Understanding and Creating Effective Employment Agreements

When bringing on new talent to your company, having a proper employment agreement is crucial for both your business and your employees. A well-crafted employment agreement sets clear expectations, protects your business interests, and helps avoid misunderstandings that could lead to costly disputes down the road.

To help streamline this process, I’ve created this Employment Agreement Generator tool, which allows you to quickly create a customized employment agreement tailored to your specific needs. In this guide, I’ll walk you through how to use the tool effectively and explain the key legal considerations you should keep in mind when creating employment agreements.

Why Employment Agreements Matter

Employment agreements are legally binding contracts that define the relationship between employers and employees. While not required by law in every situation, they serve several important functions:

They clarify expectations regarding job duties, compensation, and other terms of employment. They protect your company’s confidential information and intellectual property. They address what happens when employment ends, including any continuing obligations. They can help establish that your employees are truly employees (not independent contractors) for tax and legal purposes. And they create a paper trail that can help resolve disputes later.

Without a proper employment agreement, you may face uncertainty, misunderstandings, and even litigation if the employment relationship sours. Having clear, written terms benefits both parties by providing structure and clarity.

How to Use the Employment Agreement Generator

The generator breaks down the employment agreement creation process into 10 manageable sections. Simply work through each tab, making selections and providing information that best fits your situation:

Parties

Start by entering the legal name of your company, your state of incorporation, and your company’s address. Then enter the employee’s full name and address. The effective date will be the date when the agreement takes effect (typically the employee’s start date).

Position

Define the employee’s role by entering their job title, selecting the employment type (full-time, part-time, temporary, or intern), department, who they’ll report to, and their exempt/non-exempt status. You should also include a detailed job description that outlines their primary responsibilities.

Term & Hours

Choose whether the employment is at-will (can be terminated by either party at any time), fixed-term (for a specific duration), indefinite (continuing until terminated), or project-based. Specify work hours, schedule, and whether the work will be performed on-site, remotely, or in a hybrid arrangement.

Compensation

Select the compensation structure (salary, hourly, commission-based, or mixed), and enter the amount. Specify pay frequency, overtime eligibility, and benefits package. The benefits details field will automatically populate based on your selection but can be customized further.

Duties

Detail the employee’s primary duties and responsibilities, performance standards, and whether there will be a probationary period. The probationary period details will update based on your selection.

Confidentiality

Choose the scope of confidentiality protection needed (standard, extensive, or limited) and how long the confidentiality obligations will last after employment ends. The tool will automatically populate appropriate confidential information definitions and confidentiality obligations based on your selections.

IP Rights

Determine who will own intellectual property created during employment, whether the employer will have full ownership, the employee will retain certain IP, or there will be mixed ownership. Specify whether the employee has any prior inventions they wish to exclude from assignment.

Termination

Select the termination type (at-will, for cause only, or contractual), notice period requirements, and severance provisions. The termination terms will update based on your selections.

Restrictive Covenants

Decide whether to include non-compete and non-solicitation provisions, and for how long these restrictions should apply after employment ends. The tool will generate appropriate terms based on your selections, including cautionary language about enforceability in states like California.

Miscellaneous

Choose the governing law (state), dispute resolution method (litigation, arbitration, or mediation followed by arbitration), and review the additional terms. You can customize these as needed.

After completing all sections, click “Preview Agreement” to review the entire document. From there, you can copy the text or make further adjustments as needed.

Key Legal Considerations for Different Sections

At-Will Employment vs. Fixed Term

Most employment in the United States is “at-will,” meaning either party can terminate the relationship at any time, with or without cause (subject to anti-discrimination laws). If you select fixed-term employment, be aware that this may create an implied promise of employment for the entire term, potentially limiting your ability to terminate the employee without cause before the term ends.

Exempt vs. Non-Exempt Status

The classification of employees as exempt or non-exempt has significant implications for overtime pay requirements under the Fair Labor Standards Act (FLSA). Misclassification can lead to significant liability for unpaid overtime, so choose carefully based on the employee’s actual job duties and compensation, not just their title.

Confidentiality Provisions

These provisions are essential for protecting your business’s confidential information, but they need to be reasonable in scope to be enforceable. The standard protection option should be sufficient for most companies, while the extensive option provides more comprehensive protection for businesses with highly sensitive information.

Intellectual Property Clauses

If your employees will be creating intellectual property as part of their job duties, it’s crucial to clearly establish ownership rights. In most employment contexts, selecting “All IP Owned by Employer” is appropriate, but be aware that some states (like California) have limitations on the scope of IP assignment.

Non-Compete and Non-Solicitation Provisions

These provisions can help protect your business from competition by former employees, but enforceability varies significantly by state. California, for example, generally prohibits non-compete agreements except in very limited circumstances. Even in states that allow them, restrictive covenants must be reasonable in terms of duration, geographic scope, and the activities restricted.

Governing Law and Dispute Resolution

The state law that governs the agreement can significantly impact how terms are interpreted and enforced. Generally, you should select the state where the employee will primarily work. For dispute resolution, arbitration is often faster and less expensive than litigation, but it typically provides fewer procedural protections for employees.

