<PAGE>
 
Exhibit 10.39

                             EMPLOYMENT AGREEMENT
                             --------------------

     This Employment Agreement (the AGREEMENT), effective as of November __,
1998, is made and entered into by and between Silver Diner, Inc., a Delaware
corporation (the COMPANY), and Ype Von Hengst, a Maryland resident (the
EXECUTIVE).

                                   RECITALS

     1. The Company is engaged in the business of operating and franchising
diner-style restaurants in the United States operating under the trade name of
"Silver Diner" and plans to expand such operations outside of the United States.

     2. The Company has employed the Executive for __ years.

     3. The Company desires to continue to employ the Executive, and the
Executive desires to obtain employment with the Company, upon the terms and
conditions stated herein.

     NOW, THEREFORE, in consideration of the mutual promises contained herein,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties agree as follows:

                                  AGREEMENTS

SECTION 1.  EMPLOYMENT

The Company hereby employs the Executive as an Executive Vice-President and
Executive Chef, to perform such duties as are reasonably required by such
position and such other duties as he may be assigned from time to time by the
Company's President. The Executive agrees to devote his full and best efforts
and abilities to the Company on a full-time basis. In performing duties
hereunder, the Executive will at all times act in a professional, competent and
loyal manner, and consistent with the Company's policies and procedures.

SECTION 2.  TERM

The term of this Agreement shall commence on the date hereof, and shall continue
until December 31, 2003, unless terminated sooner pursuant to the terms of this
Agreement (the TERM). The Term may only be renewed or extended in a writing
signed by the President of the Company.

Section 3.  COMPENSATION/BENEFITS

     (A)  BASE SALARY The Executive shall be entitled to an annual base salary,
          -----------                                                          
payable in installments, less required legal deductions, and in accordance with
the Company's policy governing salary payments to executive employees generally,
as it may be amended from time to time by the Company (BASE SALARY). From the
effective date of this Agreement through December 31, 1998, the Base Salary
shall be payable at the annual rate of $125,000. From January 1, 1999 through
December 31, 1999, the Base Salary shall be payable at the annual rate of
$150,000. Effective January 1, 2000, the Base Salary shall be the sum of the
Base Salary for the immediately preceding period (including all prior increases)
plus an amount equal to the excess of (i) the amount determined by multiplying
the Base Salary for the immediately preceding period (including all increases)
by a fraction the numerator of which is the Consumer Price Index for all urban
consumers -- all items (1967 = 100) for the Washington, D.C. - Maryland -
Virginia Metropolitan Areas as prepared and published by the Bureau of Labor
Statistics of the U.S. Department of Labor (the "CPI") for the comparison month
and the denominator of which is the CPI for the base month over (ii) the Base
Salary for the immediately preceding period (including all increases).  For the
purposes of this subsection, the initial base month shall be January 1999 and
the initial comparison month shall be the following December 1999. For the
second year following 
<PAGE>
 
the execution of this Agreement and thereafter the base month and comparison
month shall be the same month, respectively, during each subsequent year. If the
CPI is revised or discontinued during the term of this Agreement, the parties
shall devise a formula based on a then-published index of the Bureau of Labor
Statistics of the U.S. Department of Labor that will yield a comparable annual
increase. In no event, however, shall the Base Salary (as adjusted) be reduced
during the term of this Agreement.

     (B) BENEFITS  The Executive shall be entitled to the following benefits
         --------                                                           
         during the Term:

         1.  Health/Dental Insurance. The Executive shall be entitled to
             participate in the group health and dental plans offered to the
             Company's executive employees generally, and as approved by the
             Company's President, in accordance with the terms of said plans, as
             they may be modified in the Company's discretion from time to time
             (MEDICAL BENEFITS). If the Executive elects coverage under said
             plan(s), the Company shall pay the full cost of family coverage
             under the plan(s).

         2.  Life/Disability Insurance. The Company shall, at no cost to the
             Executive , provide the Executive with life insurance coverage in
             the amount of $1,500,000 and disability insurance coverage in the
             minimum amount of $2,600 per week, subject to usual and customary
             terms and a 90-day waiting period. If, at any time during the Term,
             the Executive receives replacement income under the disability
             insurance coverage, the Company's obligation to pay the Base Salary
             shall be reduced by the amount of replacement income received by
             the Executive.


         3.  Other Benefits. In addition to existing stock options, the
             Executive shall be entitled to participate in stock options and
             bonus plans and to such other benefit plans as customarily made
             available by the Company to executive employees generally.

