Formalizing an employment relationship in an employment contract can change how you view your employees and how they view you. Make sure you understand both the pros and cons of using a written employment contract before offering one. This article will review situations where a written agreement can be most beneficial and some basic terms to include when creating an employment contract.
Understanding Employment Contracts
In the United States, job security is generally governed by the at-will doctrine. In practice, this doctrine means that employment can end at any time. The decision to terminate employment can be made by the employee or the employer. Typically, under employment at-will, neither side will owe the other anything more than is required by law at termination.
An employment contract can change or modify the general expectations of at-will employment. You can tailor each legal contract to best suit the needs of both your business and the employment relationship you are memorializing.
Structure of an Employment Contract
Every written employment contract can be modified to fit your particular requirements. For example, some companies ask employees to sign a contract acknowledging that their employment is at-will. However, employment contracts can go much further than those boilerplate employment agreements. These terms will explicitly alter the at-will relationship by changing what is needed for either party to terminate employment.
Most employment contracts will include provisions addressing:
- Duration - The term of employment covered by the agreement.
- Duties - What the employee must do to collect their salary and benefits and avoid termination.
- Benefits - What the employee will receive as compensation for carrying out their duties. This section might cover salary and bonus structure, medical and insurance benefits, vacation and paid-time-off policies and stock or equity ownership plans.
- Conflict Resolution - Consider requiring binding arbitration for any disputes between you and the employee.
- Termination Procedures - What will happen if one party needs to breach the agreement? For instance, if a business opportunity never materializes or the employee suffers a debilitating illness these procedures can be implemented.
Beyond the standard terms of an employment contract, you may also want to consider the following additions:
- Non-Disclosure Agreement (NDA) - A requirement to keep some part of your business a secret, such as tradecraft or client lists.
- Non-Compete Agreement - Limiting what types of work the employee can do and for whom after your employment contract ends. The requirements to create an enforceable non-compete clause vary by state.
- Non-Solicitation Agreement - If an employee leaves, this clause will prevent them from taking other employees along with them to their new home.
- Assignment/Ownership Clause - Anything produced or created by the employee during the contract is your company's property.
What works best for your business will always be unique. Here at LawDistrict, we offer various templates coupled with advice that is personally structured. You can even use our Contract Maker to quickly and easily create a custom employment contract.
Start Your Employment Contract
When Should You Offer an Employment Contract?
Extending a formal employment contract is not a decision to be taken lightly. Because you are making a long-term commitment to an employee, you should generally only offer employment contracts to your most valuable employees. You may want to use contractual employment as an incentive to recruit top outside talent. Many elite candidates will be seeking the security provided by an employment contract.
Another scenario where you may consider an employment contract is to include an NDA or other limiting clause. If the employee works on extremely sensitive material, an employment contract can add certainty and better define expectations for handling trade secrets.
Advantages of a Written Employment Contract
Using employment contracts can help your business thrive. There are numerous ways that a contractual relationship can benefit you, including:
Talent Retention and Acquisition
Competitors are always seeking to poach your best employees with lucrative offers. Having your top talent sign employment contracts will prevent them from leaving with just a simple resignation letter and taking their skills to your adversaries. Similarly, offering an employment contract to new candidates extends a degree of trust and ensures them of their future prospects.
Workforce Certainty
Workplace disruptions can be costly or even catastrophic. If your best or most essential employees are under contract, you can better anticipate disruptions caused by departures. It can also help you know ahead of time when you need to start recruiting again.
Preserving Business Continuity
Your trade secrets and client lists are valuable. So are your processes and procedures. You have invested time, money, and energy in training employees to be productive. An employment contract can help preserve all these business interests through clauses such as NDAs, non-competes, and non-solicitation agreements.
Disadvantages of a Written Employment Contract
While the upsides of using an employment contract are considerable, there are reasons most employers continue to use at-will employment law to cover the bulk of their workforce. Employment contracts limit your courses of action and should only be used in certain situations.
Some disadvantages of using written employment contracts include:
No Termination At-Will
If you give an employee a written contract and their productivity slips, you are stuck with the options outlined in the contract. So long as they meet their minimum duties, you often cannot fire them without costly dispute procedures or severance.
Loss of Flexibility
No one anticipates a particularly severe slowdown at their company. Typically, you could layoff some of your employees to minimize labor costs. Using an employment contract limits this flexibility, at least in regards to workers with contracts.
Increased Costs
Your HR costs to administer and implement employment contracts will be higher. All of your policies and procedures must be reviewed to ensure they do not invalidate or breach your employment contracts. If a dispute arises, your costs will only grow because the employee has more protection than simple at-will employment.
While there are drawbacks, so long as you understand what you are doing, a written employment contract can move your business further along the path to success. As part of a comprehensive strategy, an employment contract is a powerful tool for retaining your best workers and protecting your trade secrets.