Customizing Agreements for Different Types of Employees

Executives and Senior Management

For executives and high-level employees, consider:

• More comprehensive confidentiality and IP protections
• Stronger non-compete provisions (where allowed by law)
• More detailed termination provisions, including severance packages
• Equity or bonus provisions tied to performance metrics

Technical and Creative Employees

For employees who will create intellectual property:

• Ensure robust IP assignment provisions
• Consider whether to allow them to retain rights to certain side projects
• Include detailed obligations regarding documentation of inventions
• Address open source contributions if relevant

Sales Employees

For sales positions:

• Clearly define commission structures and payment timing
• Include appropriate customer non-solicitation provisions
• Consider whether garden leave provisions are appropriate
• Specify ownership of client relationships and contact information

Remote Employees

For remote workers:

• Include detailed expectations about work hours and availability
• Address equipment provisions and expense reimbursement
• Consider jurisdiction issues if they live in a different state
• Include specific performance measurement criteria

Practical Tips for Implementing Employment Agreements

Present the Agreement Early

Provide the employment agreement during the offer stage or at least before the employee’s first day. This avoids the awkwardness of surprising them with a contract after they’ve already started working.

Explain Key Terms

Take time to walk through important provisions with new employees. This creates goodwill and ensures they understand their obligations, particularly regarding confidentiality, IP ownership, and any post-employment restrictions.

Allow Time for Review

Give employees reasonable time to review the agreement and consult with an attorney if they wish. Pressuring employees to sign immediately may raise questions about enforceability later.

Update Agreements Periodically

Employment relationships evolve over time. If an employee’s role changes significantly, consider updating their employment agreement to reflect their new responsibilities, compensation, and any new restrictive covenants that may be appropriate.

Be Consistent But Flexible

While it’s beneficial to have a standard template, don’t apply exactly the same terms to every employee regardless of role. Tailor agreements based on factors like level of responsibility, access to confidential information, and role-specific concerns.

Document Changes Properly

If you need to modify an employment agreement after it’s been signed, create a formal amendment rather than relying on verbal agreements or email exchanges. The generator includes an option for creating amendments to existing agreements.

Frequently Asked Questions

Do I need an employment agreement for every employee?

While not legally required for most positions, having a written employment agreement is generally beneficial. At minimum, key employees with access to confidential information or those in leadership roles should have formal agreements. For other positions, an offer letter combined with a comprehensive employee handbook may be sufficient.

How enforceable are non-compete agreements?

Enforceability varies significantly by state. In California, non-competes are generally void except in very limited circumstances such as the sale of a business. Even in states that allow them, courts will only enforce reasonable restrictions that protect legitimate business interests without unduly preventing an employee from earning a living. The geographic scope, duration, and scope of restricted activities must all be reasonable under the circumstances.

What happens if I misclassify an employee as exempt when they should be non-exempt?

Misclassification can lead to significant liability for unpaid overtime, plus potential penalties and interest. The Department of Labor and state agencies can investigate misclassification, and employees can bring lawsuits seeking back pay. Classification should be based on job duties and salary level, not title or preferences. When in doubt, consult with an employment attorney about proper classification.

Can I prohibit an employee from working for a competitor forever?

Generally, no. Courts typically won’t enforce perpetual non-compete restrictions. The duration must be reasonable—often 1-2 years at most, depending on the industry and position. Some states have specific statutory limitations on duration. The more restrictive the covenant, the more likely a court would find it unenforceable.

What should I do if an employee refuses to sign the employment agreement?

First, understand their concerns and see if you can address them. Some provisions may be negotiable, particularly for highly sought-after employees. If they’re concerned about restrictive covenants, you might consider narrowing the scope or duration. If they still refuse, you’ll need to decide whether to proceed with the employment relationship without a signed agreement (which may create risks) or rescind the offer. In most at-will employment states, you can make signing the agreement a condition of employment.

How do employment agreements interact with employee handbooks?

Employment agreements and employee handbooks serve different but complementary purposes. The agreement establishes the specific terms of employment for an individual employee, while the handbook sets forth general policies applicable to all employees. It’s important that the two don’t contradict each other. Your employment agreement should reference the handbook and clarify that employees are expected to comply with all company policies, which may be updated from time to time.

Do I need to have an attorney review my employment agreement even if I use this generator?

While this generator creates a solid starting point customized to your needs, having an attorney review the final agreement is always recommended, especially for higher-level positions or in situations involving complex compensation structures, equity grants, or highly sensitive intellectual property. Employment laws vary by state and are constantly evolving, so legal review helps ensure your agreement reflects current law and addresses your specific situation.

Creating clear, comprehensive employment agreements is an investment in your company’s future. By taking the time to carefully consider and document the terms of employment, you can set the stage for productive working relationships and protect your business from unnecessary risks and disputes.

If you have specific questions about employment agreements for your business or need assistance with complex employment matters, I’m available for consultation. Use the “Schedule Legal Consultation” button to set up a call.