Drafting Effective Employment Contracts for Your Small Business

Hiring a few employees can mean the difference between scaling up and feeling overwhelmed. However, a good working relationship with your employees is crucial if you want to make the most of things. Employment contracts ensure everyone is on the same page. An excellent contract protects you and your staff legally and prevents conflict. 

Why Do You Need an Employment Contract?

An employment contract is a crucial aspect of business growth. A solid one will outline the expectations your small business has for the worker and the details of their job. It also outlines your legal responsibilities to pay the employee in a timely manner. A solid contract covers everything from working hours to what happens when the relationship is severed.

What to Include in Your Contract

Knowing you need a contract is a great start, but ensuring yours meets your needs as a small-business owner while being fair to the employee is a tall order. You can find templates online, but they may not fully cover all the aspects of the role you’re hiring for. Ensuring everything will stand up in a court of law, if needed, is also a crucial consideration in drafting a contract. 

1. Compliance Elements

A fair contract will protect your small-business assets, cover what you should do as the employer and explain what’s expected of the employee. The U.S. Equal Employment Opportunity Commission outlines a few things all companies should keep in mind when drafting effective employment contracts. 

Employees have a few rights, including: 

• Not being discriminated against based on race, sex, religion or disability. 
• Receiving equal pay for equal work. 
• A right to reasonable accommodations for special needs and if required by law. 

They can also expect that any personal information they share will be kept confidential and they won't be punished for reporting discrimination. You must also consider state or local ordinances involving fair employment practices. 

2. Job Title and Responsibilities

A new hire may not fully understand the scope of an open position. In some instances, you might be hiring for several different roles, and the applicant may be confused about which one you’re offering.

Outlining the job title and the scope of responsibilities is a must to avoid misunderstandings and disgruntled employees. If your business is new, you may not fully know what you need the staff member to do. It’s OK to outline responsibilities in general and revisit them at a later date. Typically, you might renew the contract once a year, offering a raise and other perks and redefining the role. 

3. Solid Agreement

Whenever possible, it’s best to have everything in writing to avoid future legal issues. The employee and business owner can also refer back to the contract if any confusion arises over pay, time off or responsibilities. 

Does every contract need to be in writing? A verbal contract can be binding but may be better suited for simple transactions, such as someone building a website for you. For the agreement to be enforceable, it must have three elements:

• Offer 
• Acceptance 
• Consideration

The person must agree to the terms of the offer, and you must show they are working within those parameters. Obviously, a verbal agreement has a lot of drawbacks that could harm your chances of enforcing it in court. It’s always better to get things in writing so you have proof of intent and eliminate ambiguity. 

4. Compensation

Any agreement should also outline the full compensation package for your employees. Include items such as:

• Hourly rate or salary
• Paid days off, including sick leave, vacations and holidays
• Benefits and expected employee contribution for things such as health and life insurance
• 401(k) plan and any matching figures
• Educational benefits, such as X dollars a year to spend on college courses or conferences
• Other perks, such as free lunch Fridays or an on-site gym

The compensation part of the contract is an opportunity to sell yourself to the potential employee. In highly competitive fields, such as data science, which will see much higher growth than other sectors through 2029, you’ll want to ensure your pay rate is in line with other companies in your area. 

5. Termination Conditions

As a small-business owner, you’d like a little notice if someone is leaving. Employees also want that buffer so they have time to find a new position. Outside of situations like embezzlement or someone being a danger to others, you should offer some idea of what the worker can expect should you need to terminate the agreement.

• Will you offer a severance package?
• What happens if employment ends before the contract is over?
• What is the notice period for both parties? Two weeks is standard, but in at-will states, you may or may not get notice.
• What are the grounds for dismissal? This can include trying to pilfer clients for an outside endeavor or moonlighting with the competition. If an employee fails to fulfill their role as outlined in the agreement, what is the process before letting them go? How many warnings do they get? Is there additional training to try to get them up to par?

The more detailed you can be, the easier any separation will go. You can’t force someone to be loyal to your company. Most small-business owners divide jobs so no one person has all the secrets to running the company or the ability to take your client lists to a competitor.

6. Dispute Resolution

Statista estimates around 3.5 billion people employed globally in 2024. As businesses look for workers outside their borders and specialized skills that might not be readily available in more rural locations, employees might be from anywhere in the world.

You’ll need to first figure out the laws of each country where you hire people. International laws might apply and dispute resolution can become a nightmare if you don’t have a plan in place. Many employers include a clause that any legal disputes must happen in the court where the business is headquartered.

7. Confidentiality and Noncompete

A lot of employers include noncompete clauses in their contracts about keeping information confidential. However, states are nixing them as irrelevant. An agreement that states someone can’t work for or with an expansive list of clients may be deemed null and void by a court.

The Federal Trade Commission recently ruled that noncompetes are banned nationwide. Its stated goal is to protect the freedom of workers to change jobs and to foster innovation. It estimates the change will increase new business formation by 2.7% each year. The rule is still in the courts and may or may not come to fruition, but it’s good to stay aware of the FTC’s statement. 

You should still outline your expectations for employees to give them a sense of the loyalty you expect as you help them build experience and a career. It isn’t illegal to put the noncompete agreement in the contract. However, understand that taking someone to court for violating it may be a waste of your time and money. Instead, protect your digital assets by separating client lists and never allowing one person too much control over your proprietary information. 

Pitfalls to Avoid

There are a few things to avoid when drafting an employment agreement.

1. Spending Thousands of Dollars

Hiring a lawyer to draft a contract can be costly. You have other options, such as hiring a third-party human resources brand to manage things. They’ll likely have boilerplate contracts they can customize to your needs.

You could also use an online template, tweak it and have a lawyer review it for loopholes or potential issues, which will take less time and money. 

2. Using Complex Language

The more complicated the language is, the more ambiguous some clauses are. Stick to clear, simple language that nonlegal people can easily understand. You’ll avoid misunderstandings, and your contract will be more enforceable in a court of law. 

3. Leaving Out Specifics

It’s easy to forget to put the little details in a contract, but they can create havoc on your relationship with your workers. If you need them to work certain hours, outline them in the agreement with language that the times and days are subject to change.

If you expect a certain role to have Saturday hours once a month, include the details in the agreement. The worker will have a better idea of what to expect, and you’ll avoid employee churn when a job isn’t what they thought it might be. 

4. Forgetting to Document Changes

When making changes, write them out and review them with your employee. Get them and a manager to initial the adjustment. 

There are many reasons a contract might change slightly throughout the year. Perhaps someone is doing such a good job that you give them a raise early. You should change the language of the contract to reflect the additional funds.

If an employee gets a promotion, needs to slightly change their work hours due to family commitments or gets rewarded with additional vacation days, you’ll want to note the change and gather signatures. A paper trail can protect you down the line. 

Do You Really Need a Contract?

Depending on the size of your business, how many employees you hire and other factors, you may or may not need a written contract. It’s always best to err on the side of caution and get things in writing. However, if you are unsure, you should consult an HR professional or employment contract attorney to understand the pros and cons of your particular situation.