Employment agreement types explained: key terms, risks & compliance tips

Common types of employment agreements

Depending on the nature of the role and the needs of the organization, US employers can use several types of employment contracts:

1. Agreements in at-will employment

The at-will employment relationship is the most common employment arrangement in the US. In all states, with the exception of Montana, employment relationships are presumed to be at-will. At-will means that an employer or employee can terminate the employment relationship at any time, for any lawful reason or no reason, without prior notice.

However, employment at-will does not necessarily mean that there is no employment agreement. Instead, it means that employment and compensation are not guaranteed for any specified duration of time. Instead, organizations may use an employment contract (written or implied in employee handbooks or employer policies) to clarify expectations, reduce risk and formalize policies around performance, compensation and notice periods.

2. Fixed-term or term employment contracts

Fixed-term contracts are employment agreements where an employer hires an employee for a specified duration. During this period, the employer cannot terminate the employee except for cause. “For cause” reasons are typically predetermined and detailed, providing clear grounds for dismissal under the contract.

Fixed-term contracts clarify the duties and expectations of both the employee and employer, and the specific terms can vary based on state laws, the position, and the industry involved.

3. Independent contractor agreements

Independent contractor agreements are formal contracts between an employer and an independent contractor that outline the terms of the working relationship. These agreements typically detail the specific project or services to be performed, deadlines for completion, payment arrangements, and conditions for termination.

Independent contractors are not employees, meaning they retain control over how, when, and where their work is performed. This classification allows businesses to avoid certain financial obligations associated with traditional employment, such as workers’ compensation and employee benefits. It is crucial for employers to have a written independent contractor agreement, as the absence of such an agreement may imply an intention to establish an employer-employee relationship.

4. Executive or senior-level contracts

To reduce the risk of losing key leaders unexpectedly, employers can use executive agreements that require notice or a set tenure (within legal limits). These contracts confirm the role, responsibilities, and expectations — similar to standard employment agreements. An executive agreement should also explicitly describe the compensation package, including base salary, bonuses, and other benefits.

Common compliance issues related to employment agreements

Employment agreements can support compliance or create risk depending on how they’re drafted and maintained. Common challenges include:

Inconsistent or outdated contract language

When agreement templates differ across departments or haven’t been updated to reflect new laws or differences in legal standard across states, employers face higher legal exposure. Clear, consistent templates that are appropriate for different jurisdictions in which the organization operates reduce confusion and ensure compliance across the organization. 

Misclassification of workers

Confusion between employees and independent contractors remains one of the most frequent compliance issues. Contractor agreements must avoid implying an employment relationship, and job duties should be evaluated against federal and state worker-classification tests.

Inadequate confidentiality or IP protection

If agreements do not clearly address confidential information, trade secrets or intellectual property ownership, employers risk losing control of sensitive data or innovations.

Missing or unclear compensation terms

Ambiguity around wages, bonuses, equity, benefits or notice periods can create disputes, especially in executive and specialized roles.

Improper use of noncompete and nonsolicitation clauses

State laws governing restrictive covenants vary significantly. Some states ban or heavily restrict the use of noncompete and nonsolicitation agreement, requiring HR teams to tailor agreements by jurisdiction.

By maintaining accurate templates, reviewing state-specific rules and aligning contracts with federal and state requirements, HR teams can reduce risk and protect the organization.