     (C) LOAN In consideration of the Executive entering into this Agreement,
         ----                                                                
the Company agrees to extend a $100,000 non-recourse loan (the LOAN) to the
Executive upon the execution of this Agreement, subject to the Executive's
agreement to execute a promissory note in the form attached hereto, and
incorporated herein, as Exhibit A (the PROMISSORY NOTE). The Executive agrees to
transfer 182,881 shares of his common stock in the Company to the Company under
the terms set forth in Exhibit A to secure the Loan (SECURED SHARES). Upon the
execution of this Agreement, the Executive agrees to transfer to the Company all
stock certificates evidencing ownership of these shares and a stock power
separate from certificate.

     (D) LOAN BONUS  During each year of the Term in which the Executive is
         ----------                                                        
actually employed by the Company on December 31, beginning December 31, 1999,
the Executive shall be entitled to an annual bonus of an amount equal to $20,000
plus accrued and unpaid interest on the Loan (the BONUS). The Bonus shall not be
paid to the Executive, but shall be applied by the Company to repay the then
outstanding principal and interest under the Loan.

SECTION 4.  EXPENSES

The Company shall reimburse the Executive for all reasonable and necessary
business expenses incurred by him in the performance of his duties hereunder, in
accordance with its policies and procedures, as they may be amended from time to
time and subject to submission of proper documentation of each expense.

SECTION 5.  PROTECTION OF THE COMPANY

     (A) EXCLUSIVE SERVICES  During the term of his employment, the Executive
         ------------------                                                  
shall at all times devote his entire working time, attention, energies, efforts
and skills to the business of the Company, and shall not, directly or
indirectly, do anything to compete with the Company's present or contemplated
business, nor will he plan or organize any competitive business activity.
<PAGE>
 
     (B) CONFIDENTIAL INFORMATION  The Executive shall not, at any time during
         ------------------------                                             
or after his employment with the Company, disclose or use, directly or
indirectly, any Confidential Information of the Company (or any affiliated
entity, hereinafter, collectively, the COMPANY), except as required by the
performance of his duties hereunder. For the purposes of this Agreement,
"Confidential Information" shall mean all information disclosed to the
Executive, or known by him as a consequence of or through his employment with
the Company, where such information is not generally known in the trade or
industry, and where such information refers or relates in any manner whatsoever
to the business activities of the Company. "Confidential Information" shall
include Company and/or franchisee (a) business plans, research, know how,
development and survey information, (b) customer, staff and other training
manuals and policy manuals, (c) kitchen and building designs, procedures, and
techniques, and (d) recipes developed and/or used by the Company. Upon
termination of this Agreement, the Executive shall immediately return to the
Company all of its property (including all Company related documents), and all
copies thereof, including without limitation all Confidential Information which
has been reduced to tangible form, in his possession, custody or control.

     (C) SOLICITATION OF EMPLOYEES  The Executive agrees that during the term of
         -------------------------                                              
this Agreement, and for a period of twelve (12) consecutive months after
termination of such employment for any reason, he shall not, except in the
course of her duties hereunder, directly or indirectly induce or attempt to
induce or otherwise counsel, advise, solicit or encourage any person to leave
the employ of the Company or any person who at the time had left the employ of
the Company within the previous six months to accept employment with any person
or entity besides the Company.

     (D) NON-COMPETITION For a period of twelve (12) consecutive months after
         ---------------                                                     
the termination of Executive's employment with the Company for any reason other
than a termination by the Company without cause as provided in Section 6(C), the
Executive shall not, (i) engage in the "diner business" anywhere in the United
States; (ii) engage in competition with the Company within a 10 mile radius of
any Company owned or franchised facility or planned facility; or (iii) directly
or indirectly, either individually or as a stockholder (other than a stockholder
of less than 5% of a corporation the securities of which are traded on a
national securities exchange), director, officer, partner, consultant, owner,
employee, agent, or in any other capacity, work for, consult with or otherwise
assist Movenpick (and all affiliates, subsidiaries and parent corporation) in
the development of "diners". For purposes of this Agreement, the Executive shall
be deemed to "engage in competition" with the Company if he shall directly or
indirectly, either individually or as a stockholder (other than a stockholder of
less than 5% of a corporation the securities of which are traded on a national
securities exchange), director, officer, partner, consultant, owner, employee,
agent, or in any other capacity, work for, consult with or otherwise assist any
person or entity engaged in the same or similar business engaged in by the
Company. For the purposes of this Agreement, "diners", the "diner business" and
the business of the Company shall mean (i) any restaurant business with the word
"Diner" in its name or logo, or which is commonly understood to be a diner; or
(ii) any moderately priced restaurant business whose menu and trade dress
together are confusingly similar to that employed by Silver Diner restaurants.
The Executive agrees that the restrictions imposed by the provisions of this
Section are fair and reasonable considering the nature of the Company's
business, and are reasonably required for the protection of the Company.

