<PAGE>
                                                                    Exhibit 10.7


      EMPLOYMENT AGREEMENT dated as of January 21, 1997 (the "Agreement")
between Atlantic Express Transportation Corp., a New York corporation with an
office at 7 North Street, Staten Island, New York 10302 (the "Company"), and
Patrick Gatto, presently residing at 100 Sandalwood Drive, Marlboro, NJ 07746
(the "Executive").

      WHEREAS, the Executive is presently employed by Atlantic Express
Transportation Group Inc. ("Atlantic"), the parent of the Company under an
employment agreement entered into as of February 28, 1994 (the "1994
Agreement");

      WHEREAS, Atlantic has agreed to transfer (the "Transfer") to the Company,
all of the capital stock of the subsidiaries of Atlantic engaged in the
transportation business (the "Transportation Subsidiaries"); and

      WHEREAS, in connection with the Transfer, the Company will become the
primary employer of the Executive and will provide all compensation and benefits
to Executive, although the Executive will continue to act for Atlantic pursuant
to an amendment to the 1994 Agreement;

      NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:

            1.    EMPLOYMENT AND DUTIES

            1.1. General. The Company hereby employs the Executive, and the
Executive agrees to serve, as Executive Vice President of the Company and upon
the Board of Directors of the Company (the "Board") as a director upon the terms
and conditions herein contained, and in such capacities the Executive agrees to
serve the Company faithfully and to the best of his ability under the direction
of the Board. The Executive also agrees to serve, if elected, at no compensation
in addition to that provided for in this Agreement, in the position of officer
or director of Atlantic and of any subsidiary of the Company; Provided, however,
that such position shall be of no less status relative to such subsidiary as the
position that the Executive holds pursuant to the first sentence of this Section
1.1 is with respect to the Company.

            1.2. Exclusive Services. For so long as the Executive is employed by
the Company, he shall devote his full-time working hours to his duties
hereunder. The Executive shall not, directly or indirectly, render services to
any other person or organization for which he receives compensation (with the
exception of services rendered on behalf of Atlantic or non transportation
subsidiaries of Atlantic) without the unanimous consent of the Board or
otherwise engage in activities which would interfere significantly with his
faithful performance of his duties hereunder.

            1.3. Term of Employment. The Executive's employment under this
Agreement shall commence on January 15, 1997 (the "Effective Date") and shall
terminate on the 
<PAGE>

earliest of (i) the fifth anniversary of the Effective Date, (ii) the death of
the Executive or (iii) the termination of the Executive's employment pursuant to
this Agreement; provided, however, that the term of the Executive's employment
under this Agreement may be extended for a period of up to three years by notice
of approval from the Board to the Executive at least six months prior to the
expiration of the then effective Employment Term but not earlier than the fourth
anniversary of the Effective Date (the period commencing on the Effective Date
and ending on the fifth anniversary of the Effective Date, or such later date to
which the term of the Executive's employment shall have been extended is
hereinafter referred to as the "Employment Term").

            2.    SALARY

            2.1. Base Salary. From the Effective Date, the Executive shall be
entitled to receive a base salary ("Base Salary") at a rate of $340,252 per
annum, payable in arrears in equal installments not less frequently than weekly
in accordance with the Company's payroll practices, with such increases as may
be provided in accordance with the terms hereof. Once increased, such higher
amount shall constitute the Executive's annual Base Salary.

            2.2. Annual Increases. Commencing one year from the Effective Date,
and annually on each anniversary thereafter, the Executive's base salary shall
be increased by the same percentage by which the regional consumer price index
as of the June immediately preceding such anniversary date shall have increased
over such consumer price index as of June of the prior year; provided, however,
that in no event shall such annual increase be more than five percent (5%) nor
less than three percent (3%) of such base salary. Regional consumer price index
shall mean the index as determined by the United States Department of Labor for
the New York, New York - Northeastern New Jersey area based upon the index for
all urban consumers.

            3.    EMPLOYEE BENEFITS

            3.1. General Benefits. The Executive shall receive the following
benefits during the Employment Term:

            (a) the Executive will be eligible to participate in benefit
programs of the Company consistent with those benefit programs provided to other
senior executives of the Company;

            (b) a disability insurance policy providing $10,000 in monthly
benefits commencing six months after a disability which prevents the Executive
from performing the ordinary and necessary functions and duties of his
employment; Provided that the premium therefore shall not exceed the usual and
customary rates charged by underwriters for such a policy for a person of the
Executive's age in good health. At the option of the Executive and in the place
of the disability policy, the Company shall pay the cash equivalent of the
premium for such policy to the Executive the "Disability Equivalent Payment");

            (c) an automobile allowance of $1,434 per month; and


                                       2
<PAGE>

            (d) a life insurance premium allowance of $23,000 payable annually
in February of each year of the term hereof.

