By Renee Mielnicki, Esquire
An employment contract is a written agreement between an employer and employee that defines their working relationship, including job responsibilities and compensation. The details of each contract depend on what the parties agreed to during their conversations.
Who might be offered an employment contract? Employment contracts are most often seen with highly skilled and highly paid employees, such as executives. While they can be used with others, it’s often not necessary because they do not have any property, such as the sale of their assets to the company, that demands special terms of employment.
What about at-will employment? Most employees are employed “at will” meaning they can quit or be terminated at any time for any reason, as long as the reason is not illegal. Discrimination is an example of an illegal termination reason. At-will employment is not a contractual relationship and is only documented by a job offer letter, not an employment contract.
Do employment contracts impact “at-will” status? When a company enters into an employment contract with an employee, the relationship is usually not at will. Those in a position with bargaining power often want their employment to be for a set duration that can only end for very specific reasons. The duration, known as the term of employment, and the reasons it can end, will be detailed in the contract. These employees also want specific compensation and benefits and are often in a position of authority to negotiate it.
What goes into an employment contract? The following details are typically addressed in an employment contract:
- Job responsibilities;
- Duration of employment;
- Benefits the employee will receive such as health insurance, vacation leave, and disability leave;
- Grounds for termination of employment by the employer;
- Reasons why the employee can resign;
- Limitations on the employee’s ability to compete with your business once the employee leaves, known as a non-compete;
- A Non-Solicitation provision to prohibit solicitation of your clients and employees away from your business;
- Protection of your trade secrets and client lists with non-disclosure provisions; and
- Dispute resolution methods such as arbitration or mediation (alternatives to suing each other in court).
Pros of Using an Employment Contract: Remember, most employers do not choose to use employment contracts in most instances. Here are the reasons they may choose to do so:
- It can attract top talent, especially those with assets the company wants to acquire;
- Since they include set durations of employment, it can reduce the risk of turnover. Hanging on to top talent can be appealing to an employer; and
- These contracts often require the employee to give extended periods of notice if they want to resign. In some cases, it can be as long as six (6) months. This can make for easier transitions of duties to other employees, especially in roles of heightened responsibility.
Cons of Using an Employment Contract: These contracts do come with quite a few cons.
- They limit your ability to separate employment and are less flexible than traditional at-will employment. Employers desiring to end these relations must make sure it’s for a particular reason described in the agreement and meets the required notice period the employee is owed.
- Since the agreement is a two-way street, it cannot be changed without the consent of the employee. For example, if you wanted to change their vacation time, it would require you to renegotiate that with the employee.
- Since this is a binding legal document, it presents additional legal ramifications that don’t exist with at-will employment. In addition to claims that at-will employees can make, such as claims related to harassment or discrimination, employees with employment contracts can also file a breach of contract claim if their contract is violated. This means the employer would face additional liability for damages, or liability they would otherwise not have had if the employee brings a claim or lawsuit against the employer.
If you are an employer with any HR concerns, please send an email to HRhelpline@eastcoastrm.com. If you have any questions about East Coast Risk Management and the services we offer, please visit our website (www.eastcoastriskmanagement.com) or call (724) 864-8745.
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