What Important Clauses Should You Include in an Employment Contract?

Employee contracts have common elements and specialty clauses depending on their purpose. As an employer, knowing what to include and what to leave out in an employee contract is crucially important. This article reviews some of the most frequent clauses.

Employment contract templates are available online, or you can opt to draft your own from scratch. Whatever you decide, consider working with an employment law attorney to make sure you comply with state and federal laws.

Foundational Terms of Employment

Every written employment contract should start by defining the basic terms of the role. These clauses form the core of the agreement and outline the fundamental parameters of the job.

Scope of Employment

The agreement should include the start date, term of employment, and end date (if any).

At-Will Employment Clause

The employment agreement can include a clause stating that the employment relationship is “at will,” meaning either party can end it for any reason with no notice.

Compensation

The new hire‘s initial salary or hourly pay rate should always be part of the contract.

Benefits

Include employee benefits and the start date for when employees may receive them. For instance, if the employer offers health insurance after the probationary period, the contract should give the approximate date these benefits will begin. This also applies to the accrual of other benefits, like sick days and vacation time. If the contract doesn’t include benefit details, define them clearly in your employee handbook.

Protective and Restrictive Covenants

Employers often include specific clauses to protect their intellectual property, client relationships, and confidential business information, especially after an employee leaves the company. Let’s take a look at these important additions.

Confidentiality Clause or Non-Disclosure Agreement (NDA)

A non-disclosure or confidentiality clause prohibits employees from sharing sensitive information such as client lists, proprietary information, and business data. Employers in competitive markets use these clauses to protect trade secrets and confidential information. Many states, such as California, New York, and New Jersey, ban confidentiality clauses that hide acts of workplace sexual harassment, discrimination, or retaliation.

Employers can attach a non-disclosure agreement to an employee agreement during their employment. A confidentiality agreement may outlast the term of employment.

Non-Compete Clause

A non-compete clause restricts the employee from working for a rival company or a similar business after they leave their current employer. Some states will not enforce noncompetition clauses. Those that do will enforce only clauses that are narrowly written and limited to a specific term or geographic area.

A related term is the non-solicitation clause. This prevents former employees from taking customers from the employer when they leave the company. For instance, an attorney leaving a law firm would violate a non-solicitation clause if they called clients to their new firm.

An “exclusivity” clause prevents workers from seeking employment while working for the company. Courts frown on exclusivity clauses unless the employee is highly compensated or the clause is very narrowly drawn. These clauses can prevent executives from serving on other corporate boards.

Intellectual Property Ownership Clause

Sometimes known as an “assignment” clause, this section makes anything the employee develops during work hours the employer’s property. The employee assigns all ownership rights to the company and waives any right to royalties, patents, or trademarks.

Intellectual property covers anything the employee creates during their term of employment. It’s often used in the tech industry, where disputes arise between programmers and software companies.

Procedural and Dispute Resolution Clauses

A well-drafted contract anticipates potential disagreements and clearly outlines the legal framework for ending the employment relationship or resolving disputes. Taking the time to confirm you’ve covered all possible angles can save you time and money down the road.

Termination Clause

A standard part of any employment contract is the termination clause. The clause should state:

• If either party must give notice
• If there is a disciplinary policy
• If there are any grounds for immediate termination

It should also identify how many of the terms must be met to trigger the clause.

Arbitration Clause

Many contracts contain arbitration clauses. Arbitration and mediation are dispute-resolution methods used instead of litigation. An arbitration clause determines when to use mediation or arbitration, who has the right to choose the arbitrator, and whether the decision will be binding on the parties. The Equal Employment Opportunity Commission (EEOC) states that even with an arbitration clause, employees may still file individual claims against employers for federal and state law violations.

Jurisdiction or Choice of Law Clause

In general, companies can be sued in their state of incorporation or where they have their “principal place of business.” For small businesses, this is usually the same state. A jurisdiction clause states that the contract will be governed and interpreted by the laws of the state of incorporation.

A jurisdiction clause means that litigation will occur in the state mentioned in the contract. This helps prevent confusion about which state’s laws apply if a legal dispute arises later, especially if the employee lives in a different state.

Specialty Clauses for Specific Roles

Depending on the employee’s role and level of responsibility, you may need to include more specialized clauses to define their authority or obligations.

Best-Effort Clause

Best-effort clauses are typically seen in professional contracts and consulting agreements. “Best efforts” in an employment contract means something beyond daily work or reasonable effort. For example, a legal firm might consider its best effort as someone going above and beyond to secure a merger. Best-effort clauses are not usually necessary for ordinary employment agreements.

Agency Clause

If an employee can act on the employer’s behalf, their contract should include an “agency” clause. This stand-alone clause creates a unique agency relationship between the employer and the employee. An employee with agency can enter into other contracts or transact business on behalf of the employer. If an employee is not an agent of the company, their contract does not need an agency clause.

Get Legal Help Drafting Your Employment Contract

An employment contract should outline the relationship between employer and employee. The business owner‘s goal should be a clear, legal document crafted for each employee’s job. Contact a local employment law attorney to ensure that your employment contract is legal and protects you, your business, and your employees.