Read More:Difference Between a Layoff and Furlough
Helpful Resources:
Federal Laws Prohibiting Job Discrimination - eeoc.gov
Labor Laws and Issues - USA.gov
Formalizing an employment relationship in an employment contract can change how you view your employees and how they view you. Make sure you understand both the pros and cons of using a written employment contract before offering one. This article will review situations where a written agreement can be most beneficial and some basic terms to include when creating an employment contract.
Understanding Employment Contracts
In the United States, job security is generally governed by the at-will doctrine. In practice, this doctrine means that employment can end at any time. The decision to terminate employment can be made by the employee or the employer. Typically, under employment at-will, neither side will owe the other anything more than is required by law at termination.
An employment contract can change or modify the general expectations of at-will employment. You can tailor each legal contract to best suit the needs of both your business and the employment relationship you are memorializing.
Structure of an Employment Contract
Every written employment contract can be modified to fit your particular requirements. For example, some companies ask employees to sign a contract acknowledging that their employment is at-will. However, employment contracts can go much further than those boilerplate employment agreements. These terms will explicitly alter the at-will relationship by changing what is needed for either party to terminate employment.
Most employment contracts will include provisions addressing:
- Duration - The term of employment covered by the agreement.
- Duties - What the employee must do to collect their salary and benefits and avoid termination.
- Benefits - What the employee will receive as compensation for carrying out their duties. This section might cover salary and bonus structure, medical and insurance benefits, vacation and paid-time-off policies and stock or equity ownership plans.
- Conflict Resolution - Consider requiring binding arbitration for any disputes between you and the employee.
- Termination Procedures - What will happen if one party needs to breach the agreement? For instance, if a business opportunity never materializes or the employee suffers a debilitating illness these procedures can be implemented.
Beyond the standard terms of an employment contract, you may also want to consider the following additions:
- Non-Disclosure Agreement (NDA) - A requirement to keep some part of your business a secret, such as tradecraft or client lists.
- Non-Compete Agreement - Limiting what types of work the employee can do and for whom after your employment contract ends. The requirements to create an enforceable non-compete clause vary by state.
- Non-Solicitation Agreement - If an employee leaves, this clause will prevent them from taking other employees along with them to their new home.
- Assignment/Ownership Clause - Anything produced or created by the employee during the contract is your company's property.
What works best for your business will always be unique. Here at LawDistrict, we offer various templates coupled with advice that is personally structured. You can even use our Contract Maker to quickly and easily create a custom employment contract.
Start Your Employment Contract
When Should You Offer an Employment Contract?
Extending a formal employment contract is not a decision to be taken lightly. Because you are making a long-term commitment to an employee, you should generally only offer employment contracts to your most valuable employees. You may want to use contractual employment as an incentive to recruit top outside talent. Many elite candidates will be seeking the security provided by an employment contract.
Another scenario where you may consider an employment contract is to include an NDA or other limiting clause. If the employee works on extremely sensitive material, an employment contract can add certainty and better define expectations for handling trade secrets.
Advantages of a Written Employment Contract
Using employment contracts can help your business thrive. There are numerous ways that a contractual relationship can benefit you, including:
Talent Retention and Acquisition
Competitors are always seeking to poach your best employees with lucrative offers. Having your top talent sign employment contracts will prevent them from leaving with just a simple resignation letter and taking their skills to your adversaries. Similarly, offering an employment contract to new candidates extends a degree of trust and ensures them of their future prospects.
Workforce Certainty
Workplace disruptions can be costly or even catastrophic. If your best or most essential employees are under contract, you can better anticipate disruptions caused by departures. It can also help you know ahead of time when you need to start recruiting again.
Preserving Business Continuity
Your trade secrets and client lists are valuable. So are your processes and procedures. You have invested time, money, and energy in training employees to be productive. An employment contract can help preserve all these business interests through clauses such as NDAs, non-competes, and non-solicitation agreements.
Disadvantages of a Written Employment Contract
While the upsides of using an employment contract are considerable, there are reasons most employers continue to use at-will employment law to cover the bulk of their workforce. Employment contracts limit your courses of action and should only be used in certain situations.
Some disadvantages of using written employment contracts include:
No Termination At-Will
If you give an employee a written contract and their productivity slips, you are stuck with the options outlined in the contract. So long as they meet their minimum duties, you often cannot fire them without costly dispute procedures or severance.
Loss of Flexibility
No one anticipates a particularly severe slowdown at their company. Typically, you could layoff some of your employees to minimize labor costs. Using an employment contract limits this flexibility, at least in regards to workers with contracts.
Increased Costs
Your HR costs to administer and implement employment contracts will be higher. All of your policies and procedures must be reviewed to ensure they do not invalidate or breach your employment contracts. If a dispute arises, your costs will only grow because the employee has more protection than simple at-will employment.
While there are drawbacks, so long as you understand what you are doing, a written employment contract can move your business further along the path to success. As part of a comprehensive strategy, an employment contract is a powerful tool for retaining your best workers and protecting your trade secrets.
Read More:Difference Between a Layoff and Furlough
Helpful Resources:
Federal Laws Prohibiting Job Discrimination - eeoc.gov
Labor Laws and Issues - USA.gov
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