What Should an Employment Agreement Include? A Complete Guide

An employment agreement is a legally binding contract between an employer and an employee that defines the terms, conditions, and expectations of the working relationship. Also called an employment contract, this document covers everything from compensation and benefits package to termination clause provisions and post-employment restrictions. Whether you are an employer hiring your first employee or an employee evaluating a job offer, understanding what an employment agreement should contain is essential. A well-drafted employment agreement protects both parties — the employer secures their business interests, confidential information, and intellectual property, while the employee gains clarity on compensation, job duties, and the circumstances under which the relationship can end. This guide covers every essential clause, explains the critical distinction between at-will employment and contract employment, and walks through what happens when either party breaches the agreement.

What Should an Employment Contract Include?

Every employment contract should include clear terms covering job duties, compensation, benefits, duration of employment, termination conditions, confidentiality obligations, and dispute resolution procedures. Omitting any of these elements creates ambiguity that can lead to costly disputes.

The essential elements of a comprehensive employment agreement include:

• Job title and description: Clearly define the employee's position, reporting structure, primary responsibilities, and performance expectations. Vague job descriptions create disputes about scope of duties — an employee asked to perform work significantly outside their described role may have grounds to claim constructive modification of the agreement.
• Compensation structure: Specify base salary or hourly wage, payment frequency, overtime eligibility under the Fair Labor Standards Act (FLSA), bonuses (including whether they are discretionary or guaranteed), commission structures, equity grants, stock options, and any other forms of compensation. Every component of pay should be clearly documented to prevent wage disputes.
• Benefits and perks: Detail health insurance, dental and vision coverage, retirement plan contributions (401(k) matching), paid time off (vacation, sick leave, personal days), parental leave, professional development allowances, remote work policies, relocation assistance, and any other benefits. Reference the company's benefits plan documents for full details.
• Start date and employment duration: Specify when employment begins and whether the position is permanent, for a fixed term, or project-based. For fixed-term contracts, include the end date and any renewal provisions.
• Probationary period: If applicable, define the length of any probationary or introductory period, the evaluation criteria used during that period, and the consequences of failing to meet probationary standards. Some employers use probationary periods to delay benefits eligibility or to establish a lower termination threshold during the initial months.
• Termination provisions: Define the circumstances under which either party can end the relationship — with cause, without cause, voluntary resignation, and mutual agreement. Specify notice periods required from each party, severance entitlements (if any), and post-termination obligations. This is one of the most consequential sections of any employment agreement.
• Restrictive covenants: Address non-compete clause restrictions, non-solicitation clause provisions preventing recruitment of the employer's clients or employees, and confidentiality clause obligations protecting proprietary information. Each restrictive covenant should specify its scope, duration, and geographic limitation.
• Intellectual property assignment: Specify that any inventions, creative works, or innovations developed during employment — and related to the employer's business — are the property of the employer. Many states (including California, Delaware, Illinois, Minnesota, and Washington) have statutes limiting IP assignment clauses to protect employee inventions created on personal time using personal resources.
• Dispute resolution: Establish whether disputes will be resolved through negotiation, mediation, binding arbitration, or litigation. Include an arbitration agreement if arbitration is preferred, specifying the arbitration rules (typically AAA or JAMS), the location, cost-sharing provisions, and the scope of disputes covered.

If you need to create an employment agreement that addresses all of these elements, Legal Tank's employment agreement generator produces a comprehensive, customizable contract in minutes. For a document you can review and adapt to your needs, our employment agreement template covers every essential clause with explanatory notes.

What Is the Difference Between At-Will and Contract Employment?

At-will employment allows either the employer or employee to end the relationship at any time, for any lawful reason, without notice. Contract employment establishes a fixed-term relationship that can only be terminated under the conditions specified in the agreement.

The United States defaults to at-will employment in every state except Montana, which requires "good cause" for termination after a probationary period. Under at-will employment, an employer can terminate an employee for any reason — poor performance, business restructuring, personality conflicts, or no reason at all — as long as the reason is not discriminatory (based on race, sex, religion, age, disability, national origin, or other protected characteristics) or retaliatory (punishing an employee for filing a complaint, whistleblowing, or exercising legal rights). Similarly, an at-will employee can resign at any time without penalty.

