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Pros and Cons of Written Employee Contracts

There are times and places for written employee contracts. As an employer, you should be aware of the various factors to consider when thinking about employee contracts.

To sum it up, an employment contract is a document that both you and your employee sign that dictates the terms of your professional relationship. There is no requirement that you have to enter into a written employee contract with every employee that you have. Indeed, most employees in the United States do not work under an employment contract. However, there are some situations in which it makes sense to enter into an employment contract with your employees.

What Is Included In an Employment Contract

First and foremost, a good employment contract will spell out what exactly you expect the employee to do (the parameters of their job). In addition, the contract will spell out what your employee can expect from you (normally a salary). However, there are other terms that you can include in an employment contract, such as:

  • The term of employment (A period of months or years, until the completion of a project, or indefinitely),
  • Terms relating to the responsibilities of the employee,
  • Benefits such as health, life or disability insurance or retirement accounts,
  • Vacation and sick day policies,
  • Reasons and grounds for termination,
  • Covenants not to compete that will limit the employee's employment opportunities if he or she is terminated or otherwise leaves the company,
  • Nondisclosure agreements relating to your company's trade secrets or client lists,
  • An ownership agreement stating that all materials produced by the employee during his employment are owned by the company,
  • Assignment clauses stating that any patents procured by the employee during his employment must be assigned to the company,
  • A method for resolving disputes relating to employment (such as mediation or arbitration).

At Will Employment Concerns

The main thrust of this article is about employees that are employed under a contract. Generally speaking, employees that are under contract are not "at will" employees because the contract will spell out the specific grounds on which the employer can terminate the employee.

However, there are other employees that are required to sign written agreements that state that their employment is at will, meaning that the employer can fire them at any time for any reason (so long as the reason is not illegal).

In addition, the employee is free to quit at any time. Employers that work with at will employees often get their employees to sign employee handbook acknowledgement or other documents that state that the employee knows his or her employment is at will. These documents, unlike "regular" employment contracts do not limit an employer's ability to terminate an employee.

Advantages of Using Employee Contracts

One of the biggest advantages that you get when you use employment contracts is that you have the ability to hang onto your best employees. You can do this by adding terms into the employment contract that limit the reasons that an employee can use to leave your company.

As an example, if you have spent a considerable amount of time and money training a key employee, you may want to consider getting them under an employment contract. You can lock that employee into a specific length of employment under the contract, or you can put in notice clauses that will give you enough time to train a new employee (perhaps 90 days' notice). Although you cannot force an employee to stay with your company, an employee may be more likely to stay if there are penalties for leaving.

Another situation in which employment contracts make perfect sense is when you will have employees that are learning and working with your company's trade secrets. When this happens, you will probably want to put confidentiality clauses into your contract that will prevent employees from disclosing your trade secrets or client lists. In addition, you can include a covenant not to compete clause in an employment contract that will prevent former employees from competing with your company for a certain amount of time after their employment ends.

On the flip side, employment contracts can also be used to lure the best employees into your company. Great employees will probably be offered many different employment contracts, and if you can offer them the best deal, they may end up coming to you.

Lastly, having an employment contract will often give you more control over how your employees work. By laying out the specific standards that you expect from your employees, you may have an easier time disciplining or firing an employee that is not meeting those standards.

Disadvantages of Using Employee Contracts

However, with all the advantages that can come to you with an employment contract, you should never lose sight of the potential disadvantages. Remember that an employment contract is a two way street -- you have obligations that you must fulfill as well. If an employee does not turn out how you want, or if the needs of your business change, you will have to renegotiate the employment contract.

As an example, if you have hired an employee under a two year contract only to find out six months into the project that you no longer need the employee, you cannot simply fire him. Instead, you will probably have to renegotiate the contract or settle with your employee as to how much money you owe.

Another disadvantage of employment contracts is that, once under the terms of the contract, you are required to act with according to the "covenant of good faith and fair dealing." This means that you have to act in good faith and in accordance with the terms of the contract. Therefore, if you breach a term of the contract in bad faith, you will not only be in breach of the contract, but you may also have breached your duty to act in good faith, which could lead to further legal ramifications.

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