The Benefits of Employment Contracts

Small businesses usually create formal, written employment contracts that dictate the specific terms of their employment agreements with top executives. The stakes of an executive hire are usually greater than those involved in the hire of a regular full-time employee, and an employment contract helps protect the long-term interests and well-being of both parties.

But should you consider drafting and requiring employment contracts for all of your full-time employees? There are benefits to doing so in the right circumstances, the biggest of which is that an employment contract provides a formal (and legal) record of both parties’ expectations and agreements at the time of hire.

With a verbal job offer and agreement, there’s nothing in writing to substantiate anything that’s said by the employer or future employee. An employment contract also protects your business from hiring managers who make verbal commitments they’re not authorized to make as well as having to play “he said, she said” if the manager no longer works for your company.

Some companies believe that a signed offer letter is the same thing as an employment contract, but this usually isn’t the case. Most offer letters don’t include as much detail as a formal employment contract, and they often contain language stating that the terms are subject to change or that more details can be found in the employee handbook. However, new workers usually aren’t given an employee handbook until after they’re hired, which can invalidate any legal standing that the offer letter might otherwise have.

Employment contracts don’t have to be lengthy and cumbersome; in fact, the more clear and brief the contract, the better. A standard contract can be created for all employees and customized for specific jobs. It should include the following:

• The specific job position offered and accepted, including job title
• The primary job duties and responsibilities of this position
• The amount and type of compensation agreed to by both parties
• The duration of employment, or an “at will” clause stating that the employment term is open-ended
• The types of benefits offered and accepted, such as paid time off (i.e., vacation, holidays, sick leave); employer-sponsored retirement plan; bonuses or profit-sharing plan; or company-provided health, dental, disability, or other insurance plan
• Restrictive covenants or a noncompete agreement that stipulates the employee cannot go to work for a competitor or start a competing business within a certain time period (such as one year) after leaving your company

Employers often think that employment contracts negate the “at-will” employment status recognized in a verbal agreement in most states. At-will employment means that either the employer or employee can terminate the employment for any legal (i.e., nondiscriminatory) reason at any time. While most employment contracts do define a specific time duration of employment, the contract can be written to include an at-will clause that states that the employment term is open ended and that either party can end the employment at any time. In other words, the employer is free to fire or lay off the employee for any legal reason; and the employee is free to quit for any reason, as long as it doesn’t violate the terms of the restrictive covenants.

When hiring an executive or other high-level employee, the consequences of making the right hire are much greater. Be sure to read Protect Your Small Business with Executive Employment Contracts to learn what these agreements should cover.