How-to guide: How to draft an employment contract (USA)

Introduction

This guide will assist in-house counsel, private practice lawyers, and human resources professionals in drafting an employment contract. It incorporates practical tips, examples and guidance to aid you in developing an appropriate agreement.

This guide covers:

1. Overview of employment contracts
2. Preliminary considerations
3. Drafting the employment contract

This guide can be used in conjunction with How-to guides: How to draft the key provisions of an employee handbook and Overview of US employment law.

Step 1 – Overview of employment contracts

In the United States the relationship between an employee and an employer is governed largely by contract. Many – if not most – of these contracts are informal verbal arrangements. This is especially the case for smaller employers with few employees. Larger employers, with a greater number of employees, are more likely to have a more formal written agreement in place.

1.1 Employment law basics

When considering the content of an employment contract, employers should take into account the principles of contract law as well as any relevant federal and state requirements.

1.1.1 Nature of relationship – contractual

Employment relationships in the United States are established and governed by contract. Federal law imposes minimum wage and overtime requirements but does not dictate minimum contractual requirements. The law also allows an employment relationship to be established without a written contract. While many employment relationships in the United States are established without a written contract and are presumed to be at will, each state has the authority to establish minimum contractual requirements for employment relationships.

Montana is the only state where employment relationships are not presumed to be at-will. An at-will employment relationship allows either party to end the employment relationship at any time, for any reason or for no reason, without being subject to legal ramifications for ending the relationship. While the flexible nature of an at-will employment relationship allows people to work and move freely, it also leaves employees with little protection or bargaining power. These concerns led Montana to enact the Wrongful Discharge From Employment Act (Mont Code sections 39-2-901 through 39-2-915). This law prohibits discharging employees (ie, terminating their employment), without good cause, who have completed a probationary period. The law does, however, give employers ‘the broadest discretion when making a decision to discharge any managerial or supervisory employee.’

1.1.2 Anti-discrimination laws

Federal law prohibits an employer from discriminating against a person because of their race, color, religion, sex, gender identity, sexual orientation, national origin (Title VII of the Civil Rights Act of 1964), age (The Age Discrimination in Employment Act of 1967), disability, genetic information, or pregnancy (Americans with Disabilities Act of 1990). Discriminatory practices are prohibited in all aspects of the employment relationship including hiring, firing, promotion, or training.

While a state cannot limit the protections provided by federal law, it can expand those protections. Many states have enacted laws that ban discrimination based upon characteristics beyond what is federally mandated. Additional protections vary by state and include the prohibition of discrimination based on weight, marital status, medical marijuana use, veteran status, credit reports, and a variety of other factors.

Step 2 – Preliminary considerations

2.1 Purpose of contract

While at-will employment relationships offer flexibility, an employer seeking a more definitive employment relationship may opt for an employment contract. Employment contracts set out in writing the terms and conditions of employment and the capacity in which an employee is being hired, along with the corresponding job responsibilities. In addition to providing clear guidelines and expectations, employment contracts can also be used to protect the employer’s business interests and intellectual property.

An employer who uses an employment contract may utilize a standard form contract for all employees or may prepare a separate contract for each employee. A standard form employment contract is quick, cost-effective, and should contain commonly used language backed by consistent case law. However, a one-size-fits-all approach to employment contracts can result in a contract that is too general to be effective in all situations. An employer will need to balance these considerations when determining the type of employment contract best suited to their business and employees.

2.2 Additional Provisions

In certain instances, it is a good idea for an employer to add or remove particular provisions to a standard form employment contract according to the state in which the employer is operating, or the nature of the employer’s business.

2.2.1 Additional contractual provisions in certain standard form employment contracts

Some examples of situations where additional contractual provisions may be needed include those listed below.

• If the employee could use the knowledge gained or client relationships built during their employment to compete with the employer’s business after termination of the employment relationship, the employer should consider adding a non-compete clause to the employment contract. A non-compete agreement prevents former employees from competing directly with the employer’s business for a prescribed amount of time after their employment ends. Non-compete agreements are matters of state law and some states prohibit their enforcement. For example, California law says that ‘every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.’ Other states impose limits on the time and geographic scope of non-compete agreements.
• If the employee is required to hold a security clearance as part of their role (eg, some positions that involve working with the US Department of State or Defense), the employer should include relevant security requirements in the employment contract. Failure to include and specify the security requirements initially could render the contract null.
• While social media review has become a standard part of the employee screening or application process, this review will usually be limited to public postings on social media platforms. Laws in many states prohibit employers from requiring employees or prospective employees to turn over social media log-in information or personal (ie, not provided by the employer) email passwords. An employment contract in these states should not require that an employee provide access to personal social media.

