Employment Agreement: What To Put In Writing Before Work Starts

Bringing on your first employee or expanding your team is a major milestone for any US startup or small business. But before anyone starts work, putting the right employment agreement in writing is critical. Too often, founders rely on handshake deals, vague emails, or outdated templates, only to face confusion about pay, job duties, or even who owns the work product. Worse, failing to document terms can expose your business to disputes, penalties, or lawsuits if you miss state or federal requirements.

This guide answers what to include in an employment agreement, how federal and state rules affect your hiring documents, and the most common mistakes startups make. Whether you are hiring your first employee or building a team across multiple states, understanding written agreements and employment law basics will help you set expectations and reduce legal risk from day one.

What Is an Employment Agreement and Why Does It Matter?

An employment agreement is a written contract between an employer and an employee that sets out the terms and conditions of employment. It covers job duties, pay, benefits, confidentiality, and how the relationship can end. While many states allow "at-will" employment (meaning either side can end the relationship at any time, for almost any reason), a written agreement provides clarity and protects both parties.

There is no single required format for an employment agreement in the US, but certain terms are commonly included, and some are required by law depending on your state or industry. For startups, a clear agreement is especially important. Early hires often work on sensitive projects, contribute to intellectual property, and may help shape your company culture. Without a written agreement, it can be unclear who owns what, how disputes are resolved, or what happens if someone leaves.

For example, if a founding engineer develops software without a clear IP assignment clause, your business could face costly legal battles over ownership. Or, if a sales manager is promised a commission structure verbally but nothing is documented, disputes can arise over bonus eligibility. A written agreement helps avoid these headaches and shows you take compliance seriously.

Key Clauses to Include in an Employment Agreement

Every business is unique, but most employment agreements should include the following key clauses. Tailor each section to your business, the role, and the employee's location:

• Job Title and Duties: Clearly describe the position, reporting lines, and main responsibilities. For example, "Software Engineer reporting to the CTO, responsible for backend development and code reviews." This helps avoid confusion and sets expectations for performance.
• Compensation: Specify the salary or hourly rate, pay frequency (weekly, biweekly, monthly), and any bonus or commission structures. Include overtime eligibility, especially for non-exempt employees under the Fair Labor Standards Act (FLSA). For example, "$80,000 per year, paid biweekly, eligible for annual performance bonus."
• Work Schedule and Location: State expected working hours, remote work policies, and where the employee will work. For remote or hybrid teams, clarify expectations for availability, communication, and equipment reimbursement.
• Benefits: Outline health insurance, retirement plans, paid time off, sick leave, and any other benefits. Be clear about eligibility, waiting periods, and whether benefits are subject to change.
• At-Will Employment: In most states, employment is "at-will" unless stated otherwise. Include a clear at-will statement unless you are offering a fixed-term or cause-only contract. For example, "Employment is at-will and may be terminated by either party at any time, with or without cause or notice."
• Confidentiality and Intellectual Property: Protect your business by including clauses on keeping company information confidential and assigning any work product or inventions to the company. For example, "Any inventions, designs, or works created during employment are the exclusive property of the company."
• Non-Compete and Non-Solicitation: You may want to restrict an employee from competing with your business or soliciting clients or staff after leaving. Be aware that enforceability varies by state and recent federal guidance limits certain non-compete clauses. For example, California generally prohibits non-competes, while Texas allows them with reasonable limits.
• Termination: Explain how either party can end the employment, notice requirements, and what happens to unused benefits or company property. For example, "Upon termination, employee must return all company equipment within five business days."
• Dispute Resolution: Consider including how disputes will be handled, such as mediation or arbitration. Check state rules before requiring arbitration, as some states limit mandatory arbitration for employment disputes.

Some industries or roles may require additional clauses, such as background checks, licensing, or compliance with specific regulations. For example, healthcare and financial services often require extra compliance language. Always tailor your agreement to your business and the role in question.

Practical Example: A New York-based fintech startup hires a remote developer in Colorado. The agreement should include Colorado-specific wage notice language, clarify remote work expectations, and ensure the IP assignment clause complies with both states' rules. Failing to do so could lead to disputes or regulatory penalties.

Federal and State Requirements: What Must Be in Writing?