            3.2. Vacation. The Executive shall be entitled to 16 days paid
vacation each year in accordance with the applicable policies of the Company;
provided, however, that the Executive must utilize at least five (5) vacation
days per contract year during the month of August.

            3.3. Reimbursement of Expenses. The Company will reimburse the
Executive for reasonable, ordinary and necessary business expenses incurred by
him in the fulfillment of his duties hereunder upon presentation by the
Executive of an itemized account of such expenditures, in accordance with
Company practices consistently applied.

            3.4. Non-Renewal of Agreement. In the event this Agreement is not
renewed by the Company as provided in Section 1.3, the Executive shall be
entitled to six months of his Base Salary as severance, payable in equal
installments on the same terms as at the end of the Employment Term ("Severance
Pay").

            4.    TERMINATION OF EMPLOYMENT

            4.1. Termination for Cause; Resignation.

            4.1.1. General. If, prior to the expiration of the Employment Term,
the Executive's employment is terminated by the Company for Cause, the Executive
shall be entitled only to his Severance Pay, unless such termination is for a
Disloyalty Termination Event, in which case the Executive shall be entitled only
to payment of his Base Salary as then in effect through and including the date
of termination. If the Executive resigns from his employment hereunder, the
Executive shall be entitled only to payment of his Base Salary as then in effect
through and including the date of resignation. The Executive shall have no
further right to receive any other compensation, or to participate in any other
plan, arrangement, or benefit, after such termination or resignation of
employment, subject to the terms of such plans or arrangements.

            4.1.2. Date of Termination/Resignation. The date of termination for
a Felony Termination Event or a BOE Termination Event (as defined below) shall
be the date of the written Notice of Termination provided for in Section 4.1.3.
The date of termination for a Conduct, Performance or Disloyalty Termination
Event shall be provided in Section 4.1.4. The date of resignation shall be the
date specified in the written notice of resignation from the Executive to the
Company, or if no date is specified therein, 10 business days after receipt by
the Company of written notice of resignation from the Executive.

            4.1.3. Notice of Termination for Felony or BOE Termination Event.
Unless first terminated by a written notice of the Board, termination of the
Executive's employment for a Felony or BOE Termination Event (as defined below)
shall be effected by delivery of a written notice of termination from Busco
Capital, Inc., the holder of the Series A Preferred 


                                       3
<PAGE>

Stock of Atlantic ("Busco") to the Executive, which notice shall specify the
event or events set forth in Section 4.2 giving rise to such termination (the
"Notice of Termination").

            4.1.4. Other Termination for Cause. Termination of the Executive's
employment for a Conduct, Performance or Disloyalty Termination Event shall be
determined by a single arbitrator selected from a list of three potential
arbitrators offered by ENDISPUTE of 300 Park Avenue, New York, New York
("ENDISPUTE"). Busco and the Executive shall each have 72 hours to object to no
more than one potential arbitrator. The remaining potential arbitrator (and if
more than one is remaining, then one shall be selected by lot) shall serve as
the single arbitrator, who shall conduct an arbitration proceeding in accordance
with ENDISPUTE's then current policies and procedures. In the event ENDISPUTE is
no longer conducting business as a dispute resolution firm at the time of the
Busco Notice (as defined below), the list of three arbitrators shall be supplied
by the American Arbitration Association ("AAA"), and the single arbitrator shall
be selected in the same manner as set forth above; such arbitrator shall conduct
the arbitration proceeding in accordance with the AAA's then current policies
and procedures. The decision of the arbitrator shall be final and binding to the
extent permitted by law, and judgment thereon may be entered in any court having
jurisdiction thereof. Such arbitration shall be commenced by a notice by Busco
to the Executive requiring dismissal subject to the provisions of this Agreement
and to ENDISPUTE (the "Busco Notice"). ENDISPUTE shall be informed that the
determination of the arbitrator is sought within 60 days of the Busco Notice.
Each party agrees to complete its presentation to the arbitrator not later than
the 45th day after the Busco Notice. Should the arbitrator suspend the
proceedings upon a court order or request of a prosecutor arising out of a
criminal proceeding commenced or to be commenced against the Executive or should
the Executive decline to participate in such arbitration, the arbitration shall
be terminated and termination of the Executive's employment hereunder shall
thereupon be final and no longer subject to arbitration. Unless termination is
decided by an arbitrator, Busco shall be liable to the Executive for damages if
such termination under this Section 4.1.4 was wrongful.

