Employment Agreement Definition

Learn more about what an employment agreement is in business.

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There’s more to a job than just the pay. An employee’s quality of life also depends on the terms and benefits of the position. For employers, it’s vital to know in advance what can be expected from the employee. So it’s essential for both sides to have a binding document that fully sets out the details of employment.

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Employment agreements are a great way to give both employers and employees clarity about the employee’s job. For that reason, all business owners, including small business owners, should consider using employment agreements with their employees. Read on to learn about the definition of an employment agreement and what the benefit is for an employment agreement. We’ll also touch on other considerations underlying employment agreements.

What is an employment agreement?

Black’s Law Dictionary assigns the phrase “employment agreement” with this definition: “A formal agreement that spells out the rules of engagement between an employee and an employer.” But that’s only a basic definition. An employment agreement’s business definition is a binding agreement between an employer and employee that defines each party’s rights and responsibilities. Employment agreements cover a wide variety of topics. Here are a few:

Health benefits — Does the employment agreement offer health benefits, dental insurance, or vision insurance to the employee? Can the employee receive life insurance or disability insurance?
Leave policy — How much paid time off will the employee receive? When can the employee take their leave? How do they request it?
Length of employment — Is the employee’s employment for a certain period of time or indefinite? What is the minimum (or maximum) period of time that the employee can work with the employer?
Work schedule — What are the employee’s work hours? Are they flexible hours or not? Does the employee have to work overtime?
Wages — How much will the employee earn? Do they receive a salary or an hourly rate? Can they receive a commission or overtime pay?

Aside from these issues, employment agreements often discuss confidentiality matters, behavioral expectations, and even non-compete clauses. Employers generally require employees to sign employment agreements before starting work.

Other names for employment agreements

Employment agreements have a variety of other names. These include “employment contracts” and “job contracts.”

Employment agreement — considerations

For most small business owners, it’s a good idea to use employment agreements with employees. However, you should first understand the benefits and drawbacks of employment agreements.

Employment agreement – benefits

An employment agreement’s greatest advantage is clarity. By addressing the most important employment issues ahead of time, employment agreements reduce conflict. They also improve employer and employee satisfaction by giving both a clear idea of what they can expect from each other. Finally, employment agreements protect both parties and provide them with stability.

Employment agreement – disadvantages

Employment agreements have disadvantages as well. For one, they limit an employer’s freedom of choice. Employees without employment agreements can be let go for almost any non-discriminatory reason. But employees with employment agreements usually can be fired only for a reason stated in the agreement. Another disadvantage of employment agreements is that they aren’t very flexible. Once both parties agree to an agreement, it is difficult for either party to alter it.

Summary

Employment agreements are a useful tool for defining the roles and responsibilities of employees and employers in a fair and comprehensive way.

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Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.