Employee Agreement: Everything You Need to Know
An Employee agreement is the traditional document used in relationships between employees and employers for the purpose of laying out the rights, responsibilities, and obligations of both parties during the employment period8 min read
2. Termination and “At-Will” Employment
3. Advantages of an Employment Contract
4. Disadvantages of an Employment Contract
5. Types of Employment
6. What to Include in Your Employment Contract Template?
7. The Probationary Period
8. Non-Compete, Non-Solicitation and Confidentiality Clauses
9. Why Use an Employment Contract?
Updated October 5,2020:
What Is an Employee Agreement?
An employee agreement is the traditional document used in relationships between employees and employers for the purpose of laying out the rights, responsibilities, and obligations of both parties during the employment period. Given its purpose, an employee agreement can be one of those vital documents utilized by an employer. The employee agreement will allow an employer to solidify the relationship with employees to make certain that the key terms of the contractual relationship are understood by each party. Examples of these key terms are:
- Work schedule
- Vacation allotment
- Restriction on confidential information
Employer benefits that are generally offered and included in an employment agreement include health insurance and 401K matching in addition to non-traditional offerings, such as vacation based on hitting performance goals.
An employee agreement will typically be reduced to a traditionally written agreement that will require the employer and employee to acknowledge and sign. That said, employers do not have to reduce every employee agreement to a written contract. In fact, more frequently than being reduced to writing, employee agreements can be implied via verbal statements or additional actions taken by either the employer or the employee. These implied agreements can take the form of company authorized memoranda, company policy and procedure, or employee handbook material.
Termination and “At-Will” Employment
In the event of termination, an employee is most likely to use an employment contract to demonstrate that an employer did not have an exclusive right to terminate the employee. In many states, employment is most frequently classified as at-will, which allows the employer to terminate any employee at any given moment, so long as the rationale for termination is not an illegal action against the employee. An at-will employment agreement also works the other way, as it allows an employee to resign at any time.
Employees that have agreed with employers to obtain employment via an employment agreement will not be classified as an at-will employee, as the employee agreement will generally dictate the conditions upon which an employer may terminate an employee. Employers who form employment relationships with employee who are classified as at-will employees will require at-will employees to acknowledge via signature on an employee handbook that the employee confirms and understands that by signing the document his/her employment is an at-will arrangement. For at-will employees, it is important to understand that signing an acknowledgment or employee handbook is unlike signing an employment agreement as an employer may terminate an employee, so long as the reason is not illegal.
Along these lines, employers may have limited rights when it comes to terminating an employee who can demonstrate that either they entered into an explicit contract to employ the individual for a specific period of time or there is an implied contract that could be shown to indicate that employment may only be terminated for cause. Employees who are relying on the enforceability of implied or verbal contracts may find that limitations as a result of a legal provision known as the statute of frauds will preclude them from bringing a successful claim. The statute of frauds in this context dictates that a verbal contract that cannot be completed in less than one year would be deemed legally invalid.
For employees to likely succeed on a contract claim pertaining to a verbal contract, the contract must be specific to demonstrate enforceability. If an employer has made a statement along the lines of “you will always have a place on our team for as long as want,” you will be unlikely to prove to a court that the employer’s claim was an enforceable contract. That said, a few state courts have held that an implied contract may have been formed if the employer, over a period of years, engaged in a specific course of dealing in which employees were retained if certain performance standards were maintained.
Advantages of an Employment Contract
While most employment in the U.S. is at-will, employers may utilize employment contracts as a way to ensure that their most qualified talent is bound by the terms of a contract, which will be a deterrent to employees leaving the company and an advantage to the contract.
Employment contracts can also incentivize highly skilled employees to join your company. The prospect of having a contract can ensure greater stability for the highly skilled employee. These employees may have other job offers, and a contract with appealing turns could lure top talent to your company. Lastly, the presence of an employment agreement will provide the employer with greater control over the work being done by the employee subjected to the contract provisions.
Disadvantages of an Employment Contract
Unlike an at-will employment relationship, the presence of a contract will preclude an employer from simply terminating an employee if the employer experiences a downturn in business or the employee does not meet the employer’s original expectations. Unfortunately, in either of these cases, the employer will be left to likely renegotiate the employment contract with the employee.
Under the legal provisions of the contract, an employer is obligated to act under a covenant of good faith and deal fairly with the employees as they enforce the original terms and conditions of the contract. This provision is an important protection for employees as it serves as a deterrent to prevent an employer from breaching the contract as acting in bad faith could ultimately lead to more extensive legal damages under the law.
