When Should A Growing Team Update Its Employment Agreement?

As your team grows, your employment agreement can quickly become outdated. Many founders and operators start with a basic agreement or template, but as you expand into new states, add remote roles, or update your policies, those original documents may no longer fit. Relying on outdated or generic agreements is a common mistake that can expose your business to legal risk, disputes, or even regulatory penalties. For example, a non-compete clause that is enforceable in Texas may be void in California. Similarly, failing to update wage and hour terms after a change in state law can result in costly claims.

This guide explains when a growing team should update its employment agreement, with practical examples, checklists, and state-law caveats. We cover legal triggers, classification risks, and common mistakes, so you know what to look for and when to seek help. Whether you are hiring your first out-of-state employee, converting contractors, or scaling your business, this article will help you spot red flags and plan your next steps.

What Is An Employment Agreement?

An employment agreement is a contract between an employer and an employee that defines the terms and conditions of employment. Unlike a simple offer letter, an employment agreement usually covers:

• Job title and duties
• Compensation (salary, hourly wage, commission, bonuses)
• Benefits (health insurance, PTO, retirement plans)
• Work location and remote work terms
• Confidentiality and intellectual property (IP) assignments
• Termination procedures and notice requirements
• Restrictive covenants (non-compete, non-solicit, non-disclosure)
• Dispute resolution (arbitration, venue, governing law)

In the US, there is no federal law requiring a written employment agreement for most private sector jobs, but written agreements are a best practice. They clarify expectations, protect confidential information, and help resolve disputes. Some industries (such as banking or healthcare) or executive-level roles may require written agreements by law or industry custom.

It is important to distinguish employment agreements from contractor agreements. Employees and independent contractors are subject to different legal standards, and using the wrong agreement can lead to misclassification risks. The IRS and Department of Labor (DOL) provide guidance on worker classification, and many states have their own tests (such as California's ABC test under AB5).

State law can also affect what must or cannot be included in an employment agreement. For example:

• California bans most non-compete clauses for employees
• New York requires written wage notices for certain workers
• Massachusetts has strict rules on non-compete enforceability
• Illinois requires specific disclosures for non-disclosure agreements

As your business grows, these state-specific requirements become more important, especially if you operate in multiple states or hire remote workers.

When Should You Review Or Update Your Employment Agreement?

There are several key moments when you should review or update your employment agreement. Here are the most common triggers, with practical examples:

• Hiring in a new state: Suppose your startup is based in Florida and you hire a remote developer in California. California law bans non-compete clauses and requires reimbursement for necessary business expenses. Your Florida agreement may not comply, so you need to update it for California hires.
• Changes in federal or state law: If the DOL raises the salary threshold for overtime exemptions, you may need to update your agreement's compensation terms. If New York passes a new paid leave law, your agreement must reflect the new entitlements for New York workers.
• Adding new roles or job types: If you start hiring sales reps on commission or remote workers in different time zones, your agreement should address unique compensation, hours, or reporting requirements.
• Switching from contractors to employees: If you convert a long-term contractor to a W-2 employee, you must provide an employment agreement that reflects employee status and includes required notices, benefits, and protections.
• Updating company policies: If you introduce a new remote work policy, change your PTO accrual, or add a new benefit, your agreement should be updated to match. For example, if you now offer unlimited PTO, your agreement should clarify eligibility and conditions.
• Major business changes: Mergers, acquisitions, or changes in ownership may require you to update agreements to reflect new management, reporting structures, or business models.
• Periodic review: Even if none of the above apply, it is wise to review your employment agreements annually. Laws and business practices change, and a regular review helps catch issues before they become problems.

Failing to update your agreement after these events can lead to disputes, regulatory fines, or unenforceable contract terms. For example, if you do not update your agreement after expanding to Illinois, you might miss new requirements for non-disclosure or non-compete clauses, exposing your business to legal challenges.

Key Legal Triggers And State-Law Caveats

Employment law in the US is a patchwork of federal, state, and local rules. Here are some of the most important legal triggers for updating your employment agreement, with state-law caveats:

• Wage and hour law changes: The Fair Labor Standards Act (FLSA) sets federal minimum wage and overtime rules, but many states (like California, New York, and Washington) have higher minimum wages and stricter overtime rules. If you hire in a new state or the law changes, update your agreement to reflect the correct rates and overtime eligibility.
• Paid leave requirements: States like Massachusetts, and Oregon require paid sick leave. Some cities (such as San Francisco and New York City) have their own paid leave ordinances. Your agreement should specify leave entitlements based on the employee's work location.
• Non-compete and restrictive covenants: California bans most non-compete clauses for employees. Massachusetts requires non-competes to be supported by "garden leave" or other consideration. Washington prohibits non-competes for employees earning below a certain salary threshold. Always tailor restrictive covenants to the employee's state.
• Classification and independent contractor rules: The IRS uses a control test, while the DOL and many states use variations of the ABC test. For example, California's AB5 law presumes workers are employees unless the business can prove all parts of the ABC test. If you change a worker's status, your agreement must reflect the correct classification and include appropriate terms.
• Required notices and disclosures: New York requires a wage theft prevention notice. Illinois requires specific language in non-disclosure agreements. Some states require arbitration disclosures or specific language about at-will employment. Missing these can result in fines or unenforceable terms.
• Remote work and reimbursement: California requires reimbursement for necessary business expenses, including home internet or cell phone use for remote workers. Illinois and Massachusetts have similar rules. If you hire remote employees, your agreement should address expense reimbursement and remote work expectations.
• Background checks and privacy: Some states require disclosures and employee consent before conducting background checks. California has strict rules under the Investigative Consumer Reporting Agencies Act (ICRAA). Your agreement or onboarding documents should include required notices.