An offer letter in an at-will relationship typically confirms the position, starting salary, and benefits, but explicitly states that employment is at-will and can be terminated by either party at any time. An offer letter is not an employment contract — it is an informational document that does not create a fixed-term commitment.

Contract employment, by contrast, creates a binding agreement for a specific duration or until specific conditions are met. The employer cannot terminate the employee before the contract term expires unless the employee commits a material breach — such as gross misconduct, fraud, criminal activity, or persistent failure to perform duties after notice and opportunity to improve. If the employer terminates a contract employee without cause before the term expires, the employee may be entitled to the remaining compensation under the contract as damages for breach of contract.

The choice between at-will and contract employment depends on the position, the industry, and the negotiating leverage of both parties. Executives, physicians, university faculty, union employees, and highly specialized professionals are more likely to have employment contracts. Most rank-and-file employees in the private sector work under at-will arrangements. If you are classifying workers, understanding the distinction between employees and independent contractors is equally important — our independent contractor agreement template covers the key differences and compliance requirements.

Is an Employment Agreement Legally Binding?

Yes. A properly executed employment agreement is a legally binding contract enforceable by either party. Like any contract, it requires an offer, acceptance, and consideration — the employer offers employment under specified terms, the employee accepts, and the consideration is the exchange of labor for compensation.

For an employment agreement to be legally binding, it must contain several elements. Both parties must have the legal capacity to enter into the agreement — the employee must be of legal working age, and the person signing on behalf of the employer must have authority to bind the company. The terms must be sufficiently definite that both parties understand their obligations. The agreement must not contain provisions that are illegal or contrary to public policy — for example, a clause requiring an employee to waive their right to file a discrimination complaint with the EEOC is unenforceable regardless of what the contract says.

Written employment agreements are far more enforceable than oral agreements, although oral employment contracts can be binding in some circumstances. However, oral agreements are extremely difficult to enforce because of the he-said-she-said nature of proving what was agreed to. The statute of frauds in most states requires contracts that cannot be performed within one year to be in writing — so any employment contract for a term longer than one year must be written to be enforceable.

Certain provisions within an otherwise valid employment agreement may be unenforceable if they violate applicable law. Non-compete clauses are unenforceable in California, Minnesota, North Dakota, and Oklahoma. Arbitration agreements that waive an employee's right to pursue certain statutory claims may be subject to challenge. Intellectual property assignment clauses that claim ownership of inventions unrelated to the employer's business may violate state inventor protection statutes. The unenforceability of one provision does not typically invalidate the entire agreement — most employment agreements include a severability clause stating that if any provision is found unenforceable, the remaining provisions survive. For a deeper analysis of non-compete enforceability across different states, see our comprehensive guide on whether non-compete agreements are enforceable.

What Are Common Clauses in an Employment Agreement?

Beyond the essential terms, employment agreements commonly include several specialized clauses designed to protect the employer's business interests and clarify the employment relationship. Understanding these clauses helps both employers and employees negotiate more effectively.

The most common specialized clauses include:

• Confidentiality and NDA provisions: Nearly every employment agreement includes a confidentiality clause or incorporates a separate non-disclosure agreement. These provisions prohibit the employee from disclosing the employer's proprietary information — trade secrets, client lists, financial data, business strategies, product plans, and other confidential material — during and after employment. Unlike non-compete clauses, confidentiality provisions are enforceable in all 50 states, making them a universally available tool for protecting business information. Our guide on how NDAs work explains the mechanics of confidentiality agreements in detail.
• Non-solicitation provisions: A non-solicitation clause prevents a departing employee from soliciting the employer's clients, customers, or other employees for a specified period after leaving. Non-solicitation clauses are generally easier to enforce than non-competes because they are narrower in scope — they do not prevent the employee from working in the same industry, only from targeting the former employer's specific relationships.
• Restrictive covenant provisions: This umbrella term covers non-competes, non-solicitation agreements, and confidentiality obligations collectively. Many employment agreements group these restrictions into a single "Restrictive Covenants" section with a unified scope, duration, and remedies framework. If your agreement includes non-compete restrictions, review our non-compete agreement template to understand the standard provisions courts evaluate.
• Clawback provisions: Allow the employer to recover bonuses, commissions, or equity grants if the employee is terminated for cause, violates restrictive covenants, or if the financial results that triggered the bonus are later restated. Clawback provisions are increasingly common for senior executives, particularly after the SEC's adoption of Rule 10D-1 requiring clawback policies for listed companies.
• Garden leave clause: Requires the employer to continue paying the employee's salary during the post-employment restrictive period. Garden leave provides the employee with income while restricted from competing and makes non-compete clauses more enforceable by demonstrating that the restriction is supported by ongoing consideration. Massachusetts requires garden leave for all enforceable non-competes.
• Severance provisions: Define the compensation and benefits an employee receives upon termination. Severance may include a lump sum payment, continued salary for a specified period, extended health insurance coverage (COBRA subsidies), outplacement assistance, and accelerated vesting of equity. Severance is almost always conditioned on the employee signing a release of claims. For tax planning purposes, employees receiving severance should review our guide on whether severance pay is taxable.
• Change of control provisions: Address what happens to the employee's position, compensation, and equity if the employer is acquired, merged, or undergoes a change of ownership. Common provisions include accelerated equity vesting (single or double trigger), enhanced severance following a change of control termination, and guaranteed employment for a specified period after the transaction closes.