2.2.2 Standard practices in industry

An employment contract should account for industry-specific considerations. Employers should be aware of any industry-specific employee expectations and provide for those in the employment contract. While all employment contracts should convey the general expectations of both parties, industry-specific expectations should not be overlooked.

2.3 Legal requirements

The legal requirements under both state and federal law for an employment contract are minimal, and relate to what may not be included. Employees may not waive minimum wage or overtime pay requirements, and may not agree in advance that anti-discrimination laws will not apply to them. Additionally, an employer must ensure that the employment agreement does not amount to collusion or agreement with other industry participants. No-hire agreements and no-poach agreements have both been challenged as violating this prohibition on collusion.

Example

For many years, large fast-food franchisors included no-poach clauses in their franchise agreements, which prohibited one franchisee from hiring or ‘poaching’ employees from a different franchisee of the same chain. State attorneys general and the Department of Justice (DOJ) challenged the legality of these clauses and successfully argued that they constituted an illegal agreement or collusion among separate industry participants (the franchisees) to restrict competition in the labor market. By agreeing not to hire each other's workers, the franchisees artificially suppressed wages and limited career mobility for thousands of employees, violating antitrust laws which prohibit such anticompetitive behavior. As a result of these legal challenges, many major franchisors were forced to remove these no-poach provisions in 2019 and 2020, demonstrating the critical legal requirement that employers cannot use contractual agreements to collude with other businesses to the detriment of their workers.

Step 3 – Drafting the employment contract

As set out above, employment relationships in the US usually do not require a written agreement (except for the rare instances in which the contract could not be performed in full in less than one year). When an employment contract is entered into the parties are free to negotiate and agree the terms and conditions of their relationship, providing none of the provisions violate any federal, state, or local law.

Though the legally mandated requirements for an employment contract are minimal, a well-drafted employment contract should be thorough and detailed enough to provide both parties with a clear understanding as to their duties and expectations. However, employers should also be wary of including too much unnecessary detail in an employment contract, in particular relating to obligations on the employer or provisions that the employer may wish to change. Employment contracts should be limited to the key terms that govern the employment relationship, with additional detail included in an employee handbook or non-contractual policies.

See How-to guide: How to draft the key provisions of an employee handbook for further information on the relationship between an employment contract and an employee handbook.

3.1 Identify the parties

The employment should clearly identify both parties and also confirm the employment status of the employee.

3.1.1 Employer

The employment contract should identify the employer with specificity. In addition to the legal name and address, the agreement should provide for any d.b.a or trade name of the employer.

Regarding affiliates or subsidiaries of the employer, the agreement should explicitly include the entities for which the employee will be working. The entities for which the employee will not work may be excluded by reference (eg, ‘Employee A is employed solely by XYZ Corp and its affiliate TUV, LLC. Employee A is not employed by any other XYZ affiliate or subsidiary’). The inclusion of affiliates or subsidiaries in the agreement can have far-reaching legal implications and should be carefully considered. This is an area where standard form language could be problematic and should be reviewed.

3.1.2 Employee

It is a best practice for an employment contract to identify the employee by providing their name and current address. If a standard form is being used, the name and address of the employee are not required, although including the name and address of the employee provides a record that the employee has actually been issued with the contract and accepted its terms.

3.1.3 Nature of employment

The employment contract should state whether the person will be considered an employee rather than a contractor if the position is temporary or permanent, and if the employee will be eligible for overtime pay (note that an eligible employee may not waive overtime pay).

3.2 Position covered

The employment contract should identify the key details of the role as set out below.

3.2.1 Job description

The employment contract should include a job title and a clear job description (eg, ‘Deputy Public Works Inspector, responsible for inspecting and maintaining streetlights and other municipally owned exterior lighting’). Any physical, educational, or technical requirements should be set out in the employment contract along with any travel expectations that come with the role.

