Employment Agreement: Everything You Need to Know
An Employment Agreement can be beneficial for both an employer and an employee as both parties can mutually agree upon the terms of the employment relationship. 7 min read
An Employment Agreement can be beneficial for both an employer and an employee as both parties can mutually agree upon the terms of the employment relationship.
What is an Employment Contract?
The terms Employment Contract and Employment Agreement are interchangeable, as well as terms like Contract of Employment, Job Contract, or Employee Contract. An employment contract outlines the rights and responsibilities, details of the job duties, basic employment information, and expectations of both parties.
The employment contract is an important legal document that can be one of the most important tools for a business. Make sure you spend the appropriate amount of time creating any employment contract and consult with an employment law attorney to ensure the employment contract does what you set out for it to do and doesn’t create more issues that it helps.
An Employment Contract outlines the details of the employment relationship, including:
- Incentive, bonus, or commission pay
- Vacation time
- Benefits, including health and retirement programs
- Probationary periods
- Confidentiality agreements
- Non-compete language
An employment contract is a great way to make sure all parties are on the same page.
Termination and "At Will" Employment
Employment contracts aren’t needed for every employee you hire. However, there will be certain situations where a traditional written agreement that is signed by both employee and employer is appropriate. In employment situations where an employer contract doesn’t exist, the employment agreement is implied, either through a verbal statement or other actions the employer has taken (employee handbook, policies or procedures).
Employment is generally considered "at will" in most states, which means the employer can terminate the employee at any time (as long as the reason is not illegal), in addition the employee can leave at any time. Employee who have an employment contract are not “at will” if the contract spells out the specific grounds for which an employer can end the employment relationship.
Most at will employees are asked to sign an employee handbook acknowledging they understand the general rules set forth for all employees, and within the employee handbook the at-will arrangement is typically discussed.
If an employer enters an agreement with an employee to employ them for set period of time, it may limit the employer’s ability to terminate the employee unless there is a breach in the contract.
Verbal employment agreement is difficult to enforce. There is a legal doctrine called the “statute of frauds” that states any verbal agreement that can’t be carried out in less than a year is not valid. Verbal contracts must also be specific, and general statements like “you will always have a job here as long as you want it” is not enforceable.
Some states have an implied contract of employment after an employee has been engaged in work for an employer and have maintained a standard of work for a period of several years or longer.
Advantages of an Employment Contract
One of the biggest advantage of having an employment contract is that the expectations of both parties have been laid out and agreed to and advance. An employment contract will also help you hold on to valued employers longer, as well.
Some potential candidates might prefer employers who offer employment contracts, so it could be seen as a way to attract good talent to your organization, especially if the candidate is presented with multiple employment agreements and you are able to detail a valuable offer to them.
Another advantage of utilizing employment contracts is that it can allow you more control over how your employees work.
Disadvantages of an Employment Contract
While there are many advantages to an employment contract, there can also be some downsides.
If there are any changes in the employment arrangement or your business changes, the employment agreement may need to be renegotiated.
The employment contract outlines the expectations for the employee, but also the employer. Therefore, be sure to follow through with the expectation you’ve laid out for yourself as an employer.
Types of Employment
There are many different types of employment arrangements, and the employment contract should outline the type of employment for that individual employee. Before deciding the type of employment relationships or classification you will have with your employee, you will want to do some research including the legality of the different types of employment relationships.
A permanent full-time employee is someone who will meet the full-time hours requirement set by the employer, and who has no predetermined end date to his or her employment.
A permanent part-time employee is someone who won’t meet the requirements for full time hours and has no predetermined end date to his or her employments.
If an employee will have a set or predetermined end date to their employment, they are considered a fixed period or term employee.
What to Include in your Employment Contract Template
The basic information included on most employment contracts include information about your company, such as name and address. It should also include the name and address of the new employee.
It’s also important to include information on how much and how the employee will be paid. You’ll want to state the frequency of the pay period (weekly, biweekly, or monthly), the wage (an hourly or annual salaried rate), and if there will be any commission or other incentives.
