A Founder’s Guide to Employment Agreement

Hiring your first employees can feel overwhelming. You may be wondering what exactly needs to go into an employment agreement, how state laws come into play, and whether you can rely on simple templates you find online. For entrepreneurs and startups, getting this right early on saves time, prevents disputes, and helps you scale with confidence.

Key Terms of an Employment Agreement

Each clause in an employment agreement is designed to reduce ambiguity and establish a clear framework for both employer and employee. For companies, this creates consistency across the team. For employees, it builds trust by showing that expectations and obligations are transparent. The following table highlights the most common sections and why they matter:

U.S.-Specific Considerations for Entrepreneurs

Employee Classification

Beyond exempt vs. non-exempt under the FLSA, startups often confuse contractors and employees. If the person is working full-time on your core business under your direction and on your premises, they are likely an employee, not a contractor. Regulators and tax authorities typically determine this status by examining the actual working relationship rather than the contract label — factors such as control, integration into the business, and exclusivity of work are key indicators. Penalties for misclassification can include back payment of wages and benefits, as well as fines that may range from several thousand dollars per violation depending on the jurisdiction and severity of the case.

Multi-State Teams

With remote hiring, your company may have employees across several states. Each state has unique rules for wage notices, mandatory sick leave, and final paycheck timing. For example, California requires unused vacation payout upon termination, while states like Florida do not. To stay compliant, employers should verify requirements through each state’s Department of Labor or official government labor website, which publish current rules and guidance. For example, see the state minimum wage resources provided by the U.S. Department of Labor. Because these requirements vary and change over time, the safest approach is to review such portals and discuss your company’s specific situation with your lawyer.

Probationary Periods

Some employers add a 90-day trial period to evaluate fit. In the U.S., this is usually symbolic because at-will employment already allows termination at any time, but it can help set expectations around early performance reviews.

Termination Clauses

Even under at-will rules, you should describe what happens if employment ends. Does the employee receive severance? How soon must company property be returned? What happens to unvested equity? Clarity here reduces stress during transitions.

Common Mistakes Startups Make

Even with the best intentions, many startups fall into predictable traps when drafting and using employment agreements. Some of these mistakes are universal, while others are tied to strict state laws — California being the most notable example due to its strong employee protections. Let’s take a closer look at some of them.

Misclassifying Employees

One of the most common mistakes is labeling someone as an independent contractor when they should be an employee. The California ABC Test makes it particularly hard to justify contractor status if the worker is doing tasks central to your business. Misclassification can lead to back taxes, penalties, and liability for unpaid benefits.

Using Outdated Templates

Startups often download free agreements or reuse documents from friends’ companies. The problem is that employment law evolves quickly. For example, California has recently expanded wage transparency rules and continues to refine arbitration and non-compete regulations. Using an outdated template can leave you exposed to noncompliance and lawsuits.

Leaving Equity Terms Vague

Equity promises often attract talent, but vague or inconsistent terms create disputes. For instance, not clarifying what happens to unvested shares if someone leaves early can lead to lawsuits. California courts also scrutinize fairness in equity arrangements, especially if employees claim they were misled about value or vesting.

Not Considering Arbitration Costs

Many founders prefer arbitration for privacy and efficiency. However, under California law, the employer must cover all arbitration costs, including arbitrator fees. If you have a small budget, this can quickly become more expensive than litigation.

Overreliance on Non-Compete Clauses

Many startups still include broad non-compete language in their agreements. In California, these are almost always unenforceable, regardless of whether the employee agrees to them. Courts in California prioritize employee mobility, so employers should focus instead on confidentiality, non-solicit, and intellectual property protections.

Where to Find the Universal Template?

You can use Skala’s employment agreement template as a starting point. It is designed to work across multiple jurisdictions, not just the U.S. Written in plain language without legal jargon, it is easy for both employers and employees to understand. The template includes all essential terms needed to structure the relationship and provides a strong foundation for long and productive collaboration.