Employment Agreements for Small Businesses: What to Include

Hiring your first employee — or your tenth — is a major milestone for any small business. It is also a moment that creates significant legal obligations and risks. One of the most important steps you can take as you bring on employees is to have a clear, well-drafted employment agreement that defines the terms of the working relationship before work begins. A good employment agreement sets expectations, protects confidential business information and intellectual property, limits the company’s exposure to certain legal claims, and provides a clear record of what the parties agreed to when the employment relationship started.

Are Employment Agreements Required?

In most US states, there is no legal requirement that employment agreements be in writing. The default rule in most of the country is employment at will, which means that either the employer or the employee can end the employment relationship at any time, for any reason that is not illegal. At-will employment is a powerful default that does not depend on a written contract.

But the absence of a legal requirement to have a written agreement does not mean written agreements are unimportant. In fact, written employment agreements are valuable precisely because they override the ambiguity of an undocumented arrangement. Without a written agreement, disputes about compensation, duties, confidentiality, intellectual property ownership, and the terms of termination are resolved by reference to state law defaults, oral understandings that the parties may remember differently, and general principles of employment law that may not reflect what either party actually wanted.

At-Will Employment: Preserving the Default

If you want to preserve the at-will employment relationship — and most small business owners do — your employment agreement must clearly state that the employee is employed at will and that nothing in the agreement modifies that status. This provision is important because courts can find that employment agreements create implied promises of continued employment if the language is not careful. An agreement that says the company will provide certain benefits for a period of years, or that contains language suggesting employment will continue as long as the employee performs satisfactorily, may unintentionally create a contractual basis for a wrongful termination claim.

Preserving at-will status means being explicit: the agreement should state that employment is at will, that this document does not create a contract of employment for any definite term, and that the at-will nature of the relationship can only be modified by a written agreement signed by an authorized officer of the company. These statements, consistently included and consistently enforced, significantly reduce the risk of successful wrongful termination claims based on implied contracts.

Compensation and Benefits

The compensation section of an employment agreement should clearly state the employee’s starting salary or hourly wage, the pay period, and any bonus or commission structure. If the employee will be eligible for performance-based compensation, the agreement should explain the basis on which that compensation will be calculated and paid, or it should make clear that bonus and commission structures are subject to the company’s current plans, which may be modified.

Benefits — health insurance, paid time off, retirement plans, and others — are usually described in the agreement by reference to the company’s employee benefit plans and policies rather than in detail. This is intentional: it allows the company to modify its benefit programs without requiring an amendment to each employee’s individual agreement. The agreement should note that benefits are governed by the plan documents and that the company reserves the right to modify or discontinue benefit programs, consistent with applicable law.

Job Duties and Position

Employment agreements typically include a description of the employee’s position and general duties. This section does not need to be a comprehensive job description, but it should be specific enough to establish the nature and level of the role. Including language that the employer may modify duties and responsibilities as business needs require gives the company flexibility to adjust the employee’s work over time without requiring a new agreement.

Confidentiality Provisions

Confidentiality provisions are among the most important protections a small business can include in an employment agreement. They require the employee to keep the company’s confidential information — trade secrets, customer lists, pricing information, business strategies, financial data, product plans, and other proprietary information — private during and after employment. A well-drafted confidentiality provision should define what constitutes confidential information (broadly), require the employee to use it only for company purposes, and obligate the employee to return or destroy confidential materials at the end of employment.

Confidentiality obligations are also protected by the Defend Trade Secrets Act, a federal law that gives businesses additional legal remedies when employees misappropriate trade secrets. Courts generally uphold reasonable confidentiality provisions in employment agreements, and they are an important first line of defense against employees who leave and take client relationships, proprietary processes, or sensitive business information to a competitor.

Intellectual Property Assignment

One of the most commonly overlooked provisions in small business employment agreements is intellectual property assignment. This provision requires that any work product, invention, code, creative work, or other intellectual property that the employee creates in the course of their employment belongs to the company, not to the employee.

Under US copyright law, works created by an employee within the scope of employment are works made for hire, meaning the employer automatically owns the copyright. But the scope of employment concept has limits, and there are situations — particularly with inventions and developments that occur outside of working hours or without the use of company resources — where ownership is genuinely ambiguous. An IP assignment provision in the employment agreement closes those gaps by requiring the employee to assign any relevant IP to the company regardless of the circumstances of its creation.

Several states, including California, Delaware, Illinois, Minnesota, North Carolina, and Washington, limit the scope of IP assignment provisions. California law, for example, prohibits employers from requiring employees to assign inventions that were developed entirely on the employee’s own time, without using company resources, and that do not relate to the company’s business or anticipated business. Employment agreements should be reviewed by counsel familiar with the law of the relevant state to ensure that IP assignment provisions comply with applicable limits.

Non-Solicitation Provisions

Non-solicitation provisions restrict employees from, after their departure, soliciting the company’s customers or recruiting the company’s employees to a competing business. These provisions are meaningfully different from non-compete agreements and are generally more broadly enforceable. They do not prevent the former employee from working in the same industry or using the skills they developed at your company — they simply prevent targeted poaching of the company’s specific customer relationships and workforce.

Non-solicitation provisions should be time-limited — one to two years is typical — and geographically limited to the extent necessary to protect legitimate business interests. Courts scrutinize overly broad or unreasonable non-solicitation provisions and may decline to enforce them. Narrowly tailored provisions that protect specific customer relationships and key employee recruitment are more likely to be enforced than sweeping provisions that attempt to bar the former employee from any contact with anyone the company has ever done business with.

Non-Compete Provisions: Handle with Caution

Non-compete agreements prevent former employees from working for competitors or starting competing businesses for a defined period after leaving. The enforceability of non-competes varies dramatically by state. California, North Dakota, Oklahoma, and a few other states effectively prohibit non-competes for most employees. Many other states enforce them but only if they are reasonable in scope, duration, and geographic area, and only to the extent necessary to protect a legitimate business interest.

The Federal Trade Commission proposed a rule that would have banned most non-competes nationally, but the rule was challenged in federal court and its implementation has been uncertain. The legal landscape for non-competes continues to evolve rapidly, and small businesses should seek legal advice before including non-competes in employment agreements and should understand that a provision that is valid and enforceable today may not be enforceable tomorrow if the law changes in their state or at the federal level.

Dispute Resolution

Many employment agreements include a dispute resolution provision that specifies how disagreements between the employer and employee will be handled. The most common approach is a mandatory arbitration clause, which requires that disputes be resolved through arbitration rather than through court litigation. Arbitration can be faster and less expensive than litigation, and it typically keeps disputes out of the public record. However, mandatory arbitration agreements have faced significant criticism and legal challenges, particularly in the context of sexual harassment and other serious employment claims, and their enforceability continues to evolve.

Whether to include an arbitration clause is a business judgment that small business owners should make in consultation with an employment lawyer. A choice-of-law provision — specifying which state’s law governs the agreement — and a choice-of-venue provision — specifying where disputes will be resolved — are also common and useful provisions for businesses with employees in multiple states.

A Final Word on Templates and Legal Review

Employment agreement templates are widely available online, and they can be a useful starting point. But employment law is highly state-specific, and a template drafted for one state may include provisions that are unenforceable or legally problematic in another. For small businesses hiring employees in California, New York, Illinois, Washington, or other states with particularly active employment law developments, having an employment attorney review your agreements before you use them is a modest investment that can prevent significant legal exposure later.