If the employee will be excluded from any of the duties or responsibilities that would otherwise be required or expected for the position, the agreement should provide for this with specificity (eg, ‘The employee shall perform all the duties of a pharmacist licensed in the state of X, except compounding or the administration of vaccines’). If the exclusion is conditional, explain the terms of that condition (eg, ‘The employee shall be permitted to administer vaccines upon showing proof that he or she has been certified by the X Board of Pharmacy to administer vaccinations’).

The job description should also include details of the employee’s reporting line and any management responsibilities.

3.2.2 Qualifications

The employment contract should also set out any qualifications that are required for the role. This is needed in order to protect the employer against a falsified employment application and means that if the employee has falsified their credentials then the employment contract is rendered null and unenforceable.

If the employee is required to obtain any additional qualifications as a condition of obtaining or continuing employment, the employment contract should clearly state the qualifications to be obtained and the date by which they must be obtained. If there is a cost associated with obtaining the qualification, the contract should state who is responsible for the cost incurred.

If the employee is required to maintain any licensure or continuing qualification as a condition of employment, the employment contract should specify this requirement and set out who is responsible for any associated costs.

3.2.3 Location

The employment contract should provide a location where the job is to be performed. This may be one location, although many employers provide for remote work and hybrid-model work. If an employee will be working remotely, employers should consider how and when the remote work will be available and note any restrictions placed on remote work, such as the hours an employee must make themselves available for consultations or conferences. If there is a difference in compensation for remote work, that should be stated.

3.2.4 Schedule and work hours

A statement of the work hours and a description of the anticipated work schedule should be included in the employment contract. If the role requires periods of overtime either regularly, seasonally, or intermittently, that expectation should also be noted.

Federal law does not limit working hours, but many states require daily rest breaks (eg, 10 minutes per hour after four hours of work) and unpaid meal breaks (usually 30 minutes after five to eight hours). Several states also mandate at least one day off per week.

The federal minimum wage is $7.25 per hour for non-exempt employees nationwide. Many states and some cities have set their own minimum wages above the federal level. For instance, California's is $16.50 (as of January 1, 2025), and San Francisco's is $19.18 (as of July 2025).

The federal Fair Labour Standards Act (FLSA), requires non-exempt employees to be paid 1.5 times their regular rate for weekly hours exceeding 40. Non-working time like leave, breaks, and vacation does not count towards overtime. An employee's regular rate can include more than just their hourly wage, such as non-discretionary bonuses. For further information see How-to guide: How to understand and comply with wage and hour laws.

3.2.5 Equipment supplied and limitations or conditions of use

An employment contract should specify any key or valuable items of equipment that will be used by the employee during their employment, such as a company car or laptop. The contract should make clear who owns the equipment, under what conditions the employee or another person is authorized to use the equipment, and what the employer’s remedy will be if the equipment is lost or damaged.

If an employee will be working at a physical workspace provided by the employer, the employment contract should state any restrictions placed on the employee when using the space, for example, whether the employee can hang photos, remove furniture, or bring a pet. The contract should set out the consequences if the employee violates the agreement or causes damage to the workspace.

Any technological equipment provided to the employee should be specified by separate reference to hardware and software together with a description of what will be considered damage to the equipment.

If the employee will be provided with a company car, the policies and procedures regarding use, fuel, maintenance, insurance, accidents, etc., should be provided for in the contract.

Additional factors may need to be addressed based on the nature of the equipment being used. For example, many employers require mechanics to supply their own tools, often with a right to full or partial reimbursement. The employer’s policy on tools should be made explicit.

3.2.6 Duration of contract and termination

An employment contract should contain an effective date on which employment begins, but there is no requirement for an employment contract to contain a termination date. The employment may be set for a fixed term, but it may also remain silent regarding the duration of the employment. In such a case, the contract will continue indefinitely unless terminated by one or both parties.

The employment contract should also outline what type of employee conduct is grounds for termination or other disciplinary action. The contract should give the employer the opportunity to terminate employment immediately in the case of misconduct, where they may otherwise be bound by a fixed term or a notice period included in the contract. In the event the employee brings a wrongful termination suit, or even if the terminated employee makes a claim for unemployment compensation, establishing grounds for dismissal will refute a claim that an employee was discharged without good cause.