Depending on the nature of the work being performed by the employee, there may be a need to have non-disclosure, non-solicitation, and a confidentiality clause in the employment agreement. This information may also be in a separate document or addendum to the employment contract.
Some contracts will include a best effort provisions that, although it may seem implied, requires the employee to always put forth their best effort, perform the best to their ability, and to be loyal to the employer. This provision also requests the employee to make suggestions to better and benefit the company.
One of the most important sections is the section outlining the termination of employment. This area should outline the reasons for giving notice, such as two weeks’ notice, and gives the employer the right to terminate employment if the employee breaches the contract in any way. Another aspect that may be covered in this section is what will happen if the employee becomes disabled or is otherwise unable to perform their job duties.
Lastly, arbitration clauses can be included in the employment contract. This section controls what will happen if there is a situation with a dispute in the employment relationship. This section will assist with these types of disputes through arbitration, rather than seeking resolution in a court of law.
What is a Probationary Period?
Most employers have a standard probationary or new employee period that is anywhere from 30 days to 180 days, although 90 days is the most comment period.
The probationary period serves as a time the employee and the company can determine if the employment relationship will continue into a longer-term situation. The employer can assess if the employee has the right skills to perform the job they were hired to do.
The employer may choose to end the employment relationship during the probationary period if they feel the employee is not going to work out. In most states, they can do with any reason and do not need to provide any notice or severance pay.
Once the probationary period has ended and the employer has decided to continue to employ the employee, typically the employer cannot terminate the employment relationship without proper reason, notice or potentially severance pay. Again, this is sometimes different by the state you work in, so make sure you check on the rules that apply to your company
The probationary period may also include a wait for certain benefits like health care or retirement benefits. These waiting period rules are set up by the individual employer or the insurance company they utilize.
Non-Compete, Non-Solicitation, and Confidentiality Clauses
Non-compete, non-solicitation, and confidentiality agreements are usually included in the employment contract and serve as protection for the company for many different circumstance during and after the employment relationship.
Non-compete clauses are included in the employment contracts and usually cover the following items:
- Includes provisions that keep the employee from working for a direct competitor of the company, or from setting up his or her own business to compete with the company.
- Can preclude employee from being a shareholder or director in a similar business.
- Determine the amount of time the non-compete clause is in place, typically between one to three years past termination.
- May determine the geographical area the clause is limited to.
Typically a non-compete agreement is agreed upon prior to the employment relationship beginning, however, there are times it might be opportune to have an existing employee sign a non-compete once they are well in to their employment with the company. In these situation, there is sometimes more than just the promise of continued employment provided, such as a raise or a bonus payment.
A confidentiality clause is added to an employment contract to protect the knowledge or trade secrets of an organization. The confidentially clause typically does the following:
- Precludes the employee from discussing certain areas with anyone outside of the company, such as product information, trade secrets, strategic planning of the company, or even discounts offered.
- Bans the use of company secrets, marketing information, or product information without the permission of the company.
- Specifies what sort of information needs to be kept confidential.
- Can last indefinitely or can have an expiration date (for example, two year after employment ends).
- Should include the consequences if the confidentiality agreement is broken.
A non-solicitation clause in an employment contract is meant to keep the employee from encouraging other employees or customers/clients of the employer to move to another company.
Remember, any clause you include in the employment contact must be reasonable and fair to both partie, and will need to be enforceable in a court of law. Consult an employment law attorney for additional information.
Why use an Employment Contract
Once you are in the final stages with a candidate and the candidate has passed all of the pre-employment requirements, you will want to make things official by having them sign an employment contract. Most of the items that will be included in the employment contract will have been discussed and/or decided on during the interview process, but it’s important to include all of that information in writing, so you and the new employee know what to expect with items like pay, benefits, and job duties and expectations.
Most employment contracts are fairly standard, but you may want to include information on certain items and term that are unique to the individual. Therefore, consultation with an employment law attorney can assist you through this process.
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