            4.2. Cause. Termination for "Cause" shall mean termination of the
Executive's employment because the Executive (a) has engaged in fraudulent or
criminal conduct in connection with the performance of his duties hereunder,
which conduct materially and adversely affects the Company (a "Conduct
Termination Event", except that the Executive's conduct related to the facts and
circumstances described under item 6 of Schedule 3.10 of the Stock Purchase
Agreement shall not be considered a Conduct Termination Event, which exception
shall not apply if a governmental authority shall commence a criminal suit
against the Executive based on charges arising out of the same facts and
circumstances as set forth in such item 6 of Schedule 3.10 of the Stock Purchase
Agreement), (b) admits to or has been convicted of a crime punishable by
imprisonment for more than one year (a "Felony Termination Event"), (c) has
failed to perform in all material respects (following a written warning
specifying such deficiency) the normal and customary duties required of his
position of employment (a "Performance Termination Event"), (d) has been
disloyal to the Company by assisting competitors of the Company to the
disadvantage of the Company by a breach of Section 6 or by otherwise actively
assisting competitors to the disadvantage of the Company (a "Disloyalty
Termination Event"), or (e) has been identified by the Board of Education of 


                                       4
<PAGE>

the City of New York in a notice to the Company (a "BOE Notice") that the Board
of Education has elected either not to extend an existing transportation
contract or that it will not accept bids from the Company for a new
transportation contract unless the employment of the Employee is terminated
together with divestiture of the Employee's stock ownership (a "BOE Termination
Event").

            5.    PERMANENT DISABILITY

            In the event the Executive shall fail because of illness, physical
or mental disability or other incapacity, for a period of six consecutive
months, or for shorter periods aggregating six months during any twelve-month
period, to render the services provided for by this Agreement, then the Company
shall, by written notice to the Executive after the last day of the six
consecutive months of disability or the day on which the shorter periods of
disability equal an aggregate of six months, reduce the Executive's compensation
hereunder for "Permanent Disability" as follows:

            First Six Months              No Reduction

            Following 18 months           90% of compensation less
                                          $l0,000 per month

            Following 12 months           Fifty percent (50%) of
            (or if less, the              compensation
             balance of the
             Employment Term)

            Balance of Employment         Twenty-five percent (25%) of
            Term                          compensation

            The Executive will use his reasonable best efforts to cooperate with
any physician referred to the Company by the physicians referral service of the
Columbia Presbyterian Medical Center of 622 West 168th Street, New York, New
York to determine whether or not Permanent Disability exists, and the
determination of such physician made in writing to the Company and the Executive
shall be final and conclusive for all purposes of this Agreement; provided that
if such physician declines to make a determination as to medical disability, the
matter will be referred to ENDISPUTE for resolution, whereby ENDISPUTE shall
select a single arbitrator to make a determination based upon the evidence and
testimony submitted by such physician and no other expert testimony or medical
evidence shall be permitted or considered by such arbitrator. Any payments
provided for in this Section 5 shall be reduced to the extent that such
payments, together with any disability payments received by the Executive under
any plan, program or arrangements, including any payment to the employee under
Section 3.1(b) exceed the Executive's Base Salary; provided that if disability
payments are received which are free of federal income tax. The payments
provided for in this Section s shall be reduced by an amount equal to the
pre-tax income which would have been required to produce such payment free of
tax based on the marginal rate for the previous tax year of the Executive.
Except (i) as to continue to pay the 


                                       5
<PAGE>

Executive's medical insurance premiums for a period of 18 months following
delivery of the written notice of "Permanent Disability" to the Executive or
(ii) as otherwise provided in this Section 5, upon delivery of such written
notice, the Company shall have no further obligation to the Executive under this
Agreement.