3.2.7 Performance standards

In an employment contract, an employer should explain how the employee’s performance will be evaluated, including a general description of the review process and information on the metrics that will be used to evaluate employee performance.

If the performance metric is quantitative, explain how it is measured (ie, total sales, customer satisfaction ratings, miles traveled, etch). If the review is qualitative, explain the manner of assessment (ie, in-person review, written evaluation, etic) and the qualities that will be measured (ie, leadership, efficiency, cooperation, etc).

An employer who includes these performance standards in an employment contract should also provide an explanation of the procedural and substantive steps that will be taken if the employee fails to achieve these standards. These steps may include counselling on strategies to improve performance, or suspension, or termination.

3.3 Compensation and benefits

The employment contract should clearly set out details of compensation, time off and any other benefits available to the employee.

3.3.1 Compensation

An employment contract should include information about the compensation amount or rate of pay, frequency and method of pay (note that many state laws require that an employee be paid no less frequently than monthly), whether the employee is hourly or salaried, details on how compensation will be calculated, and instructions on how to account for commissions, tips, bonuses, and overtime.

3.3.2 Time off

An employment contract should set out the amount of time off an employee is permitted to take, what types of time off are available, and how using the time will affect compensation. Personal time off, vacation, and sick leave should all be addressed.

Employees may also be allowed time off based on federal law, state law and government regulations. For example, state laws usually provide employees who serve in the military Reserve, the National Guard, or a state militia with time off for military duty. While an employer cannot deny employees this leave, this information could be added to the agreement for clarification of the employer’s time-off policies.

3.3.3 Other benefits

If an employee will be receiving benefits as part of their employment, the benefits package should be detailed in the employment contract. An employer should include details of any medical, dental, life, or disability insurance coverage provided to the employee. Additionally, any retirement or 401(k) plan should be detailed in the contract. If the employer will be providing any educational benefits or tuition reimbursements to the employee, the contract should include a description of those benefits. Wellness programs, health club memberships, and other perks can be included in the benefits portion of the employment contract.

3.4 Limitations

If an employer wishes to place any limitations on the employee, such as preventing them from working for another employer either during their employment or afterwards, this should be set out in the employment contract.

3.4.1 Restrictions on outside work

Employers may legally restrict an employee from engaging in other work, especially if that work substantially interferes or competes with the duties of their primary job. Employees can be limited from working for a competitor while employed by the employer, poaching clients, or starting their own business in direct competition with their employer. An employer who intends to restrict the outside work of an employee should include that restriction in the employment contract.

An employer may also include a clause in the contract which requires the employee to obtain authorization from the employer before engaging in any outside work which may violate the employment contract.

3.4.2 Non-compete agreement

An employer may include provisions in the employment contract that prevent employees from engaging in certain behaviors after leaving the company. A non-compete agreement within the employment contract prevents former employees from competing directly with the company for a prescribed amount of time after their employment ends.

Non-compete agreements are largely unenforceable in California, North Dakota, the District of Columbia, and Oklahoma. Although allowed in other states, these clauses are generally applied narrowly in favor of the employee due to strong public policy that favors competition and innovation.

On April 23, 2024, the Federal Trade Commission (FTC) issued a proposed rule to ban most noncompete clauses nationwide, aiming to enhance job mobility and wage growth. The rule prohibited employers from entering into new noncompete agreements with any worker and rendered existing ones unenforceable for non-senior employees. However, in August 2024, the US District Court for the Northern District of Texas vacated the rule, stating that the FTC lacked authority. The FTC withdrew its appeal on September 5, 2025, effectively ending the rule’s enforceability. The agency has since shifted to case-by-case enforcement under Section 5 of the Federal Trade Commission Act of 1914. 

Employers should, however, note the recent heightened federal scrutiny of non-compete agreements. This is exemplified by the FTC's September 4, 2025, action against Gateway Services, Inc. and its subsidiary, who operate a pet cremation business, seeking to halt the enforcement of allegedly overbroad, one-year, nationwide non-competes required of all employees. On the same day, the FTC launched a public inquiry - with responses due by November 3, 2025 - to gather feedback on non-competes from the public, including restricted employees, affected employers, and the healthcare sector, to ‘shine a light on unfair and anticompetitive agreements.’