     (E) SPECIFIC PERFORMANCE  The Executive agrees that in the event of his
         --------------------                                               
breach of any of the provisions of this Section, the remedies available at law
to the Company would be inadequate and in lieu thereof or in addition thereto
the Company shall be entitled to appropriate equitable remedies, including
specific performance, attorneys fees and injunctive relief. In the event that a
court of competent jurisdiction shall declare any provision or restriction
contained in this Section to be unenforceable, the provisions of this section
shall remain in full force and effect to the extent not so declared to be
unenforceable, and the court shall be empowered to modify said unenforceable
provision(s) as needed to make such provision(s) enforceable to the maximum
extent permitted by law. In no event shall any such modifications increase the
period of time or make the provisions contained in this Section 5 more
restrictive.
<PAGE>
 
SECTION 6.  TERMINATION

     (A)  AUTOMATIC TERMINATION  This Agreement shall terminate automatically
          ---------------------                                              
upon the death of the Executive or the Executive's inability to perform the
essential functions of his job due to an impairment or disability, and with or
without a reasonable accommodation, for at least 180 consecutive days. In the
event of a termination under this Section because of the Executive's death, all
Company obligations to pay the Base Salary, Bonus and Medical Benefits shall
cease as of the effective date of the termination, except as otherwise required
by law. In the event of a termination under this Section because of the
Executive's inability to perform the essential functions of his job, (i) the
Executive's right to Base Salary and the Bonus shall cease as of the effective
date of the termination, and (ii) the Company shall make the Medical Benefits
available to the Executive for a period of eighteen (18) months following
termination, the costs of which shall be paid by the Company for the first
twelve (12) months of such period. If the Agreement is terminated pursuant to
this Section, the Principal Balance of the Loan shall be extinguished, and all
right, title and interest in the Secured Shares shall vest with the Maker (or
his estate or heirs).

     (B)  FOR "CAUSE"  This Agreement may be terminated by the Company
          -----------                                                 
immediately for "Cause" for any one of the following reasons: (i) the active
participation of Executive in materially gross and fraudulent conduct; or (ii)
the conviction of Executive of a felony where imprisonment is imposed. Upon an
event constituting "Cause", the Company shall deliver to the Executive written
notice of such conduct and the Executive shall immediately be suspended from
performing his duties for a period of 14 calendar days during which time the
compensation and other benefits provided to Executive shall continue and the
Executive shall have the opportunity to review the facts and circumstances
surrounding such notice and to meet with the Company's Board of Directors. If,
at the end of the 14-day suspension, the Company has not revoked the written
notice, the termination shall become effective. In the event of a termination
under this Section, (i) the Company's obligation to pay the Base Salary, Medical
Benefits and Bonus shall cease immediately upon the termination; and (ii) the
Principal Balance shall be extinguished, and all right, title and interest to
the Secured Shares shall vest immediately with the Company.

     (C)  WITHOUT "CAUSE"  This Agreement may be terminated by the Company
          ---------------                                                 
immediately for any reason, with or without "Cause". If this Agreement is
terminated by the Company without "Cause", (i) the Executive shall be entitled
to the applicable Base Salary, Bonus, and Medical Benefits (at the Company's
expenses), for a one (1) year period commencing with the effective date of the
termination; and (ii) the Principal Balance of the Loan shall be extinguished
and all right, title and interest in the Secured Shares shall vest with the
Maker (or his estate or heirs).

     (D)  VOLUNTARY RESIGNATION   The Executive may terminate this Agreement at
         ----------------------                                               
any time upon 60 days written notice. Upon receipt of such notice, the Company
may, at its option, relieve Executive of any or all of his duties, or may
terminate Executive immediately. If this Agreement is terminated by the
Executive under this Section, (i) the Company's obligation to pay the Base
Salary, Medical Benefits and Bonus shall cease immediately upon the termination;
and (ii) the Principal Balance shall be extinguished, and all right, title and
interest to the Secured Shares shall vest immediately with the Company.

     (E)  DUTIES FOLLOWING TERMINATION  Upon termination of employment and/or
          ----------------------------                                       
this Agreement, the Executive shall cooperate with the Company, as reasonably
requested by the Company, to effect a transition of Executive's responsibilities
and to ensure that the Company is aware of all matters being handled by
Executive. Except in any suit between the Executive and the Company, Executive
shall also, upon reasonable notice, furnish such information and proper
assistance to the Company as may be reasonably required by the Company in
connection with any litigation in which it is or may become a party. Any suit
between the Executive and the Company shall be subject to the rules of discovery
in the jurisdiction in which the suit is pending.