At the federal level, there is no law requiring a written employment agreement for most private-sector jobs. However, federal laws do require certain information to be provided to employees, such as:

• Wage and hour details under the FLSA, including overtime eligibility and pay rates.
• Anti-discrimination notices under laws like Title VII, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA).
• Eligibility to work verification (Form I-9) under federal immigration law.

Many states go further. For example:

• California: Requires written wage notices for most non-exempt employees, and prohibits most non-compete clauses. California Labor Code Section 2810.5 requires employers to provide a written notice of pay rates, payday, and employer information at the time of hire.
• New York: Requires a Wage Theft Prevention Act (WTPA) notice at hire, including pay rate, payday, and employer contact information. Employers must also provide written notice of any changes.
• Massachusetts: Requires written notice of pay and employer details, and uses the strict "ABC test" for worker classification.
• Illinois: Requires written commission agreements for sales employees and restricts non-compete agreements for low-wage workers.

Some states require written agreements for certain roles or industries (such as commission sales or healthcare). Always check your state labor agency for specific requirements. If you hire remote employees in multiple states, you may need to comply with the rules of each employee's state, not just your own.

Even if not required, a written agreement is highly recommended. It can help prove what was agreed if a dispute arises, and shows that you take compliance seriously. For startups, this is especially important as you scale and attract investment. Investors often ask to see employment agreements and may flag missing or non-compliant documents as a risk.

Checklist: Federal and State Requirements

• Review federal requirements for wage, hour, and anti-discrimination notices.
• Check your state's labor agency for required written notices or specific contract terms.
• For remote or multi-state teams, confirm compliance with each employee's state of residence.
• Keep signed copies of all agreements and notices for your records.

Employee vs. Contractor: Why Classification Matters

One of the most common and costly mistakes startups make is misclassifying workers as independent contractors instead of employees. The distinction matters because employees are entitled to minimum wage, overtime, tax withholding, and benefits under federal and state law. Contractors are not. Misclassification can lead to back taxes, penalties, and lawsuits.

The Department of Labor (DOL) and the IRS both provide guidance on worker classification. Key factors include:

• How much control the business has over the worker's schedule, methods, and work product.
• Whether the worker supplies their own tools and works for other clients.
• How the worker is paid (by the hour, by the project, etc.).
• Whether the relationship is ongoing or project-based.

Some states use stricter tests, such as the "ABC test" in California and Massachusetts. Under this test, a worker is presumed to be an employee unless the business can prove:

1. The worker is free from control and direction in performing the work.
2. The work is outside the usual course of the company's business.
3. The worker is customarily engaged in an independently established trade or business.

If you are not sure how to classify a worker, seek legal advice before drafting an agreement. Misclassification is a top enforcement priority for both federal and state agencies, and penalties can include back pay, tax fines, and even personal liability for business owners.

Practical Example: A startup hires a designer as a "contractor," but requires them to work set hours, use company equipment, and report to a manager. Under the DOL and IRS tests, this person is likely an employee, regardless of what the contract says. Using an employment agreement for employees and a contractor agreement for true contractors helps avoid misclassification claims.

Common Mistakes When Drafting Employment Agreements

Even well-intentioned founders can make mistakes when putting together employment agreements. Here are some of the most common pitfalls, with practical tips to avoid them:

• Using generic templates: Free or generic templates may not reflect your state's laws or your business needs. Always tailor your agreement and update it for each new hire's state.
• Failing to update for state law: State rules on pay, overtime, non-competes, and benefits can change frequently. For example, a non-compete clause valid in Florida may be void in California. Always check current state law before finalizing any agreement.
• Overpromising in writing: Avoid language that could be interpreted as a promise of job security, guaranteed bonuses, or permanent benefits unless you intend to provide them. For example, "You will receive an annual bonus" can be risky if bonuses are discretionary.
• Ignoring at-will disclaimers: If you want to preserve at-will status, include a clear statement. Otherwise, you may unintentionally create a contract for a fixed term or "for cause" employment, limiting your ability to terminate.
• Leaving out IP and confidentiality clauses: Especially for early hires, make sure you address who owns work product and how confidential information is handled. For example, a missing IP assignment clause can lead to disputes over software or inventions.
• Not addressing remote work: If your team works remotely, clarify expectations for hours, communication, equipment, and expense reimbursement. Some states, like California, require reimbursement for work-related expenses.
• Forgetting required notices: Some states require specific language or notices to be included in employment documents. For example, New York's WTPA notice or California's wage theft notice. Missing these can lead to fines.
• Not updating agreements as your business grows: What worked for your first hire may not work for your tenth. Review your agreements regularly, especially if you expand into new states or add new roles.

