Why Is an Employment Contract Important for a Small Business?

Regardless of the size of a business, it is always important to have an employment contract. While the needs and legalities of the employment contract will vary from industry to industry, this contract is put into place to protect both the employee and the employer. For those who might not know, an employment contract is a legally binding agreement into which both parties enter without duress or pressure. This contract is designed to provide security to both the employee and the employer. It is also important to enlist the help of an employment lawyer to help review any agreement.

Since many people have not entered into a written employment contract before, it is important for everyone to know why this contract is important and how it works. Most contracts follow a standard format that specifies the length of employment, the terms under which someone will work, and information about compensation and benefits. This contract is important because it guarantees an employee a certain amount of protection. It also specifies how or why someone might be terminated.

First, it is conventional for an employer to specify the scope of someone’s duties in an employment contract. Basically, this specifies what the employer can ask the employee to do. More importantly, it might also specify what the employer cannot ask the employee to perform. This is important for making sure employees are not asked to do something that is outside of their scope.

Next, the employment contract will also specify the length of employment. How long is this position going to last? Often, contracts have evergreen language in them which automatically renews the contract unless either party decides not to renew. Many employment contracts will also specify severance pay if the contract ends, such as one month’s pay for every year worked. This money is designed to carry someone until the start of their next job.

In addition, employment contracts should also specify the base salary and benefits. In contracts, it is also customary for the employer to outline benefits. This might include insurance and retirement benefits. Stock options are usually not specified in a contract unless the parties entire into a discussion about shares in the company.

Most importantly, an employment contract must also specify the terms under which someone can be terminated. This includes everything from resignation to termination “for cause,” if the employee violates terms of the contract. It is critical for employees to read this language carefully to ensure they cannot be fired without due case.

In the end, the language in an employment contract can be confusing. It is important for employees to hire a lawyer to review any employment contract before signing.


Alex is a small business blogger with a focus on entrepreneurship and growth. With over 5 years of experience covering the startup and small business landscape, Alex has a reputation for being a knowledgeable, approachable and entrepreneurial-minded blogger. He has a keen understanding of the challenges and opportunities facing small business owners, and is able to provide actionable advice and strategies for success. Alex has interviewed successful entrepreneurs, and covered major small business events such as the Small Business Expo and the Inc. 500|5000 conference. He is also a successful entrepreneur himself, having started and grown several small businesses in different industries.