Always check the latest guidance from the DOL, IRS, and your state labor agency when updating your agreements. State and local rules can change quickly, and what is enforceable in one state may be void in another.

Common Mistakes When Updating Employment Agreements

Many businesses make avoidable mistakes when drafting or updating employment agreements. Here are some of the most common, with examples and tips to avoid them:

• Using a one-size-fits-all template: A template that works in Texas may not work in California or New York. For example, a Texas agreement might include a non-compete clause that is unenforceable in California. Always tailor your agreement to the employee's work location.
• Failing to update after legal changes: If your state raises the minimum wage or passes a new paid leave law, your agreement must be updated. For example, Washington's minimum wage increases annually, and agreements must reflect the current rate.
• Overly broad restrictive covenants: Courts often strike down non-compete or non-solicit clauses that are too broad in time, geography, or scope. For example, a non-compete that bans an employee from working in any capacity for a competitor nationwide is likely unenforceable in most states.
• Unclear job duties or compensation: Vague job descriptions or pay terms can lead to disputes. For example, if an agreement says "salary as discussed" without specifying an amount, it may be unenforceable.
• Not addressing remote work: As remote work becomes more common, agreements should clarify expectations for hours, equipment, expense reimbursement, and data security. For example, if you require employees to use their own devices, your agreement should address security and privacy.
• Missing required notices: Some states require specific disclosures, such as New York's wage theft prevention notice or California's at-will employment disclaimer. Missing these can result in fines or legal challenges.
• Misclassifying workers: Using an employment agreement for a contractor, or vice versa, can lead to IRS or DOL penalties. Always use the correct agreement and classification based on the worker's role and applicable law.
• Not updating after company policy changes: If you change your PTO, benefits, or disciplinary policies, your agreement should be updated to match. For example, if you switch to unlimited PTO, clarify eligibility and procedures in the agreement.

To avoid these mistakes, review your agreements regularly, tailor them to each employee's location and role, and consult with a qualified employment law professional when in doubt.

Checklist: When To Review Or Update Your Employment Agreement

Use this practical checklist to decide if your employment agreement needs a review or update:

• Have you hired employees in a new state in the last 12 months?
• Have there been recent changes to federal, state, or local employment laws that affect your business?
• Are you hiring new job types (such as remote workers, managers, or sales staff) with different duties or pay structures?
• Have you converted any contractors to employees, or vice versa?
• Have you updated your PTO, remote work, or benefits policies?
• Has your business undergone a merger, acquisition, or major restructuring?
• Are you using the same agreement for all employees, regardless of state or role?
• Do your agreements include all required state notices and disclosures?
• Are your restrictive covenants (non-compete, non-solicit) tailored to state law and the employee's position?
• Do your agreements clearly define job duties, compensation, and termination procedures?
• Do you address remote work expectations, expense reimbursement, and data security for remote or hybrid roles?
• Have you checked for updates from the DOL, IRS, and relevant state labor agencies?

If you answer yes to any of these, it is time to review your employment agreement. Even if you answer no, consider a periodic annual review to ensure ongoing compliance and clarity.

For example, if you hire a remote employee in Oregon, you need to update your agreement to include Oregon's paid sick leave requirements and expense reimbursement rules. If you convert a contractor in California to an employee, your agreement must reflect California's wage, overtime, and expense reimbursement laws, and avoid non-compete clauses.

FAQs

How often should I update my employment agreement?

Review your employment agreement at least once a year, or whenever you hire in a new state, add new roles, or there are significant legal changes. Regular reviews help ensure compliance and reflect your current business practices. For example, if you expand to Massachusetts, review your agreement for compliance with Massachusetts non-compete and paid leave laws.

What happens if my employment agreement does not comply with state law?

If your agreement conflicts with state law, non-compliant provisions may be unenforceable, and you could face penalties or lawsuits. For example, a non-compete clause in California is likely void, and missing wage statements in New York can result in fines. Always check state-specific requirements before finalizing agreements.

Do I need a different employment agreement for remote employees in other states?

Yes, you should tailor your agreement to the laws of the state where the employee works. Remote employees are generally subject to the employment laws of their work location, not your company headquarters. This includes wage, overtime, leave, and restrictive covenant rules. For example, a remote employee in Illinois may be entitled to expense reimbursement and specific leave entitlements not required in other states.

Can I use the same employment agreement for contractors and employees?

No, contractors and employees are subject to different legal rules and classifications. Using the same agreement can create confusion and increase your risk of misclassification, which can lead to IRS or DOL penalties. Contractors should have a separate agreement reflecting their independent status, without employee benefits or obligations.

What should I do if I am unsure about my employment agreement?

If you are unsure whether your employment agreement is up to date or compliant, consult with a qualified employment attorney or HR professional. They can review your agreements, identify risk areas, and recommend updates based on current laws and your business needs. This is especially important if you are hiring in new states or changing worker classifications.

Key Takeaways

• Employment agreements should be reviewed and updated regularly, especially when your team grows, you expand into new states, or employment laws change.
• Federal, state, and local laws may require specific terms or disclosures in your agreements. Using outdated or generic templates can create legal risks and lead to unenforceable terms.
• Common triggers for updates include hiring in new states, adding new roles, converting contractors to employees, and changes to company policies or the law.
• Always tailor your agreements to the employee's location and role, and include required notices and clear terms for job duties, compensation, and termination procedures.
• If you are unsure about your employment agreement, seek professional guidance to avoid compliance issues and potential disputes.

If your business is growing or you are unsure whether your employment agreement is up to date, our team can help you review and update your documents to reduce risk and support your next stage of growth. Call (888) 449-8437 or email team@sprintlaw.com to discuss your needs. Where legal services are required, they are provided by licensed US lawyers at ElevateNext US, LLC, a trusted US law firm, through the Sprintlaw platform.