Practical Example: A Texas startup uses a California template that prohibits non-competes. In Texas, a tailored non-compete may be enforceable, but the template leaves the company unprotected if a key employee leaves for a competitor. Always adapt agreements to your state and business needs.

Checklist: What to Do Before Work Starts

Here is a practical checklist for US startups and small businesses to follow before a new employee begins work:

• Confirm worker classification (employee vs. contractor) using DOL and IRS guidance and your state's rules.
• Draft a tailored employment agreement that includes all required and recommended clauses for your state and industry. Consider seeking help with contracts if you are unsure.
• Provide required wage, hour, and anti-discrimination notices as needed by federal and state law.
• Complete Form I-9 and verify the employee's eligibility to work in the US.
• Set up payroll, tax withholding, and any required workers' compensation insurance.
• Review and update your employee handbook or workplace policies, if you have them.
• Discuss and document remote work arrangements, if applicable, including equipment, expense reimbursement, and expectations for communication.
• Have the employee sign the agreement before their first day of work. Keep a signed copy for your records and provide one to the employee.
• Schedule a new hire orientation to review policies, benefits, and workplace expectations.

Taking these steps before work starts can prevent misunderstandings and help your business stay on the right side of the law. For businesses hiring across state lines, create a checklist for each state where you employ workers, and keep up with changes in state and federal law.

FAQs

Do I need a written employment agreement for every employee?

In most states, written employment agreements are not legally required for every employee, but they are highly recommended. Some states or roles may require written terms, especially for pay rates or commission-based roles. Even when not required, a written agreement helps clarify expectations and can protect both the employer and employee if disputes arise.

What is the difference between at-will and contract employment?

At-will employment means either the employer or employee can end the relationship at any time, for almost any reason, with or without notice. Contract employment usually means the employee can only be terminated for specific reasons or for a set period. Most US employment is at-will unless a contract says otherwise. Be sure your agreement reflects your intent and complies with state law.

Can I use the same employment agreement in every state?

It is risky to use the same employment agreement in every state without adjustments. State laws on pay, overtime, non-compete clauses, and required notices can differ significantly. Always review and update your agreements to reflect the rules in the state where the employee will work. For example, a non-compete that is enforceable in Georgia may be void in California.

What happens if I misclassify a worker as a contractor?

If you misclassify an employee as a contractor, you could face back taxes, penalties, and liability for unpaid wages or benefits. Both the IRS and state labor agencies can audit your business and impose fines. Misclassification can also lead to lawsuits from workers seeking overtime, benefits, or unemployment insurance. Always check federal and state worker classification rules before hiring.

Are non-compete clauses still enforceable?

Enforceability of non-compete clauses varies by state and is subject to changing federal guidance. Some states, like California, generally prohibit non-competes for employees, while others allow them with restrictions. The federal government has also proposed rules limiting non-competes. Always check current laws before including a non-compete in your agreement, and consider alternatives like non-solicitation or confidentiality clauses where non-competes are not allowed.

Key Takeaways

• An employment agreement sets clear expectations and protects both employer and employee before work begins.
• Include key clauses like job duties, pay, benefits, at-will status, confidentiality, and intellectual property.
• Federal law sets a baseline, but state rules can require additional terms or notices. Always check the rules for each state where you have employees.
• Correct worker classification is critical to avoid legal risks and penalties. Use the right agreement for employees and contractors.
• Review and update your agreements regularly, especially if you hire in new states or your business grows. Laws and best practices can change quickly.

Questions about employment agreements or hiring documents? Contact our team at (888) 449-8437 or team@sprintlaw.com for practical support. Where legal services are required, they are delivered by licensed lawyers at trusted law firm partners through the Sprintlaw platform.