SECTION 7.  MISCELLANEOUS

     (A) NON-WAIVER  The Company's failure at any time to require the
         ----------                                                  
performance by the Executive of any of the terms hereof shall in no way affect
the Company's right thereafter to enforce the same, nor shall the waiver by the
Company of the breach of any term hereof be taken or held to be a waiver of any
succeeding breach.
<PAGE>
 
     (B) SEVERABILITY  In the event that any provision of this Agreement
         ------------                                                   
conflicts with the law under which this Agreement is to be construed, or if any
such provision is held invalid or unenforceable by a court of competent
jurisdiction or an arbitrator, such provision shall be deleted from this
Agreement and the Agreement shall be construed to give full effect to the
remaining provisions thereof.

     (C) GOVERNING LAW  This Agreement shall be interpreted, construed and
         -------------                                                    
governed according to the laws of the State of Maryland, without regard to the
principle of conflicts of laws thereof.

     (D) HEADINGS AND CAPTIONS  The paragraph headings and captions contained in
         ---------------------                                                  
this Agreement are for convenience only and shall not be construed to define,
limit or affect the scope or meaning of the provisions hereof.

     (E) ENTIRE AGREEMENT  This Agreement contains and represents the entire
         ----------------                                                   
agreement of the parties and supersedes all prior agreements, representations or
understandings, oral or written, express or implied with respect to the subject
matter hereof. Neither this Agreement, nor any term of Executive's employment
with the Company, may be modified or amended in any way unless in a writing
signed by both the Executive and the Company's President. No representation,
promise or inducement has been made by either party hereto that is not embodied
in this Agreement, and neither party shall be bound or liable for any alleged
representation, promise or inducement not specifically set forth herein.

     (F) ASSIGNMENT  This Agreement shall be binding upon and inure to the
         ----------                                                       
benefit of the parties hereto and their respective successors and assigns. The
Executive shall not have any right to assign, delegate or transfer any duty or
obligation to be performed by him hereunder to any third party, nor to assign or
transfer the right, if any, to receive payments hereunder.

     (G) NOTICES  All notices required or permitted hereunder shall be in
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writing and shall be deemed properly given if delivered personally or sent by
certified or registered mail, postage prepaid, return receipt requested, or sent
by telegram, telex, telecopy or similar form of telecommunication, and shall be
deemed to have been given when received. Any such notice or communication shall
be addressed:  (a) if to the Company, to Robert T. Giaimo, Silver Diner, Inc.,
11806 Rockville Pike, Rockville, Maryland  20852; and a copy to Arnold
Westerman, Esquire, Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut
Avenue, N.W., Washington, D.C. 20036-5339, or (b) if to the Executive, to his
home address at 4307 Pinetree Road, Rockville, Maryland  20853; or to such other
address as the parties shall have furnished to one another in writing.

     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
to be effective as of the day and year first above written.

EXECUTIVE:                      SILVER DINER, INC.


                                     By: 
--------------------------------         --------------------------------
Ype Von Hengst                           Robert T. Giaimo, President

Date:   November _____, 1998             Date:  November ___, 1998
<PAGE>
 
                                   EXHIBIT A


                                PROMISSORY NOTE


$100,000                                                   November __, 1998

     Ype Von Hengst, a Maryland resident (MAKER), promises to pay to the order
of Silver Diner, Inc. (the COMPANY), the principal sum of $100,000, plus
interest on the unpaid principal balance thereof from time to time outstanding
(the PRINCIPAL BALANCE) at the rate of 5.25% per annum before maturity, as set
forth in this Promissory Note.

     SECTION 1  REFERENCE TO OTHER DOCUMENTS.

     This Promissory Note is issued pursuant to the Company's agreement to make
a $100,000 loan to Maker (the LOAN), as set forth in a certain Employment
Agreement dated as of the date hereof between the Maker and the Company
(incorporated herein by reference). All capitalized terms used in this Note
which are not otherwise defined herein shall have the meanings assigned to them
in the Employment Agreement.

     SECTION 2  SECURITY.

     To secure his obligations hereunder, the Maker hereby grants the Company a
security interest in 182,881 shares of his common stock in the Company
(including any securities or property issued or issuable with respect to this
common stock by reason of dividends, stock splits, reclassification,
recapitalization, mergers, asset sales or any similar transaction) (SECURED
SHARES) and agrees to transfer to the Company (i) all stock certificates
evidencing his ownership of the Secured Shares and (ii) a stock power separate
from certificate.