The presence and negotiability of these clauses depend on the employee's level and bargaining power. Entry-level employees typically receive standardized agreements with non-negotiable terms. Senior executives and specialized professionals can often negotiate significant modifications to restrictive covenants, severance triggers, equity provisions, and termination protections.

Can an Employment Agreement Be Changed After Signing?

Yes, but modifications to an employment agreement generally require mutual consent and new consideration to be enforceable. An employer cannot unilaterally change the material terms of an existing employment contract without the employee's agreement.

For at-will employees, the analysis is more straightforward. Because at-will employment can be terminated at any time, an employer can present modified terms and condition continued employment on acceptance. The employee's choice is to accept the new terms or resign. In this context, continued employment after notice of the change can constitute acceptance of the modified terms — though some states require additional consideration beyond mere continued employment for certain modifications, particularly the addition of restrictive covenants.

For contract employees, modification requires a formal amendment signed by both parties. The employer cannot unilaterally reduce salary, change job duties, add restrictive covenants, or alter termination provisions during the contract term without the employee's consent. If the employer makes material changes without consent, the employee may have a claim for breach of contract. The amendment should clearly identify which provisions of the original agreement are being modified, state the new terms, and include new consideration flowing to the employee (such as a salary increase, bonus, additional equity, or extended contract term).

Common scenarios that trigger employment agreement modifications include promotions (new title, responsibilities, and compensation), organizational restructuring (changes to reporting structure or job duties), annual compensation reviews (salary increases, bonus adjustments), addition of restrictive covenants (adding a non-compete or non-solicitation clause mid-employment), and changes in benefits (modifications to health insurance, retirement plans, or PTO policies).

The key legal principle is that modifications must be supported by fresh consideration. Asking an existing employee to sign a non-compete agreement without providing anything in return — no raise, no bonus, no promotion — may render the non-compete unenforceable for lack of consideration in many states. Illinois, for example, requires that employment continue for at least two years after signing a non-compete for continued employment to constitute adequate consideration. Oregon requires a written non-compete signed at least two weeks before the first day of employment or entered into upon a subsequent bona fide advancement.

When modifying employment agreements, both parties should document the changes in a written amendment, ensure both parties sign the amendment, retain copies of both the original agreement and the amendment, and confirm that the amendment includes adequate consideration. Verbal modifications to employment agreements are risky for both parties and should be avoided — if a dispute arises, the written agreement controls unless the party claiming an oral modification can prove it by clear and convincing evidence.

What Happens if an Employer Breaches an Employment Contract?

When an employer breaches an employment contract, the employee may be entitled to compensatory damages, specific performance, reinstatement, or other remedies depending on the nature and severity of the breach. Wrongful termination of a contract employee is the most common form of employer breach.