Types of Employment
Generally speaking, employees are classified as individuals who are hired by a company and receive cash compensation from their employer for completion of their responsibilities. As the types of employment vary, employers must take great care to properly classify all workers when drafting a contract. For example, a full-time worker who is permanent would be an employee who meets the requirement for full-time employment and does not have a predefined conclusion date to their work. On the other hand, a part-time worker who is employed on a permanent basis does not meet the required number of hours for full-time employment and also does not have a predefined conclusion date to their work.
An employee who has been hired for a fixed time period is defined as a fixed-term employee and will have a predefined conclusion date for their work. Their contract will automatically conclude on the end date set forth in the terms and conditions of their employment. In addition, an employer may terminate a fixed-term employee without any notice. The fixed-term employee may also terminate his/her employment without any advanced notice.
What to Include in Your Employment Contract Template?
Employers must take great care to ensure that the necessary information about the company and the prospective employee are contained in the employment contract. Such information like the name and address of the company as well as the name and address of the prospective hire are basic and should be found in the template. Clearly, an employer would want to ensure that the cash compensation to be provided to the employee has been reduced to writing.
Traditionally, employees receive compensation for their work in the form of a salary payment or commission amount based on pre-defined metrics. Employers are also free to combine the compensation types by offering an employee both a salary and the ability to additionally earn commissions.
Another item that may be included in the employment contract template is the standard confidentiality provisions that aim to protect the company’s intellectual property. Some employers will choose to do this in the form of a Non-Disclosure Agreement, but it is also as effective in the employment contract template. Either way you choose, an employer must be specific about the information that must remain confidential.
In terms of social media account access, if your prospective employee with be responsible for maintaining your online social media presence, you should probably formalize the fact that the company retains ownership of any of the employee’s activities on these respective media forums.
While most employers will try to determine during the interview process whether an employee will work diligently upon employment, some employers will attempt to formalize such an expectation in the form of a best-efforts clause embedded within the employment contract. Quite simply, a best-efforts clause states that the employee will work to his/her best potential ability and will remain loyal to their employer throughout the course of employment. In addition, a best-efforts clause often will require the employee to agree to bring forth suggestions for improvement that could benefit the operations at the company.
The Probationary Period
Employers will often like to determine if the employee they interviewed meets the expectations they had upon hiring the employee. Thus, the common practice for newly hired employees is to be subject to a three-month probation period.
During this three-month probation period, the employer is evaluating the employee to determine whether the employees is a solid cultural fit within the company, if the employee truly has the skillset to perform his/her job responsibilities, and if the employer still believes that the employee can benefit the company in a long-term manner.
Often, an organization will structure the three-month probation period to allow for the employer to terminate the employee for whatever reason without the need to provide reasonable notice or compensation.
Non-Compete, Non-Solicitation and Confidentiality Clauses
In certain specific industries and job fields, employers are best served to include clauses in their employee agreements that address the issues of competition, solicitation, and confidentiality. Such clauses provide the employer with a valuable tool of protection from a variety of circumstances that could cause irreparable harm to the company. For example, a company may lose market share, have employees poached by competitors or have trade secrets revealed to outside parties.
If an employer would like to restrict an employee’s potential ability to work for a competitor directly in the same business practice, a non-compete clause would be highly advisable to achieve that mission in the employee agreement. A non-compete clause is not open-ended and must have an end date upon which the employee may compete with his/her current employer if need be. In addition, not only does the time period need to be provided, but other requirements must be met to ensure enforceability. One example would be language that limits the competition restriction to a geographic location that is deemed reasonable.
While we have been speaking about non-compete clauses in the context of new employees, an employer may ask an existing employee to sign a non-compete agreement. However, an employer will generally have to offer some consideration for the employee’s contractual promise. The consideration is likely to be in the form of cash compensation or a bonus.
As with the non-compete clause, an employer may be concerned that an employee who has resigned may attempt to take customers or other employees from their former employer for the benefit of their new employer. Like non-compete clauses, non-solicitation clauses must meet certain parameters to be declared valid, such as a provision that limits the time in which this restriction would apply to a reasonable length of time.
Lastly, an employer will generally have a desire to keep information that has not been revealed to the public as confidential. As such, many employers will embed confidentiality language in the employee agreement. This language will serve to bar employees from disclosing such confidential information obtained during the course of employment to any person outside the company. Unlike non-compete and non-solicitation clauses, confidentiality clauses may remain in effect for an indefinite time period. Though some employers will provide an expiration date.
Why Use an Employment Contract?
After the job application has been filled out and the resume submitted to HR, the employee has met with several current employees for interviews, an employer will ask the employee to sign an employee agreement to formalize the employment process. While there still may be some items to iron out, it is vital for employers to put the terms and conditions for employment in writing so that both the employer and employee know what to expect from the relationship.
If you need help understanding employee agreements, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience.