<PAGE>

                                                                   EXHIBIT 10.13


         EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND GARY McGRATH

     This agreement is dated and made effective the 25th day of October, 1999
(the "Effective Date") between Gary McGrath ("Executive") and Pyramid Breweries
Inc., a Washington Corporation ("Company").

     1.  Employment.  Company employs Executive and Executive accepts employment
         ----------
on the terms and conditions in this agreement.

     2.  Duties. Executive is employed in the capacity of Vice President of
         ------
Sales. In this capacity, Executive shall have primary responsibility for
advising on and executing the Company's sales strategies and for attaining the
associated annual business plan goals. Executive shall report directly to, and
take direction from, the Company's Chief Operating Officer ("COO"), or in the
absence of a COO, the Chief Executive Officer. Executive shall perform the
duties customarily performed by a vice president of sales, provided that
Executive's precise duties may be changed, extended or curtailed, from time to
time, at the direction of the COO, and Executive shall assume and perform the
further reasonable responsibilities and duties that the COO may assign from time
to time.

     3.  Intensity of Effort; Other Business. Executive shall devote his entire
         -----------------------------------
working time, attention, and efforts to Company's business and affairs, shall
faithfully and diligently serve Company's interests and shall not engage in any
business or employment activity that is not on Company's behalf (whether or not
pursued for gain or profit) except for (a) activities approved in writing in
advance by the Board and (b) passive investments that do not involve Executive
providing any advice or services to the businesses in which the investments are
made.

     4.  Term. The term of this agreement is of indefinite duration. As stated
         ----
in paragraph 9 below, this agreement and Executive's employment relationship may
be terminated at any time, with or without cause.

     5.  Compensation. Executive's compensation shall be as follows:
         ------------

         (a) Executive's salary shall be $4,807.69 payable every two weeks
(equal to $125,000 on an annualized basis).  Payday is the Friday following each
two-week period.  Executive's salary shall be reviewed on January 1st each year
and adjusted as determined in the COO's sole discretion.

         (b) Executive will be eligible to receive a personal performance bonus
each year of up to an additional $20,000 as determined by the COO and based upon
performance criteria established in the quarterly Incentive Bonus Program at his
discretion.  Executive is eligible for the personal performance bonus for any
quarter only if Executive remains employed by Company at least through the last
day of each quarter.  If Executive's employment ends prior to the last day of a
quarter, Executive will be ineligible for any portion of the remaining personal
performance bonus for that year, save that if the Company shall terminate
employment without cause, Executive shall be eligible for a pro-rata portion of
that quarter's personal performance bonus.  The personal performance bonus, if
any, shall be paid on or before the end of the following quarter.

         (c) Executive will also be eligible to receive a corporate bonus each
year of up to an additional $ 10,000 as determined by the Board of Directors
Compensation Committee's review of the Company's performance in the past year
compared to the plan for that year.  If Executive's employment ends prior to
December 31, Executive will be ineligible for any portion of the corporate
performance bonus for that year.  The corporate performance bonus, if any, shall
be paid on or before April 15 of the following year.

         (d) Executive shall be eligible for stock options and/or other
incentive compensation only as stated in Non-Qualified Stock Option Agreements
between the Company and Executive.

         (e)  Executive shall receive a car allowance of $475 per month, plus
reimbursement for gas purchased by employee for business use.
<PAGE>

     6.  Benefit Plans. Executive (and qualifying immediate family members where
         -------------
applicable) shall be eligible to participate in the Company's Employee Benefit
Package offered generally to employees, which currently includes health
insurance through Blue Cross of Washington, life and AD&D insurance, fifty
percent (50%) Company-payment of vision and dental, maternity leave, health
insurance continuation, sick leave, paid vacation, holidays, and 401(k). The
exact terms and conditions of the Company's benefits, including eligibility are
governed by the benefit plans, not this agreement or any summary provided to
Executive.

     7.  Vacation and Sick Leave. Executive shall be entitled to accrue up to 4
         -----------------------
weeks (20 days) of paid vacation and five days of paid sick leave per calendar
year (prorated if this agreement begins and/or ends in the middle of a calendar
year). Up to three weeks (15 days) of vacation not used in any calendar year may
be carried over into the next calendar year; otherwise unused vacation is
forfeited at the end of the calendar year. Upon termination of employment for
any reason, Executive shall be paid for earned but unused vacation. Sick leave
may be accumulated up to a maximum of twenty (20) days. Unused sick leave is not
paid upon termination of employment, regardless of the reason.

     8.  Business Expenses. Executive is authorized to incur reasonable travel
         -----------------
and entertainment expenses to promote Company's business. Company shall
reimburse Executive for those expenses. Executive shall provide to Company the
itemized expense account information that Company reasonably requests.

     9.  Termination. Executive's employment may be terminated as follows; in
         -----------
which event Executive's compensation and benefits shall terminate except as
otherwise provided below:

         (a)  Without Cause or Good Reason. Either party may terminate
              ----------------------------
Executive's employment at any time by giving fourteen (14) calendar days'
advance written notice of termination to the other without the necessity of
cause or good reason.

         (b)  By Company for Cause. Company may terminate Executive's
              --------------------
employment for cause, without advance written notice of termination, by giving
written notice of such termination. Any termination of Executive's employment
for cause must be approved by a majority of the Board other than Executive.
Executive must be given reasonable advance notice of the meeting at which his or
her termination is to be considered, and a reasonable opportunity to address the
Board. For purposes of this agreement "cause" means and is limited to
dishonesty, fraud, commission of a felony or of a crime involving moral
turpitude, harassment or illegal discrimination of any nature, including sexual
harassment, destruction, theft, or unauthorized use or distribution of Company
property or confidential information, fighting with an employee or customer or
vendor, intoxication at work, use of alcohol to an extent that it impairs
Executive's performance of his or her duties, use of illegal drugs at any time,
malfeasance or gross negligence in the performance of Executive's duties,
violation of law in the course of employment, Executive's failure or refusal to
perform his or her duties, Executive's failure or refusal to follow reasonable
instructions or directions, misconduct, or any material beach of Executive's
duties or obligations to Company.

         (c)  Death. Executive's employment shall terminate automatically upon
              -----
Executive's death.

         (d)  Permanent Disability. Company may terminate Executive's employment
              --------------------
immediately if Executive becomes permanently disabled. For purposes of this
agreement Executive will be considered "permanently disabled" if, for a
continuous period of twenty-four (24) weeks or more, Executive has been unable
to perform the essential functions of the job because one or more mental or
physical illnesses and/or disabilities, provided that Company may grant
Executive unpaid leave if and to the extent that, in Company's judgment, doing
so is required by law.

     10. Termination Payments.
         --------------------
<PAGE>

          (a)  Termination Without Cause.
               -------------------------

               (i)    If Company terminates Executive's employment when neither
cause nor permanent disability exists, Company shall pay Executive, as
liquidated damages and in lieu of all other remedies to which Executive might be
entitled arising out of the termination, termination payments equal to three
month's salary plus a pro rata share of any personal performance bonus for which
Executive is eligible in the quarter of termination. For the same three-month
period, Company shall continue to provide at the Company's cost, the Company's
medical benefits to employee and qualifying family members. Such liquidated
damages shall be paid only if Executive executes a full and final general
release of all claims against Company (including Company's officers, directors,
agents, employees and assigns) arising out of Executive's employment
relationship with Company.

               (ii)   In addition, if Company terminates Executive's employment
when neither cause nor permanent disability exists, but Company gives Executive
less than the fourteen (14) days' advance written notice called for above,
Company shall pay Executive, as liquidated damages and in lieu of all other
remedies to which Executive might be entitled arising out of Company's failure
to give fourteen (14) days' advance written notice, termination payments equal
to the additional salary Executive would have received if Company had given
Executive fourteen (14) day's advance written notice of termination.

               (iii)  Termination payments shall be paid out at Executive's
normal payroll rate on regular payroll days subject to normal payroll
deductions, commencing first with the termination payments called for by subpart
(ii), if any, followed by the termination payments called for by subpart (i).
Any reimbursable expenses incurred prior to termination will be paid immediately
upon termination.

          (b)  All Other Terminations. In all cases of termination or expiration
               ----------------------
of this agreement or of Executive's employment (including, but not limited to, a
termination of Executive by Company for cause of Executive's resignation of
employment), Executive's compensation and benefits shall terminate on the date
the employment ends and Executive shall not be entitled to any termination
payments or damages.

     11.  Confidentiality/Unfair Competition. Executive agrees that Company has
          ----------------------------------
many substantial, legitimate business interests that can be protected only by
Executive agreeing not to compete with Company unfairly. These interests
include, without limitation, Company's contacts and relationships with its
supply sources, Company's reputation and goodwill in the industry, and Company's
rights in its confidential information. Executive agrees that information not
generally known to the public to which Executive has been or will be exposed as
a result of Executive's employment by Company is confidential information that
belongs to Company. This includes information developed by Executive, alone or
with others, or entrusted to Company by its supply sources, customers or others.
Company's confidential information includes, without limitation, information
relating to Company's trade secrets, know-how, procedures, pricing, products,
services, purchasing, accounting, marketing, sales, supply sources, employees,
and customers and active prospects and their related needs. Executive will hold
Company's confidential information in strict confidence and will not disclose or
use it except as authorized by Company and for Company's benefit. Executive also
will not disparage Company or its business or services. Executive will not,
apart from good faith competition, interfere with Company's relationships with
its clients, employees, vendors, bankers or others.

     12.  Possession of Materials. Executive agrees that upon conclusion of
          -----------------------
employment or request by Company, Executive shall turn over to Company all
documents, files, office supplies and any other material or work product in
Executive's possession or control that were created pursuant to or derived from
Executive's services for Company.

     13.  Nonraiding of Employees. Executive recognizes that Company's workforce
          -----------------------
is a vital part of its business. Therefore, Executive agrees that for twelve
(12) months after Executive's employment with Company ends, regardless of the
reason it ends, Executive will not solicit, directly or indirectly, any
<PAGE>

employee to leave his or her employment with Company. For purposes of this
agreement, the phrase "shall not solicit, directly or indirectly," includes,
without limitation, that Executive (a) shall not identify any Company employees
to any third party as potential candidates for employment, such as by disclosing
the names, backgrounds and qualifications of any Company employees; (b) shall
not personally or through any other person approach, recruit or otherwise
solicit employees of Company to work for any other employer; and (c) shall not
participate in any pre-employment interviews with any person who was employed by
Company while Executive was employed or retained by Company.

     14.  Dispute Resolution. Company and Executive agree to resolve all
          ------------------
disputes arising out of their employment relationship by the following alternate
dispute resolution process: (a) Company and Executive agree to seek a fair and
prompt negotiated resolution; but if this is not successful, (b) all disputes
shall be resolved by binding arbitration; provided that during this process, (c)
at the request of either party, not made later than seventy-five (75) days after
the initial arbitration demand, the parties agree to attempt to resolve any
dispute by non-binding third-party intervention including either mediation or
evaluation or both (but without delaying the arbitration hearing date). By
entering into this contract, both parties give up their right to have the
dispute decided in court by a judge or jury. The provisions of the Washington
arbitration statute, Chapter 7.04 RCW, are incorporated herein to the extent not
inconsistent with the other terms of this agreement.

          (a)  Binding Arbitration. Any controversy or claim arising out of or
               -------------------
connected with Executive's employment at Company, including but not limited to
claims for compensation or severance and claims of wrongful termination, age,
sex, racial or other discrimination, or civil rights violations shall be
determined by arbitration commenced in accordance with RCW 7.04.060, provided
that the total award by a single arbitrator (as opposed to a majority of three
arbitrators) shall not exceed Two Hundred Fifty Thousand Dollars ($250,000). If
either party assets in good faith that it is entitled to an award over Two
Hundred Fifty Thousand Dollars ($250,000), there shall be three (3) arbitrators.
The location of the arbitration shall be Seattle, Washington, or such other city
to which the parties may agree. If Company and Executive cannot agree on the
arbitrator(s), then the arbitrator(s) shall be selected by the administrator of
the American Arbitration Association (AAA) office nearest the city where the
arbitration is to be conducted. Each arbitrator shall be an attorney with at
least 15 years' experience in commercial law or judicial arbitration experience.
All statutes of limitations, which would otherwise be applicable, shall apply to
any arbitration proceeding hereunder. Any issue about whether a controversy or
claim is covered by this agreement shall be determined by the arbitrators).

          (b)  Procedures. The arbitration shall be conducted in accordance with
               ----------
this agreement using as appropriate the AAA Employment Dispute Resolution Rules
in effect on the date hereof. There shall be no discovery or dispositive motion
practice (such as motions for summary judgment or to dismiss or the like) except
that the arbitrators) shall authorize such discovery as may be shown to be
necessary to ensure a fair hearing, and no such discovery shall extend the time
limits contained herein. The arbitrator(s) shall not be bound by the rules of
evidence or of civil procedure, but rather may consider such writings and oral
presentations as reasonable business people would use in the conduct of their
day-to-day affairs, and may require both parties to submit some or all of their
respective cases by written declaration or such other manner of presentation as
the arbitrators) may determine to be appropriate. The parties agree to limit
live testimony and cross-examination to the extent necessary to ensure a fair
hearing on material issues.

