Last Updated Apr 20, 2007 3:05 PM EDT
An employment contract is an agreement between an employer and employee, which may in some cases, also be tied to an existing labor union agreement. It should not be confused with a contract employee: someone either self-employed or employed by a third party who contracts with an employer, usually to carry one particular job to completion.
Employment contracts have advantages for both the employer and the employee. They do however require extra administration so, for the most part, are reserved for key positions in an organization—usually for those highly compensated individuals who pose the greatest risk to the company should they leave.
Whether you already have employment contracts in place or have only begun considering them for your employees, you may find this checklist helpful.
Employees want some protection from being dismissed at the whim of managers who do not need legal, concrete reasons for terminating them. Not having an employment contract could discourage prospective employees from applying.
From an employer’s point of view, employees who work without an employment contract do not necessarily have any allegiance to their employers and could defect to a competitor taking their previous employer’s secrets with them without that employer having any legal recourse. Employment contracts might also discourage less than honorable people from applying, knowing that recruitment and hiring practices would probably turn up something about their past that they would rather hide.
The advantage of further refining your contracts is that you may get closer to your desired goal the next time. Going back will only precipitate the very issues that made you decide on employment contracts in the first place. However, having something such as a termination policy poorly defined in a contract, can get you into as much hot water as having no contract at all.
If you have few in-house resources and have been unable to get enough specific information through professional contacts, personal networks, associations, or online resources, you have two options: develop the expertise yourselves or hire experts to help you develop suitable employment contracts. Either way you have added expense, but compare that with losing a legal battle over “unjust termination.”
A common concern is that, without some sort of agreement, employees are free to leave with knowledge that their employers paid them to develop. These types of agreement are very common, and may serve their purpose well. However, their legality is a state-by-state issue, and they are sometimes considered unenforceable. An employment contract allows an employer to cover more than just the non-compete aspect of the relationship. Disputes between employees and their employer occur for myriad reasons; employment contracts merely try to head off disputes by addressing some of the most common areas of dispute ahead of time.
If you have yet to put employment contracts into effect, doing an organizational assessment—needs and wants, strengths and weaknesses, pros and cons—is a good place to start. Any major effort that involves the whole company needs to be well-thought-out. Key positions throughout the company should be considered for employment contracts. It would be impractical and probably unfair to have contracts for only one or two critical jobs, so you will want to consider implementing them for key employees throughout your company.
The same sort of assessment process is also advisable for those of you who have employment contracts in place and want to revise them.
- Start by answering the following questions—perhaps along with a committee made up of members from across the breadth of your organization: What in your organization, or industry, has changed enough recently to warrant your making this commitment, or upgrade, to employment contracts?
- What jobs, and associated job descriptions, have changed in the past year or so?
- What problems have your staff recently experienced, which can be attributed to things that could be overcome with a more defined employee/employer relationship?
- What do you see happening in the next year, in terms of industry and company health?
- What type of workforce do you have, and what type of contract will make sense for the type of work that workforce does?
Look for sample employment contracts; many are available on the Web; you may even find one that applies to your type of organization or company. But whether directly applicable or not, what you do find will help identify areas you need to consider.
Be sure to research employment law or any changes in the law that might affect your contracts. If you are involved with a labor union, you will need to include it as a partner in both the research and drafting of the contract language. While having a legal advisor on the team is nice, it is not a requirement, but an attorney specializing in employment law should take a look at the proposed contract before you put it into effect.
The following are among the things that an employment contract can require of the signatories.
The employee must agree to:
- work solely for the employer, unless otherwise stipulated;
- work honestly and safely, and do nothing that compromises the organization or conflicts with its basic interests;
- respect and adhere to a confidentiality agreement (also known as a non-disclosure agreement). Products built and proprietary information gained while employed remain the property of the company, and must not be shared with competitors;
- in some cases, sign a non-compete clause, which further binds the employee after he or she leaves the company.
- The employer must: provide work as stipulated and defined in the contract;
- pay employees according to the terms of their contract, including stipulated benefits and reasonable costs and expenses that arise from the job;
- provide a work environment that is safe and free of health hazards;
- provide a reliable evaluation process for determining if stated job goals have been met, and measurements by which career advancement becomes available;
- provide a mechanism by which work-related grievances can be heard and remedies sought.
The following is a list of elements that should be included in employment contracts. For those of you who are rewriting contracts, look for things that may have been missing in the past, or that may help to avoid future conflicts:
- name of employee and the company or organization;
- name of the job and job description;
- if necessary, a qualifications statement;
- dates (starting and ending—if the contract is for a limited period);
- terms and conditions of employment (for example, probationary period, hours, flextime, places of work, and so on);
- salary or rate of pay, plus details about its calculation and frequency of payment;
- company benefits (health and medical, vacation entitlements, sick leave, bonuses, retirement, an so on);
- options for termination and notices required;
- process for filing a grievance and recourse for appealing disciplinary action;
- collective bargaining agreements that become part of the contract;
- confidentiality, non-disclosure, and non-compete clauses, some of which can apply for a period of time after the employee has left the company;
- ownership rights to property and product (intellectual and real) developed while employed;
- employer indemnity statement that protects the company and its employees from liability stemming from an employee’s illegal activities while employed elsewhere—stealing company secrets from a former employer, for example.
Take your time. Be sure the language in your employment contract is clear and unambiguous; avoid legalese. Double check that nothing stated, required, or implied runs contrary to employment laws or regulations. Make sure that employees know that by signing an employment contract, they are bound by its terms and that subsequent changes require agreement by both parties.
While you as an employer may want to define the terms of employment very specifically, you should take a last look at it from a different perspective. You want a contract with direction and objectives that will challenge your employees—but you also want one that will allow individuals to use their creativity and initiative to contribute in ways you had not anticipated.
If your reason for developing or revising employment contracts is to ensure that you have measurements built in to better get a handle on work performance, make certain your employees understand these changes and agree with them. You may have to allocate more staff resources to tracking the measurements accurately, so that they can be used effectively when the time comes to renegotiate contracts, discuss pay raises or, conversely, build a case for terminating an employee.
Remember, you are making a lot of changes at once. Whether you are only now introducing employment contracts or are revising those already in place, an employee now holding job, who is asked to sign a contract, may see the contract as a thinly veiled attempt to dismiss him or her. If you are eager to keep the employee, make sure you communicate this in such a way that you win trust and, eventually, an agreement that the contract is in everyone’s best interest.
If, on the other hand, you believe a current job holder will not be able to measure up to the new challenges, do not use a new contract as the way to get rid of him or her. An employee is not obligated to sign an agreement that departs radically from the job as it was presented when he or she was hired. Forcing the issue could create serious legal problems for the company.