Best practices for drafting effective employment contracts

 

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What to include in an employment contract

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Drafting clear and enforceable contract language

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Non-compete and restrictive covenant best practices

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Compensation and benefits provisions

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Confidentiality and intellectual property clauses

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Termination and severance terms

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Compliance with employment regulations

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Common mistakes to avoid

 

 

What to include in an employment contract

Employment contracts need to be precise, consistent, and compliant with all applicable laws and regulations.

Basic essential clauses in an employment contract include:

• Identification of the parties
• Job title and duties
• Compensation, including base pay rate, bonuses, and equity
• Benefits the employee is entitled to receive
• Work schedule
• Whether employment is at will or for a fixed term
• Employee’s agreement to comply with company policies

When drafting the contract, incorporate state-specific requirements and mandatory provisions. For example, if you include non-compete or non-solicitation clauses, tailor them to meet the applicable state’s requirements for enforceability.

Also include an integration clause (sometimes called an “entire agreement clause”) stating that the terms of the employment contract are the parties’ complete and final agreement. This prohibits any conflicting terms from prior agreements from being used as evidence in contract disputes.

Using AI-assisted drafting tools can help ensure you include all necessary provisions and details, and provide language to use that is precise and unambiguous.

Drafting clear and enforceable contract language

Draft employment contracts using precise language to avoid ambiguity. When contract provisions are unclear, the parties can interpret them differently, which can result in disputes and litigation. Ideally, your intended meaning should be the only possible interpretation of your contract provisions.

To increase clarity in your employment contracts:

• Use plain language and avoid legalese to make the contracts more accessible for all parties.
• Use short sentences, write in active voice, and use verbs instead of nominalizations to make the language easier to read.
• Use “shall,” “will,” and “may” precisely to convey your exact meaning.
• Instead of starting from scratch, use previous employment contracts as templates and use standard clauses for consistency.

Use AI drafting tools to keep contract language consistent

AI-assisted drafting tools can be very helpful to ensure consistency.

These tools can pull language from your prior employment contracts so that your contracts stay consistent within the organization over time. These tools can also help you maintain consistency within the contract by incorporating standard clauses, which help reduce the ambiguity that can arise when the same concepts are described using different terms.

AI tools also can make you more efficient by speeding up the entire drafting process from finding the right starting point through the final review.

Non-compete and restrictive covenant best practices

Non-compete clauses, which prohibit an employee from working for a competing employer or starting a competing business, are controversial, especially when applied to low-income workers. This is an active area of legislation, with new laws being passed and more in the works.

There is currently no national ban on non-compete agreements. Although the Federal Trade Commission (FTC) issued a final rule in 2024 implementing such a ban, a district court ordered a halt to enforcement several months later. The FTC, at first, appealed the court’s order but then withdrew its appeal in September 2025 — at this time, the ban is not in effect and not enforceable.

Most states, however, have some level of regulation of non-competes. These vary widely from state to state. Several ban non-competes completely (with some minor exceptions). Some allow non-competes only for employees earning more than a specified income threshold. Others place limits on non-competes according to criteria other than income, such as the employer’s industry. Some apply a reasonableness test. And some may have no restrictions on non-competes from legislation but apply limits from case law.

The legal landscape of non-competes is still shifting rapidly. Therefore, if you include these types of restrictions in employment contracts, you should be aware of the latest laws and regulations in the applicable states.

In jurisdictions where non-competes are banned or limited, evaluate whether you might use alternative types of restrictive covenants. For example:

Garden leave clauses

Garden leave clauses delay an employee’s ability to quickly join a competitor’s business by requiring the employee to give advance notice before leaving, followed by a period where they stop working but stay on the employer’s payroll and cannot work for the competitor.

Non-solicitation clauses

Non-solicitation clauses prohibit former employees from soliciting their former company’s customers or clients. Note that different states have varying standards for determining whether a non-solicitation agreement is enforceable.

Proprietary information and inventions assignment

PIIAAs ensure that the ownership rights to any inventions an employee creates as part of their job are assigned to their employer.

In jurisdictions where there is a common-law or legislative reasonableness test for non-competes, you should consider the agreement’s:

• Scope: Is the non-compete necessary to protect the employer’s legitimate business interests? Does it create an unnecessary hardship for the employee?
• Duration: Is there a reasonable time period for when the restrictions remain in effect?
• Geographic limits: Do the restrictions apply beyond the area where the company does business?

Practical Law Connect resources can help you quickly and accurately navigate the complexities of non-compete agreements.

Compensation and benefits provisions

Offering attractive compensation and benefits packages is a key part of recruiting and keeping talented employees.

Provisions for compensation and benefits should be clear and precise to avoid potential future disputes. Employment contracts generally specify the details of the total compensation paid to employees, including base salary, annual bonuses, sign-on bonuses, equity awards (such as stock options), and eligibility for benefits.

Note that companies subject to the Employee Retirement Income Security Act (ERISA) and Affordable Care Act (ACA) requirements need to be mindful when structuring retirement and healthcare benefits to ensure that any carve-outs comply with federal regulations.