          (c)  Hearing; Law; Appeal Limited. The arbitrator(s) shall take such
               ----------------------------
steps as may be necessary to hold a private hearing within one hundred twenty
(120) days of the initial request for arbitration and to conclude the hearing
within two (2) days; and the arbitrator(s)'s written decision shall be made not
later than fourteen (14) calendar days after the hearing. The parties agree that
they have included these time limits in order to expedite the proceeding, but
they are not jurisdictional, and the arbitrators) may for good cause allow
reasonable extensions or delays, which shall not affect the validity of the
award. The written decision shall contain a brief statement of the claim(s)
determined and the award made on each claim. In making the decision and award
the arbitrators) shall apply applicable substantive law. Absent fraud, collusion
or willful misconduct by an arbitrator, the award shall be final and judgment
may be entered in any court having jurisdiction thereof. The arbitrators) may
award injunctive relief or any other
<PAGE>

remedy available from a judge, including the joinder of parties or consolidation
of this arbitration with any other involving common issues of law or fact or
which may promote judicial economy, and may award attorneys' fees and costs to
the prevailing party, but shall not have the power to award attorneys' fees and
costs to the prevailing party, but shall not have the power to award punitive or
exemplary damages. The decision and award of the arbitrators need not be
unanimous; rather, the decision and award of two (2) arbitrators shall be final.

          (d)  Injunctive Relief. In the case of a breach of any of Executive's
               -----------------
obligations to Company, Company may request a court of competent jurisdiction to
issue such temporary or interim relief (including temporary restraining orders
and preliminary injunctions) as may be appropriate, either before arbitration is
commenced or pending the outcome of arbitration. No such request shall be a
waiver of the right to submit any claim or controversy to arbitration. Any
issues of law or fact, which arise in connection with such request, shall, at
Company's election, be determined by arbitration in accordance with subparagraph
(a) through (c) above.

     15.  Attorneys' Fees, Venue and Jurisdiction. In any lawsuit or arbitration
          ---------------------------------------
arising out of or relating to this agreement or Executive's employment,
including without limitation arising from any alleged tort or statutory
violation, the prevailing party shall recover reasonable costs and attorneys'
fees, including on appeal. Venue and jurisdiction of any lawsuit involving this
agreement or Executive's employment shall exist exclusively in state and federal
courts in King County, Washington, unless injunctive relief is sought by Company
and, in Company's judgment, that relief might not be effective unless obtained
in some other venue. The provisions of this section are subject to and do not
supersede the dispute resolution provisions described above.

     16.  Governing Law. This agreement shall be governed by the internal laws
          -------------
of the state of Washington without giving effect to provisions thereof related
to choice of laws or conflict of laws.

     17.  Saving Provision. If any part of this agreement is held to be
          ----------------
unenforceable, it shall not affect any other part. If any part of this agreement
is held to be unenforceable as written, it shall be enforced to the maximum
extent allowed by applicable law. The confidentiality, possession of materials,
non-competition and nonraiding provisions of this agreement shall survive after
Executive's employment by Company ends, regardless of the reason it ends, and
shall be enforceable regardless of any claim Executive may have against Company.

     18.  Waiver. No waiver of any provision of this agreement shall be valid
          ------
unless in writing, signed by the party against whom the waiver is sought to be
enforced. The waiver of any breach of this agreement or failure to enforce any
provision of this agreement shall not waive any later breach.

     19.  Assignment; Successors. Company may assign its rights and delegate its
          ----------------------
duties under this agreement. Executive may not assign his or her rights or
delegate his or her duties under this agreement.

     20.  Binding Effect. This agreement is binding upon the parties and their
          --------------
personal representatives, heirs, successors and assigns.

     21.  Counterparts. This agreement may be executed in any number of
          ------------
counterparts, each of which shall be an original and all of which, taken
together, shall constitute a single agreement.

     22.  Complete Agreement. This agreement, together with the Employee Stock
          ------------------
Option Agreements dated and October 25, 1999, is the final and complete
expression of the parties' agreement relating to Executive's employment. Only a
writing signed by both parties may amend this agreement; it may not be amended
orally or by course of dealing. The parties are not entering into this agreement
relying on anything not set out in this agreement. This agreement shall control
over any contrary policies or procedures of Company, whether in effect now or
adopted later. Company's policies and procedures that
<PAGE>

do not conflict with this agreement, whether in effect now or adopted later,
shall apply or not apply to Executive as determined by Company in its
discretion.


     DATED as of the date first written above.


     EXECUTIVE:           /s/ Gary McGrath
                      -------------------------


     COMPANY:         PYRAMID BREWERIES INC.


               By     /s/ Martin Kelly
                 -------------------------------
                      Its:  Chief Operating Officer