     SECTION 3  REPAYMENT OF PRINCIPAL BALANCE.

     (a) Principal and Interest. This Note shall be deemed repaid in full if
         -----------------------                                             
the Maker complies with all terms of the Employment Agreement for the full Term
contemplated by that Agreement. Provided the Maker complies with all terms of
the Employment Agreement, $20,000, together with accrued and unpaid interest on
the Note shall be paid by application of the Bonus for each year that Maker
complies with the Employment Agreement.

     (b) Interest Calculations. Interest shall be calculated and accrue through
         ---------------------                                                  
the Maturity Date on the basis of a 365 day year and actual days elapsed.

     (c) Forgiveness of Debt. If the Employment Agreement is terminated by the
         --------------------                                                  
Company for "Cause" pursuant to Section 6(B) of the Employment Agreement, or
through the voluntary resignation of Maker pursuant to Section 6(D), the
Principal Balance shall be extinguished, and all right, title and interest to
the Secured Shares shall vest immediately with the Company. If the Employment
Agreement is terminated pursuant to Section 6(A), or by the Company without
"Cause" pursuant to Section 6(C), the Principal Balance shall be extinguished,
and all right, title and interest to the Secured Shares shall vest immediately
with the Maker (or his estate or executors).

     (d) Prepayment. Except as provided in Section 3(c), the Maker may not
         -----------                                                       
prepay all or any part of the Principal Balance without the express written
consent of the Chairman of the Board.

     (e) Release of Secured Shares. If the Chairman of the Board consents,
         --------------------------                                        
Maker shall have the right to withdraw from the security granted hereby some of
the Secured Shares; provided, however, that the aggregate fair market value of
the Secured Shares remaining subject to the security interest granted hereby
shall be equal to or greater than 125% of the remaining balance of this Note.
<PAGE>
 
     SECTION 4  DEFAULT

The filing by Maker of a voluntary petition for relief in a case under the
Bankruptcy Code or any state insolvency law, or the filing of an involuntary
petition against Maker in a case under the Bankruptcy Code or any state
insolvency law, shall constitute a default under this Promissory Note. In the
event of such a default, all right, title and interest in the Secured Shares
shall vest immediately with the Company.

     SECTION 5  NON-RECOURSE

Except as provided herein in Section 3(c), (i) the Maker shall have no personal
liability for payment of the principal or interest under this Promissory Note;
(i) the Company agrees to enforce any right to payment hereunder solely against
the Secured Shares; and (iii) the Company agrees to look solely to the Secured
Shares in satisfaction of the payments due hereunder.

     SECTION 6  MISCELLANEOUS

     (a)   Notices.  Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be delivered to the parties at
the addresses set forth below (or to such other addresses as the parties may
specify by due written notice to the other). Notices are other communications
given by certified mail, return receipt requested, shall be deemed given 3 days
after the date of mailing:

               Maker:    Ype Von Hengst
                         4307 Pinetree Road
                         Rockville, Maryland  20853

               Company:  Silver Diner, Inc.
                         11806 Rockville Pike
                         Rockville, Maryland  20852
                         Attn: Robert T. Giaimo

                         with a copy to:

                         Arent Fox Kintner Plotkin & Kahn, PLLC
                         1050 Connecticut Avenue, N.W.
                         Washington, D.C. 20036-5339
                         Attention: Arnold R. Westerman

     (b)   Waivers.  Waiver of any provision of this Promissory Note shall not
           --------                                                           
constitute a continuing waiver of any rights of the Company.

     (c)   Governing Law.  The validity, construction and enforceability of, and
           --------------                                                       
the rights and obligations of the Maker and the Company under this Promissory
Note shall be governed by and construed and enforced in accordance with the laws
of the State of Maryland without reference to the conflicts of laws provisions
thereof.

     (d)   Binding.  The obligations and liabilities of Maker under this
           --------                                                     
Promissory Note shall be binding upon and enforceable against Maker and his
successors and assigns, including but not limited any Chapter trustee appointed
in the Maker in any bankruptcy matter.

     (e)   Negotiability.  The Company agrees not to assign, transfer or
           --------------
negotiate this Note without the written consent of the Maker.
<PAGE>
 
                                        MAKER:

Date:   November __, 1998               ____________________________________
                                        Ype Von Hengst



This is to certify that this Promissory Note from Maker to Company was executed
by the same in my presence:

     Dated this __ day of November, 1998.


                                        ____________________________________
                                        Notary Public
     
My Commission expires:
[SEAL]