Building Your Business Business Taxes Is an Employment Contract Necessary for All Employees? Some positions are more suited to contracts than others. By Jean Murray Updated on September 13, 2022 Fact checked by Taylor Tompkins In This Article View All In This Article Which Employees Need A Contract? What Else Should You Include in an Employment Contract? Consider the Disadvantages, Too The Bottom Line Photo: PhotoAlto/Eric Audras / Getty Images Employment contracts are documents that outline an agreement between an employer and the person they are hiring, stipulating what both parties are responsible for over the time the person works at the company. Most employees don't have employment contracts and they don't need them. They work under an implied employment contract, meaning that the general terms of employment are determined by state and federal laws and previous court cases. Key Takeaways Employee contracts often stipulate certain things employees can and can't do while they work for a company. Not all employees need a contract, but those handling sensitive information or having specialized knowledge may require one. Employment contracts also hold businesses to certain terms for the employee's stint with the company. Which Employees Need A Contract? You probably don't need a contract if you're hiring an administrative assistant, a shipping clerk, or an IT person, but it can be a very good idea when you're filling other positions. The following are some instances where a contract is necessary. When the Employee Would Be Difficult To Replace A professional with very specific skills or an employee who has knowledge of your market and your competition would be one example of someone you might have a hard time replacing if they should suddenly leave your employ. You'll want to consider it if it might be difficult to find and train a replacement in a specific field or area. In these cases, you would use the contract to limit the employee's ability to leave without giving you ample notice. When the Employee Has Knowledge of Confidential Information This might include trade secrets or knowledge of other sensitive materials. In this case, you would want to include a confidentiality clause in the contract to prevent the employee from divulging this information during and after the end of the contract. When You Want To Avoid Competition An employment contract can be a good idea when you don't want the employee leaving and competing against you for business. You would want the employee to sign a non-compete agreement as part of the employment contract, limiting their ability to compete with you within a certain time period and within a defined geographic area in a specific type of business. What Else Should You Include in an Employment Contract? The language of an employment contract should include a general description of the duties you expect the employee to perform, as well as restrictive covenants like the non-compete agreement mentioned above. It should include specifics about what happens if a contract employee leaves. Note An employment contract should be in writing. This isn't the time for a handshake deal because there are too many complex issues involved. Consider the Disadvantages, Too Remember that legal contracts bind both parties. You'll have obligations and responsibilities under the terms of an employment contract as well. The contract might set an employment term. If the employee isn't really working out, you'd be stuck with them regardless—or you'd have to go back to the drawing board and negotiate a new contract with them to cover the early termination. Some courts might hold you to a higher standard in the event of a dispute and a lawsuit. This is a threshold you might not quite have to reach if you didn't enter into an employment contract. Your every action and decision could be placed under a microscope. The Bottom Line Check with an employment attorney to discuss the need for a contract with a specific employee if you're unsure. A legal professional can also make sure that the contract language you include is correct and sufficient. Note If you try to bind an employee to a term that's not supported by law, your entire contract can be invalidated if there's eventually a dispute. In most cases, you probably don't need contracts with hourly employees or lower-level salaried employees, but if you hire an office manager or administrative assistant who deals with highly confidential information, you might want to sign them to a contract. And contracts can protect you against some serious problems with professionals and top management as well. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. FindLaw. "Pros and Cons of Written Employee Contracts." U.S. Department of State. "Model Contract of Employment."