            6.    NONCOMPETITION, NONSOLICITATION AND CONFIDENTIALITY

            6.1. Noncompetition/Nonsolicitation. The Executive shall not,
directly or indirectly, as a sole proprietor, member of a partnership,
stockholder or investor, officer or director of a corporation, or as an
employee, associate, consultant or agent of any person, partnership, corporation
or other business organization or entity other than the Company: (a) engage in
any business that is in competition with any business actively conducted by the
Company or any of its subsidiaries within (i) the counties then served by the
Company as well as adjacent counties, and (ii) any other counties in which the
Company has made a bid within 24 months prior to the Executive's termination and
any adjacent counties in which the Company conducts business; (b) solicit or
endeavor to entice away from the Company or any of its subsidiaries any person
who is, or was during the then most recent 24-month period, employed by or
associated with the Company or any of its subsidiaries; or (c) solicit or
endeavor to entice away from the Company or any of its subsidiaries any person
or entity who is, or was within the then most recent 24-month period, a
customer, client or prospect of the Company or any of its subsidiaries. The
obligations of this Section 6.1 shall apply for 24 months after termination of
employment of the Executive as well as during employment and shall be extended
by a period of time equal to any period during which the Executive shall be in
breach of such obligations. The obligations of this Section 6.1 shall not be
applicable during any period in which the Company is not in compliance with
Executive's Put Right under the 1994 Agreement.

            6.2. Confidentiality. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company or any of
its subsidiaries and affiliates. The term "confidential information" includes
information not previously disclosed to the public or to the trade by the
Company's management, or otherwise in the public domain, with respect the
Company's, or any of its affiliates' or subsidiaries', products, services,
facilities, applications and methods, trade secrets and other intellectual
property, systems, procedures, manuals, confidential reports, product or service
price lists, customer lists, technical information, financial information
(including the revenues, costs or profits associated with any of the Company's
products), business plans, prospects or opportunities.

            6.3. Exclusive Property. The Executive confirms that all
confidential information is and shall remain the exclusive property of the
Company. All business records, papers and documents kept or made by the
Executive relating to the business of the Company shall be and remain the
property of the Company.


                                       6
<PAGE>

            6.4. Injunctive Relief. Without intending to limit the remedies
available to the Company, the Executive acknowledges that a breach of any of the
covenants contained in this Section 6 may result in material and irreparable
injury to the Company or its affiliates or subsidiaries for which there is no
adequate remedy at law, that it will not be possible to measure damages for such
injuries precisely and that, in the event of such a breach or threat thereof,
the Company shall be entitled to obtain a temporary restraining order and/or a
preliminary or permanent injunction restraining the Executive from engaging in
activities prohibited by this Section 6 or such other relief as may be required
specifically to enforce any of the covenants in this Section 6. If for any
reason a final decision of any court determines that the restrictions under this
Section 6 are not reasonable or that consideration therefor is inadequate, such
restrictions shall be interpreted, modified or rewritten by such court to
include as much of the duration and scope identified in this Section 6 as will
render such restrictions valid and enforceable.

            7.    MISCELLANEOUS

            7.1. Notices. All notices or communications hereunder shall be in
writing, addressed as follows:

            To the Company:

            Atlantic Express
              Transportation Corp.
            7 North Street
            Staten Island, NY 10302

            Attention: President

            To the Executive:

            Patrick Gatto
            100 Sandalwood Drive
            Marlboro, NJ 07746

Any such notice or communication shall be sent certified or registered mail,
return receipt requested, addressed as above (or to such other address as such
party may designate in writing from time to time), and the actual date of
receipt, as shown by the receipt therefor, shall determine the time at which
notice was given.

            7.2. Severability. If a court of competent jurisdiction determines
that any term or provision hereof is invalid or unenforceable, (a) the remaining
terms and provisions hereof shall be unimpaired and (b) such court shall have
the authority to replace such invalid or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision.


                                       7
<PAGE>

            7.3. Assignment. This Agreement shall inure to the benefit of the
heirs and representatives of the Executive and the assigns and successors of the
Company, but neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by the Executive.

            7.4. Entire Agreement. This Agreement represents the entire
agreement of the parties and shall supersede any and all previous contracts,
arrangements or understandings between the Company and the Executive, including
the 1994 Agreement. The Agreement may be amended at any time by mutual written
agreement of the parties hereto.

            7.5. Withholding. The Company shall be entitled to withhold, or
cause to be withheld, from payment any amount of withholding taxes required by
law with respect to payments made to the Executive in connection with his
employment hereunder.

            7.6. Governing Law. This Agreement shall be construed, interpreted,
and governed in accordance with the laws of New York without reference to rules
relating to conflict of law.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.

                                          ATLANTIC EXPRESS
                                           TRANSPORTATION CORP.


                                          By: /s/ Domenic Gatto
                                             ---------------------
                                          Name: Domenic Gatto
                                          Title: President and Chief Executive 
                                                 Officer

                                          PATRICK GATTO

                                          /s/ Patrick Gatto
                                          ------------------------


                                        8