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What is an Employment Agreement? Learn the Details

As a small business owner, you may find yourself in a great position to be able to expand your business and hire employees. But before hiring any employees, you will want to set out the terms of their work with your company. To do so officially and properly, draw up a formal employment agreement before their first day of work. Below, we’ve included everything you need to know about setting up an employment agreement, plus how you can use Ownr to easily tailor and create the employment agreement you need for your business. 

What is an employment agreement?

An employment agreement is a legally-binding document between an employer and an employee, contractor or freelancer that sets out the detailed provisions of their work arrangement. According to the Government of Canada website, an employment agreement serves the purpose of “providing a detailed description of the job, describing the terms and conditions of employment, articulating the employer’s responsibilities and the worker’s rights, and helping ensure the worker gets fair working arrangements”.

Both employers and employees are beholden to the provincial Employment Standards Act (ESA). The ESA governs the relationship between employees and employers, and includes provisions covering all the essential elements of employment.  An Employment Agreement must contain all the key elements related to employment, but the agreement must be fair, respect of the rights of the employee, and be compliant with the Employment Standards Act.

Why you need an employment agreement

An employment agreement provides clarity on the terms of the job and protects both parties from legal disputes should they arise. As an employer, it’s important to have clear and specific written documentation outlining the terms of employment for anyone you hire—whether full-time permanent, part-time seasonal or contracted. Without a clear and compliant employment agreement, it may not be easy to resolve and disputes, discrepancies, or misunderstandings with your employee. 

When should you use an employment agreement?

While you may have a verbal agreement in place with your prospective employee, it’s crucial that they sign the employment agreement prior to the start date of their duties. We recommend drafting the terms early and discussing the job and salary details ahead of an employee signing the agreement.

Types of employment agreement contracts

In Canada, these are a few main types of employment agreement contracts. Before you draft up the agreement, you’ll need to determine if the employee is providing services as a permanent employee, or as a contractor. There are few key elements to the distinction:

Duration of Engagement

For permanent employees, the engagement is usually for an undefined duration. Contractors, on the other hand,  may have a set duration. Perhaps they are being hired for a specific time period or to complete specific tasks or goals. 

Time Commitment

Employees are usually expected to work exclusively for the company, and for a predetermined number of hours per week. Contractors can often set their own schedules, and take on different projects for different companies concurrently.

Payment and Taxes

Employees will have their taxes and remittances deducted by their employer. In most cases, contractors will receive a gross sum and be responsible for paying their own taxes and remittances.


When terminated, employees are usually entitled to notice of termination and/or termination pay. Contractors do not have automatic right to termination pay or notice. Their compensation depends on what is in the Contractor Agreement.

Based on the definition of your employee’s status, there are a few options for the type of employment agreement that you might draw up:

  • Permanent employment agreements: this is the most common type of employment contract and is also known as an indefinite term employee agreement. An employee is hired either part-time or full-time for an ongoing term. As this contract has no end date, it will continue until either the employee or employer ends the contract. Typically, permanent employees receive benefits from their employer such as stock shares, medical and dental health coverage, paid vacation and more.
  • Fixed-term employment agreements: Under this type of agreement, an employee is hired for a set term with an agreed upon end date. This is common for seasonal positions, maternity or paternity leave coverage and other short-term hires. Fixed-term employees are usually granted some but not all of the same benefits as permanent employees. 
  • Contractor employment agreements: Under this agreement, an independent contractor is hired for specific services on a project. They are not considered an employee of that company. 

What to include in an employment agreement

Employment contracts come in many forms. They can be as simple or detailed as your business requires. Consider including details like:

  • Job title
  • Start date
  • Employment terms
  • Description of duties
  • Working hours
  • Overtime
  • Compensation
  • Employee benefits
  • Probationary period
  • Ownership of intellectual property 
  • Confidential information and confidentiality agreement (you may choose to include an employee NDA within their employment agreement)
  • Probationary period
  • Non-compete and non-solicitation clauses
  • Social media conduct
  • Termination clause
  • Non-solicitation
  • Non-competiton
  • Vacation

Pros of an employment agreement

An employment agreement makes the terms clear to both the employer and the employee. While the agreement serves to protect the interests of the employer, there are clear benefits to both parties:

  • It clearly outlines employee duties and benefits: From vacation time to health coverage, the terms of the employment are clearly outlined in writing which provides certainty to both parties
  • It helps ensure compliance with labour laws: The agreement can include important details like overtime pay, minimum wage and other items governed by local labour laws.
  • It helps solve legal disputes: For both parties, having clear, written documentation can help stop and prevent legal disputes from arising.
  • It protects the company’s intellectual property: The employment agreement can clearly define what is owned by the company while the employee is under contract
  • It maintains the confidentiality of trade secrets: It may be essential for your employees to access proprietary information in order to complete their roles. To protect this information from being shared, you can include details on what information is confidential and the consequences for breaching those terms.

Cons of an employment agreement

A detailed employment agreement serves to protect the employer more than the employee. Even if there is no agreement or a simple agreement in place, the employee is under the full protection of the governing laws. With an employment agreement in place, the employer is able to define the terms that govern that contract Of course, the employer cannot include terms that are illegal for the employee to do. Some of the downsides to an employment agreement are:

  • It may require an employee to give up some workplace rights: Certain rights such as the right to privacy, right to compete, right to free speech and more may be amended in the employment agreement to comply with the employer’s terms. In short, to be employed, you may have to sign away some rights as an employee.
  • It may be difficult to terminate the agreement: If either party wishes to terminate the agreement, they are limited by the terms within it. See more on this below where we discuss terminating an employment agreement. 
  • It may be difficult to amend terms: If re-negotiations of the employment terms are required, it will mean that both employer and employee need to agree to sign off on any changes. 
  • Some terms may be too complex to draft and understand: For both employer and employee, agreements may require additional legal counsel depending on the complexity and nature of the work. (Psst — need to draft an employment contract without hiring lawyers? Check out how Ownr’s tailored legal documents can help easily customize contracts and agreements).

How to terminate an employment agreement contract

Termination of an employment agreement will depend both on the terms in the agreement signed and on local labour laws. Start by reviewing the termination clause to understand what contractual obligations are in place. For example, how much notice needs to be given by either party. Next, a formal written notice should be submitted in the form of a termination or resignation letter. This notice will include details like the date of termination and may include the reason for termination. Take into account the local labour laws to ensure you are following the conditions like notice periods and severance pay. 

Termination of an employment agreement is often where legal disputes may arise, so pay careful attention to this clause when drafting your employment agreement and seek legal counsel where necessary. 

Key takeaways

The bottom line is that as a business owner, it’s in your best interest to use an employment agreement every time you hire a new employee.

What is an employment agreement: FAQs

Here are some frequently asked questions and answers about employment agreements. 

What is the purpose of an employment agreement?

When hiring an employee, an employment agreement is a document used to govern the working relationship between the employee and employer. It includes important details like their salary, working hours, benefits, ownership of intellectual property, and how to terminate employment.

Is an employment agreement necessary?

An employment agreement is always recommended to help protect both an employer and employee and ensure that all details are clear and agreed upon. Ownr recommends using an employment agreement before you hire an employee, regardless of their work term. 

What are the two main types of employment agreements?

In Canada, the two main types of employment agreements are permanent indefinite-term agreements and fixed-term agreements. Otherwise, for independent contractor workers, there are contract agreements. If you need to know more, read our article on the difference between an employee and an independent contractor.