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Understanding Employment Contracts: Key Components and Legal Considerations


— February 4, 2025

Whether you’re drafting your first employment contract or refining your current templates, staying informed is key.


Employment contracts can be the foundation of a strong working relationship between employers and employees. These documents not only outline the terms of employment but also set clear expectations, ensuring both parties are protected. Whether you are an attorney drafting a contract, a business owner hiring your next team member, or an employee lining up your next opportunity, understanding these contracts is essential.

This article will explore the key components of employment contracts, discuss how they protect all parties involved, and highlight common pitfalls and how to avoid them.

What Is an Employment Contract?

An employment contract is a legally binding agreement between an employer and an employee that alters the default at-will employment and defines the terms of their working relationship. It outlines mutual obligations, such as job responsibilities, salary, benefits, confidentiality, and termination procedures. A well-drafted employment contract ensures clarity and security for employers and employees by spelling out these details.

While contracts can vary depending on the nature of the job, industry, or current national and state policies they generally include similar foundational elements. Mastering these contract components will empower you to create and review agreements with confidence.

Key Components of an Employment Contract

A well-drafted contract can safeguard the legal rights and interests of both parties, minimizing the risk of disputes and misunderstandings. Here are some key elements that should be included in every employment contract.   

1. Job Title and Job Description 

Every employment contract should outline the specific role of the hired employee. This includes their official title and a summary of job responsibilities. This section aids in the elimination of ambiguity about what is expected from the employee.

For example, if hiring a marketing manager, the contract should specify tasks such as leading campaigns, analyzing performance metrics, and managing a team. Clear job descriptions benefit employers and employees by minimizing misunderstandings and providing a framework for performance expectations.

2. Compensation and Benefits 

The agreement should detail how the employee will be compensated, including:

  • Salary or hourly rate;
  • Payment schedule (e.g., weekly, bi-weekly, monthly);
  • Bonuses or commission structures, if applicable; and
  • Benefits such as health insurance, retirement plans, or paid time off.

Being specific in this section protects employees from potential misunderstandings while setting expectations for employers about their financial obligations.

3. Working Hours and Location 

Flexibility in modern workplaces has made this an increasingly vital section. Specify working hours, whether the position is remote, on-site, or hybrid, and any expected availability outside usual business hours. For example, a contract might include employees working 9 AM–6 PM Monday to Friday but must be available for occasional late-night meetings with international clients.

4. Probation Period (if applicable) 

Some employers stipulate a probationary period, especially for new hires. Typically lasting 3–6 months, this period allows the company to evaluate the employee’s performance before confirming permanent employment. It is important to be clear about evaluation criteria and what happens once the probation period ends.

5. Confidentiality and Non-Disclosure Clauses 

Employers often include confidentiality or non-disclosure agreements (NDAs) within employment contracts to protect sensitive company information. These clauses prohibit employees from sharing trade secrets, proprietary information, and/or client lists with unauthorized parties. Precisely drafted confidentiality clauses help businesses safeguard critical assets in competitive industries.

6. Termination and Notice Period 

The termination clause is a critical component of any employment contract. It outlines:

  • Situations in which the contract terminates, such as resignation, termination for cause, or layoffs;
  • Required notice period for both employer and employee; and
  • Severance packages or other post-employment benefits (if provided).

This section is pivotal for avoiding disputes during employee offboarding. For example, if an employer requires thirty (30) days’ notice from employees resigning, this must be stated explicitly.

7. Non-Compete and Non-Solicitation Clauses 

Non-compete clauses prevent employees from joining competitors or starting competing businesses during and after employment. On the other hand, non-solicitation clauses prevent an employee from poaching co-workers or clients if they leave the company. However, these clauses must be reasonable in scope and duration to withstand legal scrutiny. Overly restrictive clauses may not survive legal challenges. 

8. Dispute Resolution and Governing Law 

To minimize the risk of disputes, a contract should clearly define a dispute resolution clause. This clause should detail the chosen methods for resolving conflicts, such as mediation or arbitration, and identify the governing laws that will be applied. For instance, a company headquartered in California might specify that California  laws apply to any disputes, even if the employee works remotely from another state.

How Employment Contracts Protect Both Parties

A strong employment contract benefits employers and employees equally. Here’s how:

  • Clarity: Prevents ambiguity or assumptions by defining key details upfront.
  • Security: Provides employees with assurance on salary, benefits, and other perks, while giving employers protections such as NDAs.
  • Legal Backup: Serves as a legally binding document if disputes arise, offering both parties a clear point of reference during a conflict.
  • Performance Expectations: Allocates benchmarks for accountability and performance, reducing the likelihood of misunderstandings.

When contracts are carefully drafted, they create a foundation of trust and transparency in the workplace.

Common Pitfalls to Avoid in Employment Contracts

Woman holding sign that says Read the Fine Print; image by Geralt, via Pixabay.com.
Woman holding sign that says Read the Fine Print; image by Geralt, via Pixabay.com.

Despite their importance, many employment contracts contain errors or omissions that can lead to disagreements or legal action such as the recent Murray v. UBS Securities, LLC case. Here are some common pitfalls and tips to avoid time in court:

1. Vague or Missing Terms 

Ambiguity in contracts can be a ticking time bomb. For example, contracts that don’t specify termination procedures may lead to disputes down the road. Clear and concise terms ensure both parties understand their rights and obligations, minimizing confusion and potential disputes.

2. Overly Restrictive Clauses 

Non-compete or non-solicitation clauses that are unreasonably restrictive can be deemed unenforceable. To comply with relevant laws and ensure enforceability, these clauses must be carefully limited in duration, scope, and geographic area. For instance, a five (5) year non-compete clause that bars an ex-employee from working across an entire industry might not hold up in court.

3. Failure to Update Contracts 

Laws and regulations surrounding employment can change. For example, updates to equal pay laws or overtime rules could affect existing contracts. Regularly review and update your contracts to comply with the latest legal standards.

4. Ignoring Local Labor Laws 

Employment laws differ across federal, state, and even local levels. Continuous review of local employment laws is essential to ensure all contracts comply with relevant regional regulations and avoid potential legal complications.

5. Verbally Agreed, But Not Written 

If it’s not in writing, it didn’t happen. While oral agreements are technically enforceable, they may be much more difficult to enforce and create significant issues if a dispute arises. Verbal agreements, such as promises for raises or additional vacation days, should always be documented to ensure enforceability and minimize ambiguities.

Building Stronger Workplace Relationships Through Contracts

An employment contract is more than just a legal formality—it’s a tool for setting expectations, fostering trust, and protecting the interests of employers and employees alike. By ensuring that your contracts are clearly written, legally compliant, and tailored to the needs of both parties, you create a strong foundation for success. If you’re unsure how to draft or review an employment contract, consider consulting an experienced employment attorney. The insights they provide will give you peace of mind and confidence in your agreements.

Whether you’re drafting your first employment contract or refining your current templates, staying informed is key. Take the time to address common pitfalls and ensure all components are clear and comprehensive. Your effort today will save you challenges tomorrow—and help maintain harmony in your workplace.

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