The specific remedies available to an employee whose employer has breached an employment contract include:

• Compensatory damages: The most common remedy. The employee is entitled to recover the economic losses caused by the breach — typically the remaining salary and benefits they would have earned under the contract. If an employer terminates a contract employee three years into a five-year agreement without cause, the employee may recover the two years of remaining compensation, including salary, bonuses, benefits value, and equity that would have vested during that period.
• Consequential damages: In some cases, the employee can recover damages beyond the contract value — such as the cost of relocating for the position, lost opportunities from declining other job offers, and reputational harm that affects future employability. Consequential damages are harder to prove but can be substantial.
• Specific performance: In rare cases, a court may order the employer to fulfill the contract terms — such as reinstating the employee, granting a promised promotion, or providing an agreed-upon bonus. Courts are generally reluctant to order specific performance of employment contracts because of the inherent difficulty of forcing a working relationship, but it can be appropriate for discrete obligations like equity vesting or commission payments.
• Liquidated damages: If the employment agreement includes a liquidated damages clause specifying the amount payable upon employer breach, the employee can recover that amount without proving actual damages — provided the amount is a reasonable estimate of anticipated damages rather than a penalty.
• Attorneys' fees: Some employment agreements include a provision requiring the breaching party to pay the other party's attorneys' fees. Without such a provision, each party typically bears their own legal costs under the "American Rule" — making attorneys' fees provisions valuable for employees who may otherwise be deterred from enforcing their rights by the cost of litigation.

The employee also has a duty to mitigate damages — meaning they must make reasonable efforts to find comparable alternative employment after the breach. The employer can reduce damages by the amount the employee earned or could have earned through reasonable mitigation efforts. However, the employee is not required to accept a substantially inferior position or relocate to a different city to mitigate damages.

Employees who believe their employer has breached an employment contract should review the agreement's dispute resolution clause first. If the agreement requires arbitration, filing a lawsuit may be subject to a motion to compel arbitration. If the agreement specifies a particular governing law or venue, disputes must be pursued in the designated jurisdiction. Understanding the interaction between severance and unemployment benefits is also important when navigating a termination — our guide on how severance affects unemployment benefits covers the financial considerations employees should evaluate after any involuntary separation.

Can an Employee Refuse to Sign an Employment Agreement?

Yes. An employee can refuse to sign an employment agreement, but the consequences depend on whether the agreement is presented before or after employment begins, and whether the employment relationship is at-will.

For new hires, the employment agreement is typically presented as part of the offer package. If the prospective employee refuses to sign, the employer can withdraw the job offer. There is generally no legal obligation for an employer to hire someone who refuses to accept the contractual terms of the position. The employment agreement is a condition of employment — just as the employee is free to decline the offer, the employer is free to require agreement to specific terms as a condition of hiring.

For existing at-will employees who are asked to sign a new employment agreement or amendment mid-employment, the calculus is different. The employer can condition continued employment on signing the agreement — meaning the employee's choice is to sign or potentially be terminated. However, depending on the state and the nature of the agreement, terminating an employee solely for refusing to sign a new agreement may create legal issues. If the agreement contains an unenforceable provision (like a non-compete in California), the employee may argue that conditioning employment on signing an illegal agreement constitutes wrongful termination in violation of public policy.

Before refusing to sign an employment agreement, employees should consider several factors. Review the specific provisions you object to and determine whether they are negotiable. Many employers will modify restrictive covenant terms, adjust non-compete durations, narrow geographic restrictions, or add severance triggers in response to reasonable requests. Identify whether any provisions may be unenforceable under your state's law — an unenforceable provision may not be worth fighting over if it cannot be used against you anyway. Assess your leverage — candidates with specialized skills, candidates in high-demand fields, and senior-level professionals have more room to negotiate or refuse terms.

Employees should also understand that signing an employment agreement does not waive all of their rights. Employment agreements cannot override statutory protections — minimum wage laws, anti-discrimination laws, workers' compensation rights, OSHA protections, and the right to engage in concerted activity under the National Labor Relations Act are all non-waivable. An employment agreement that purports to waive these rights is unenforceable on those specific provisions, even if the employee signed it voluntarily.

If you need to create or review an employment agreement, Legal Tank provides both an employment agreement generator for creating customized contracts and an employment agreement template for reviewing standard provisions. For employers who also need to protect confidential information separately from the employment agreement, our NDA template provides a standalone confidentiality agreement that can be executed alongside the employment contract.

Before drafting a formal employment agreement, most employers first send an offer letter outlining the key terms of the position, including salary, benefits, and start date.