Other useful compensation and benefits provisions include specifying:

• Whether the annual base pay rate is fixed for the term of the employment contract or if it is subject to automatic or discretionary increases.
• Whether bonuses are based on performance or are at the employer’s discretion.
• The amount and type of equity awards and whether they vest.
• Eligibility for benefits and other perks, and whether they are taxable.
• Whether the employer may recover compensation previously paid to an employee due to the employee’s misconduct, breach of fiduciary duty, or other negative actions. These clawback clauses are often applied to incentive-based pay, such as bonuses.

Like employment contracts, offer letters provide provisions stating compensation and benefits. While offer letters are generally not legally binding, it’s a good practice to seek alignment between the letters, other hiring-stage documentation, and employment contracts.

Confidentiality and intellectual property clauses

A trade secret is information that derives value from not being generally known. Trade secrets are a type of confidential information, which is defined more broadly as any non-public information that provides a competitive advantage to a business.

A confidentiality clause (or an NDA) in an employment contract can cover both trade secrets and other types of confidential information. It should include a definition of confidential information, exceptions, the employee’s obligations, and any legally required disclosures. Using standard confidentiality clauses from Practical Law can speed up drafting time and help ensure that you include all necessary provisions.

An IP clause in an employment contract specifies the rights that an employee transfers to their employer for intellectual property that the employee creates in connection with their employment. The transfer can be an assignment, which transfers all of the rights, or a license, which is usually more limited in scope and time, and may be exclusive or non-exclusive.

In copyright law, under the work-for-hire doctrine, an employer owns the copyright for work that its employees create within the scope of their employment. Certain conditions must be met, however, which may be difficult to prove, for an employer to gain ownership of the copyright under the doctrine. For this reason, it’s considered good practice for an employer to include a written assignment clause in the employment contract.

Termination and severance terms

In almost all states, employment is at-will when there is no employment contract. Employment contracts, however, can override the presumption of at-will employment.

For-cause termination provisions in employment contracts typically specify that the employer can terminate the contract for cause at any time without notice and without providing severance pay. When drafting these provisions, you should define the specified causes for termination in a way that is unambiguous and neither overly broad nor overly narrow. Ambiguous definitions can open the door to breach of contract litigation.

Although precise drafting helps lower the chance of disputes, you still need to address the possibility that they may happen. Employment contracts should therefore contain dispute resolution provisions, such as mandatory arbitration clauses, forum selection, and choice of governing law.

The flip side of termination with cause is termination without cause. Provisions for termination without cause allow either the employer or the employee to terminate the employment contract for any reason or no reason. The terms of these provisions usually require giving notice in a specified amount of time in advance of termination and that the notice be in writing. These provisions often include severance provisions.

Severance packages can protect employers from liability by requiring departing employees to release all claims against the employer in exchange for receiving severance payment or other benefits. Severance packages may also include COBRA coverage and outplacement services. Severance provisions must be drafted precisely to ensure they comply with ERISA, IRS requirements, and the Older Workers Benefit Protection Act (OWBPA).

Compliance with employment regulations

Employment regulations are constantly changing. Key areas of federal and state employment regulation that are currently evolving include:

• Pay transparency: As of September 2026, approximately 18 jurisdictions (17 states and Washington D.C.) require employers to disclose salary ranges, with specific requirements varying by state. At least a dozen more states are also considering similar legislation.
• AI-in-hiring laws: As of October 2026, several states and New York City have enacted laws that regulate the use of automated tools to make employment decisions, and similar bills are pending in additional states. In New York City, for example, local law prohibits employers from using AI, machine learning, statistical modeling, or data analytics decision-making tools unless the employers ensure a bias audit is conducted. Several other states and the EEOC are addressing the use of AI tools in employment using existing anti-discrimination laws.
• Family and medical leave: Several states have recently enacted new family and medical leave legislation or updated their existing laws.

Common mistakes to avoid

A well-drafted contract will be enforceable and help prevent future disputes. Be aware of these common errors that make employment contracts less effective:

Vague language

Disputes may arise when contract language can be interpreted in more than one way.

Missing severability clauses

A severability clause states that if one provision in the contract is invalid or unenforceable, the other provisions remain in force. When the clause is missing, a court could void the entire contract.

Overreliance on boilerplate

Using pre-made generic contracts or old templates that haven’t been updated can leave you unprotected and invite disputes. On the other hand, building a contract from standardized clauses or using up-to-date templates can save you time, reduce human error, systemize quality, increase precision, and help ensure consistency.

You have to consider your source. The resources you use for clauses and templates should be continually updated to reflect changes in the law and give you the flexibility to select exactly the provisions you need.

Failing to tailor contracts to jurisdiction-specific requirements

A court could deem your contract provisions unenforceable if you don’t take into account variations in state and local regulations and draft your terms accordingly.

For more information on employment contracts, explore Thomson Reuters’ labor and employment solutions.