Unlike many years ago, when employers and employees began the working relationship with a simple trusting handshake, today’s employment often begins with lengthy employment contracts and careful scrutinizing, discussion, and negotiation. Such contracts are often necessary to reduce the potential for expensive litigation on a multitude of issues, although in many cases, it is advantageous for an employer not to have to deal with the restrictions and obligations that a contract may create. For this reason, not every prospective employee will be successful in obtaining an employment contract. Until recently, employment contracts were used almost solely for executives. Today, many employees, particularly managers and professionals with special expertise, look to employment contracts as a hedge against job loss brought on by mergers and corporate “housecleaning” and as a way to negotiate greater predictability in their work lives.
This article provides a checklist of some of the more important issues to consider at the time of establishing an employment contract. It is not intended as legal advice. The law pertaining to employment contracts and the enforcability of particular provisions vary substantially from one state to another. Therefore, an individual should seek the advice of a knowledgeable attorney before deciding on the content and language of an employment contract.
A well-drafted employment contract clearly states the agreement between employer and employee and reduces the potential for future litigation. It should start with the basics, such as job title and a description of the level of responsibility the employee will assume. If the employee wants to remain in a particular location or desires to avoid extensive travel, these issues should be addressed in the contract. Generally, employees are hired for an indefinite period of time. However, in many states, a contract is unenforceable if a definite term is not stated. The parties should consider whether extensions to the contract term will be permitted and under what conditions.
The salary and total compensation package should be addressed in an employment contract. This would include the following: base pay, bonus, commissions, cost-of-living salary adjustments, pension, life/medical/ dental/disability insurance (address who pays what percentage), 401(k), stock, profit-sharing, incentive pay, expense account, company car, vacation, parking, use of company property, associations/club memberships, mobile phone, tuition (self, dependents), moving costs, low-interest loans, severance pay, tax/legal/financial counseling, child care, and employee discounts. Just because an employer does not state that a particular item is available as a benefit does not mean that a well-qualified applicant cannot use his or her qualifications as leverage to negotiate for and receive that benefit.
In an individual employment contract, there is often a clause listing the specific reasons that will justify termination. If the contract does not address valid reasons for termination, the employee is generally considered to be an employee at will. The doctrine of employment at will holds that unless there is a contract stating otherwise, employers have the legal right to terminate an employee for any reason as long as the basis for termination does not violate state or federal law. This doctrine is generally followed in all states, subject to some exceptions that vary from state to state.
If an employee desires some protection beyond the minimum required by law, the employment contract should state, for example, that the employer cannot terminate the individual unless there is just cause. Also, the parties may wish to specify that termination may occur only after the occurrence of certain specified events. The contract should specify what the consequences would be for the parties in various scenarios. For example, misconduct, particularly gross misconduct, normally does not entitle an employee to severance pay. If the termination is for something less than the agreed-upon standard of misconduct or if the employer breaches the terms, the contract should state how, when, and how much the employee is to be compensated.
One of the most often used provisions in employment contracts is a clause that prohibits the employee from working for a competitor during the term of the contract and after leaving the employer. Noncompetition agreements have long been used in the employment contracts of top executives, sales representatives, and research/technical personnel. As employers have become more competitive and more concerned about trade secrets and other proprietary information getting into the hands of their competitors, covenants not to compete are being included more often in contracts involving employees who will have access to customer lists, business and marketing plans, pricing and financial data, research and development, production methods, product formulas, and any other information that would be of value to a competitor.
A prospective employee should give this issue serious consideration before agreeing to a restriction on future employment. Most states enforce noncompetition agreements. As with most other matters related to employment contracts, state laws control how these agreements are interpreted and the extent to which they may be enforced. State laws dealing with such agreements vary significantly.
A noncompetition agreement often includes other restrictive covenants, such as a nondisclosure agreement prohibiting the former employee from using or disclosing the employer’s confidential or proprietary information. Also, a nonsolicitation agreement may be used to prohibit former employees from soliciting the employer’s customers and prospects, and a non-raiding provision can prohibit former employees from hiring the employer’s other employees. Employers often include a provision in employment contracts to protect their interest in intellectual property created while the employee is employed. Employees should be careful not to give up ownership of patents or copyrights already obtained prior to joining employers.
Many employers include compulsory arbitration clauses covering all employment-related claims in their employment contracts. Giving up one’s right to seek a legal remedy in court is a serious issue and should be given due consideration by the employee.
If the employee will be assigned to work outside the United States, it may be wise to consider such issues as cost-of-living adjustments, minimum number of trips home (at company expense), and travel and moving expenses back to the United States upon termination of the contract.
Many other types of provisions are often used that may place additional restrictions on either the employee or the employer. The parties are limited primarily by their imagination and their particular needs when determining what should be included in the employment contract. Both parties would be well-advised to have knowledgeable employment attorneys assist them in this process to avoid unpleasant surprises in the future.
- Flynn, G. 1999. “Employment Contracts Gain Ground in Corporate America.” Workforce 78:99-101.
- Flynn, G. 2000. “Protect Trade Secrets from a Corporate Raid.” Workforce 79:92-94.
- Koen, C. M. and Morgan, J. 2003. “Can You Keep a Secret? And Other Intriguing Issues Concerning Intellectual Property.” Supervision 64:14-18.
- Koen, C. M. and Reinhardt, W. 2000. “Employment Contracts: Preventative Strategies for Post-termination Disputes.” Supervision 61:5-9.