Written Employment Contracts: Pros and Cons
A written employment contract is a document that you and your employee sign that sets forth
the terms of your relationship. You don’t have to enter into a written contract with every
employee you hire — in fact, written employment contracts are generally the exception, rather
than the rule. In some situations, however, it makes good sense to ask an employee to sign a
contract.
What Goes in an Employment Contract
In addition to clearly describing what the employee is going to do for you (the job) and what
you are going to do for the employee (the salary), the contract can — if you want it to —
address a number of other issues, including:
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duration of the job (one year, two years, or indefinitely)
information about the employee’s responsibilities and benefits (such as health
insurance, vacation leave, disability leave, and so on) the employee will receive
grounds for termination
limitations on the employee’s ability to compete with your business once the employee
leaves
protection of your trade secrets and client lists
your ownership of the employee’s work product (for example, if the employee writes
books or invents gadgets for you), or
a method for resolving any disputes.
What About Written At-Will Agreements?
When we refer to written employment contracts, we mean a contract that limits the
employer’s right to fire the employee — usually by detailing the grounds for termination or
setting a term of employment (for example, one or two years).
Some employers require employees to sign a written agreement stating that they are employed
at will — that is, that they can quit at any time, and can be fired at any time, for any reason that
is not illegal. Employers might ask employees to sign an offer letter, handbook
acknowledgment, or other document agreeing to at-will employment, for example. These
documents do not limit the employer’s right to fire the employee. Instead, they affirm the
employer’s general right to fire at will.
Advantages of Using Contracts
Employment contracts can be very beneficial if you want control over the employee’s ability to
leave your business. For example, if finding or training a replacement will be very costly or timeconsuming for your company, you might want a written contract. It can lock the employee into
a specific term (for example, two years), or it can require the employee to give you enough
notice to find and train a suitable replacement (for example, 90 days’ notice). While you can’t
force someone to keep working for you, an employee is likely to comply with the agreement’s
terms if there’s a penalty for not doing so.
Employment contracts might also make sense if the employee will be learning confidential and
sensitive information about your business. You can insert confidentiality clauses that prevent
the employee from disclosing the information or using it for personal gain. Similarly, a contract
can protect you by preventing an employee from competing against you after leaving your
company.
Sometimes, you can use an employment contract as a way to entice a highly skilled individual to
come work for you instead of the competition. By promising the individual job security and
beneficial terms in an employment contract, you can”sweeten the deal,” so to speak.
Finally, using an employment contract can give you greater control over the employee. For
example, if the contract specifies standards for the employee’s performance and grounds for
termination, you may have an easier time terminating an employee who doesn’t live up to your
standards.
Disadvantages
An employment contract is not a one-way street. The contract binds both you and the
employee, so it limits your flexibility. This may pose a problem if you later decide that you don’t
like the contract terms and want to get out of them, or the needs of your business change. In
those circumstances, if you want to change the contract terms, you’ll have to renegotiate the
contract.
For example, if you decide you want to end a two-year contract after six months because you
don’t really need the employee after all, you can’t simply terminate the employee — this would
be a breach of contract. Similarly, if the contract promises the employee health benefits, you
can’t later stop paying for these health benefits as a way to save money. The only way to
change the terms of the contract is to renegotiate them. This can be done, but it’s timeconsuming and requires the employee’s consent.
Another disadvantage of using employment contracts is that they bring with them a special
obligation to deal fairly with the employee. In legal terms, this is called the “covenant of good
faith and fair dealing.” If you end up treating the employee in a way that seems unfair, you may
be legally responsible not only for violating the contract, but also for breaching your duty to act
in good faith.
© 2010 Nolo. Reprinted with permission from the publisher, Nolo, Copyright 2009,
http://www.nolo.com