5 Key Components of an Employment Contract
If you run a business of any size, the odds are that you will hire at least one employee at some point. There is a lot to consider as you grow and hire, and understanding the crucial components of an employment contract is essential.
At Angie Avard Turner Law, LLC, our goal is to protect what you create. One of the most important ways to do that is through legally binding contracts with your employees and contractors. Whether you are hiring your first employee or your hundredth, we can help you decide what needs to go into a contract. Reserve your time today to discuss this with Angie.
What Is an Employment Contract? Who Needs One?
As a solopreneur or small business owner, you may think having formal employment contracts with employees is a bit over the top. Some entrepreneurs believe a contract is something only larger companies with lots of employees have.
Many small business owners initially grow their companies by hiring people they already know or via recommendations from their network. This situation can make them feel that a contract is not needed because familiarity can breed trust. However, a legal agreement is important for every hire, and including the right components of an employment contract is crucial.
A contract protects you, your business, and the employee or contractor. You can’t afford to skip over this step of the hiring process, even when the person is a friend or family member. Actually, that level of relationship makes a contract even more essential, if that’s possible.
Crucial Components of an Employment Contract
An employment contract is a legally binding agreement between an employer and an employee that clearly outlines the relationship and expectations for both parties. There should also be contracts in place when you hire a 1099 contractor for your business. Contracts vary depending on the company, industry, and job. But five key components need to be in every worker’s agreement.
1. Crystal Clear Job Description
Your employment contracts must be transparent about what the role requires of the employee or contractor. At a minimum, this agreement should include the following information:
Full-Time or Part-Time
List of Duties and Expected Benchmarks
Name/Position of Supervisor
Names/Positions this Role Oversees
Length of Contract
Expected Location - Home, Remote, Hybrid
Evaluation and Review Procedures
2. Worker Classification
Before diving into drafting the employment contract, consider what type of worker you need to hire. Will they be working on a specific short-term project that requires specialized expertise? This would probably best fit a 1099 or contract consultant. Or do you need to be able to dictate their work hours and location? If so, you need to hire a W2 employee.
There are financial and legal repercussions if you misclassify a 1099 contractor. So it's essential to understand the difference between a W2 and a 1099. Once you determine this piece, be sure your contract is clear about the classification.
3. Compensation and Benefits
Let’s be honest. The salary is usually the number one thing people look at when combing through job postings. Other benefits are probably number two. So it makes sense that compensation is one of the most significant components of an employment contract.
Additional benefits are a major draw for attracting high-quality talent, but they also need to be clear in the contract. This information must be in every agreement. As I’ve said before, money makes people get weird, y’all!
Here are the most vital parts to clarify in your contracts:
Financial Compensation - Whether the pay is hourly, an annual salary, or project-based, you need to make the amount clear. If the role requires meeting specific benchmarks to receive any payments, this must be in the contract. Generally, that situation comes into play for things like bonuses or incentives. If any compensation is in stocks, that must be clearly stated.
Retirement Plans - Your contract should clarify when an employee is eligible and how they go about enrolling in the retirement plan, if available.
Medical Benefits - State if these are available and when. Your contract should also explain what the employee needs to do to enroll.
Vacation, Sick Days, PTO - Be sure your contract outlines how many days off are available, when an employee can use them, and whether or not they are paid days. Also, clarify the protocol for requesting time off for various reasons, such as how far in advance they must ask for vacation days. The agreement should also state if the accrued days carry over to the following year.
4. Confidentiality, Privacy, and Responsibility
Even if your business does not involve a proprietary process or a secret sauce, you have data and information that deserves protection. Your business intellectual property could be at risk, along with client or customer data.
Adding confidentiality and non-compete clauses to your employment agreement helps protect that data during the worker’s tenure with you. It can also cover their behavior, to an extent, after they leave your company. Alternatively, some companies use a separate non-disclosure agreement in addition to the employment contract.
Social media is a powerful tool for connecting with potential clients, so you may also want to consider rules and expectations around how employees interact online.
5. Termination and Severance
You might be thinking, “Isn’t it a little early in the process to be thinking about firing an employee?” Truthfully, it’s not too early. Most employment contracts end at some point for any number of reasons, so it's important to consider what you expect when it's time to part ways.
Your employment contract should include termination criteria that align with your state's laws and federal regulations. I cannot state this enough: be sure to have an attorney on board when drafting your contract. Employees have a lot of rights and protections, and your agreement must follow the law, especially when it comes to termination.
Employment agreements also need to outline the employee’s responsibilities when they are ready to move on from your company. Clarify all of the following:
How much notice must they offer?
Who do they turn in their resignation to when it’s time?
Does their notice need to be in writing?
Are they eligible to take advantage of any unused vacation days?
If a severance package is part of the contract, be clear about the conditions for receiving it and how much it will be.
Employment Contracts Are Not the Time for DIY
Protecting your company requires diligence and awareness. And although many entrepreneurs love the DIY mentality for a lot of the tasks in their businesses, employment contracts aren’t the place for it. There is far too much at stake.
For support in drafting an employment contract, reach out to us at Angie Avard Turner Law, LLC. We serve clients around the nation from our offices in Pelham, Saint Simons Island, and Atlanta, GA. Reserve a time to discuss your legal needs today, or consider subscribing to one of our Law Lab subscription services.