3.4.3 Confidentiality

Employers who want to protect their business’s confidential and proprietary information should include confidentiality requirements in the employment contract.

A non-disclosure clause creates a legal obligation between the employer and employee. The agreement outlines confidential material, knowledge, or information that is known to both parties due to the employment, and prohibits the parties from disclosing that information. Non-disclosure agreements are generally more readily enforceable than non-compete agreements and provide an additional protection for confidential information.

A non-use clause restricts the use without authorization of confidential information that has already been disclosed. This provision, when added to the employment contract, adds a layer of protection for information that has already leaked beyond the authorized audience.

These clauses can be used together to help protect the employer’s protected proprietary information.

3.4.4 Ownership of intellectual property

An employer should include a provision in the employment contract stating the general rule that the employer owns the intellectual property developed by their employees in the course of their employment.

Additionally, the employer should include another clause requiring the employee to promptly disclose new inventions or other intellectual property created in the scope of employment to the employer upon conception and to make a formal assignment of such inventions to the employer at that time.

For employees in intellectual property-focused roles (eg, biotech researcher), a more detailed Intellectual Property Agreement that stands alone or is incorporated by reference should be considered.

3.5 Additional terms

The following additional terms are likely to be prudent for many employment contracts.

3.5.1 No promise of permanent employment

An employment agreement should state that the contract is at will and may be terminated by either party at any time. This clause is particularly important for employment agreements established in Montana, due to their removal of the at-will presumption that is followed by all other states.

An employer may include a clause requiring the employee to provide notice prior to terminating the employment relationship, or stating that the employer will give the employee notice before termination.

Note that federal law, the Worker Adjustment and Retraining Notification Act of 1988, requires most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs.

3.5.2 Arbitration provision

An employment contract can mandate the method of dispute resolution used in the case of a conflict. It is increasingly common for employment contracts to include provisions that require any disputes between the employer and employee to be submitted to arbitration, and those provisions will be enforced by the courts. If allowed by local law, many employers opt to include a clause mandating arbitration for all dispute resolution. An employee who signs an arbitration agreement promises to pursue any legal claims against the employer through arbitration, rather than through a lawsuit. The provision should include which organization will administer the arbitration and which set of arbitration rules apply.

Note that the use of mandatory arbitration clauses in employment contracts has increased since the 1990s (see Scheinman Institute: The Growing Use of Mandatory Arbitration). This trend limits employees' access to the judicial system.

3.5.3 Integration clause

Finally, the employment contract should contain an integration clause that states that the terms of the contract are the complete and final agreement between the parties.

Additional Resources

Economic Policy Institute, ‘Power in the Employment Relationship’
Minnesota Department of Employment and Economic Development, Employment Agreements
SCORE Association, A Guide To Employment Contracts

Related Lexology PRO content

How-to guides:

Overview of US employment law 
How to draft the key provisions of an employee handbook 
How to protect trade secrets in the employment relationship
How to use arbitration agreements in employment
How to prepare for an Occupational Safety and Health Administration (OSHA) inspection
How to comply with the unemployment insurance program 
How to make reasonable accommodations for employees with disabilities
How to investigate workplace harassment complaints 
How to develop a whistleblower policy and reporting program

Checklists:

Determining the difference between an employee and an independent contractor
Dealing with workplace injuries
Developing a Bring Your Own Device (BYOD) policy
Employee drug testing
Terminating the employment of an at-will employee
Drafting a non-compete agreement 
Developing an Equal Employment Opportunity Commission (EEOC) compliant policy
Responding to an Equal Employment Opportunity Commission (EEOC) charge

Reliance on information posted:

While we use reasonable endeavors to provide up to date and relevant materials, the materials posted on our site are not intended to amount to advice on which reliance should be placed. They may not reflect recent changes in the law and are not intended to constitute a definitive or complete statement of the law. You may use them to stay up to date with legal developments but you should not use them for transactions or legal advice and you should carry out your own research. We therefore disclaim all liability and responsibility arising from any reliance placed on such materials by any visitor to our site, or by anyone who may be informed of any of its contents.