could last forever. Courts tend to uphold non-disclosure agreements so long as the terms are reasonable and clearly understood by the parties at the outset. This potential for long-term consequences makes it crucial to scrutinize the language very carefully to make sure you do not limit your ability to find another job in the same field.

What is a non-compete clause in an employment contract?

Formally known as a covenant not to compete, a non-compete clause is contract language restricting the employee from competing against his or her former company. The idea is to prevent an employee from learning the processes and trade secrets of their employer, taking the company’s client list, and then opening their own business across the street.

Much like non-disclosure agreements, non-compete clauses are generally enforceable so long as they are reasonable. While it may be reasonable to restrict a former employee from opening a competing business within 5 miles of the employer, it would be much more difficult to restrict that employee from opening their own business within 5,000 miles. An effective non-compete clause should also be limited to direct competition. If you work at an auto repair shop and leave to open an ice cream parlor a mile down the road, your former employer will likely have a tough time making the argument that your ice cream parlor is in direct competition with their shop, regardless of whether you had a non-compete clause or not.

Ownership agreements

The concept of an ownership agreement is simple: Anything you produce while working for the company belongs to the company. If you work on an assembly line, there’s nothing to think about—the company owns whatever finished product rolls off the line.

Where it gets much trickier is when the employee devises a product, process, or idea of enormous value. Even if the company ultimately makes billions of dollars from that employee’s work, the employee is still only entitled to the compensation outlined in the employment contract. These employer protections can extend all the way to include intellectual property that has not yet been fully realized. For instance, a Texas court ruled that a former employee of Alcatel (a mobile phone company) must turn over a software algorithm to his employer, even though it only existed in the employee’s mind as a theoretical concept at the time of his employment.

Employment opportunity limitations

While the reasons may vary, when an employee leaves a job, the last thing they want is for their soon-to-be-former employer to interfere with their potential opportunities. One way to avoid this nightmare is to include an employment opportunity limitations clause in your employment agreement. For instance, if you leave your company for a new opportunity, your previous employer would be restricted from contacting the new employer and disparaging you to interfere with your new job.

Simply stated, the clause means that your current employer cannot interfere with you seeking a position with a new company. This protection can include situations where you are terminated or leave on your own accord. But be aware that these contract provisions can be problematic because leaving a job can sometimes be a messy process with hard feelings on one or both sides.

Termination clauses

Your employment contract should clearly lay out all the possible reasons for termination. One of the key benefits of an employment contract is that it guarantees employees certain protections, even if you are in an “at-will” state where employers can fire you at any time for any lawful reason. For example, if there were no employment contract in place, your employer may fire you with no legal recourse simply because she doesn’t like the color of your shoes. But for the employee to be adequately protected, the potential grounds for termination must be outlined in clear, unambiguous terms.

Severance terms

When your employment comes to an end, you may be entitled to severance pay, which is compensation and benefits extended to an employee after the term of employment is over.

There are many different scenarios where you may receive severance pay, including layoffs due to downsizing, early retirement incentives, or outsourcing employee duties to a distant location. Sometimes the employer will offer severance pay to an employee who resigns or is fired, with the understanding that the compensation is a show of goodwill that would preempt any unwanted litigation or other repercussions. And while a company can offer severance pay without being contractually obligated to do so, there is little you can do to force their hand when the time comes if you don’t have clear terms in your employment agreement.


Conclusion

When it comes to employment contracts, the devil is in the details. Despite any pressure you may feel to sign on the dotted line, you should never be afraid to take the time to review the contract (perhaps with the help of a legal professional), ask questions, and propose changes as you see fit. Remember, you may really want the job, but the employer wants you to accept the offer and be a happy and productive employee, too. As a result, you may have more bargaining power than you realize to ensure your employment contract is a fair one that will protect your rights and lead to success with your new role.