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A manager's guide to employment contracts
HR Magazine, May, 1996 by Theresa Donahue Egler
More and more employees are being asked to sign employment agreements. Here's what to include in a contracts.
Employment agreements used to be reserved for executives. With their salary guarantees, benefit provisions and other "perks," employment agreements were effective tools for luring top talent from one company to another.
However, as employment laws have changed, so too has employers' use of contracts. Many companies now use employment contracts for employees at all levels. Given the increasing litigation of workplace disputes, employers are finding that employment agreements can effectively define the employment relationship and provide protection from lawsuits.
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ESSENTIAL INGREDIENTS
What should an employment agreement contain? Several clauses can help protect employers if the relationship sours. First, unless the company has agreed to employ an individual for a definite period, the contract should include a clear statement that the employment is "at will": either the company or the employee may end the employment relationship at any time for any reason, or for no reason at all.
Traditionally, "employment-at-will" was the rule in the American workplace and exceptions were rare. However, in recent years courts increasingly have recognized exceptions to the employment-at-will doctrine, including contract claims based on provisions in employment manuals, offer letters and managers' oral statements.
Despite dilution of the employment-at-will doctrine, many courts have held that express at-will provisions in an employment contract control the employment relationship. To be sure of an employee's at-will status, employers are well advised to insert a clear at-will statement in employment agreements.
In some circumstances, employers choose to offer employment for a definite period of time. In such cases, the contract should define that period clearly, stating both the employee's starting date and termination date. The contract should also contain a provision allowing for termination before the end of the contract period "for cause" and clearly defines what constitutes "cause."
In addition, the employer and employee may negotiate a contract provision for termination without cause upon advance notice (usually 30 days) by either party. Because cause for a termination may be difficult to prove even when it does exist, a "no cause" provision can provide employers with an easy way out of the contract.
SUMMARIZE DUTIES, BENEFITS
Another important element of employment agreements is the duties to be performed. Because job content can evolve and change, employers enjoy greater flexibility if an employment agreement does not spell out job duties in detail. An employment contract that contains intricate descriptions of job duties may require the employer to assign the employee all of the enumerated responsibilities or only those responsibilities.
It is more prudent to have the agreement simply state the position for which the employee is initially hired and the starting salary "as may be adjusted from time to time at the discretion of the employer." By including this language, employers reserve flexibility with the terms of employment.
As with job duties, benefits generally should not be listed in detail in an employment agreement. Detailed descriptions of benefits in an employment contract may conflict with the language of the actual benefit plans, and conflicting interpretations of benefits can lead to litigation.
If the employee will receive standard benefits that are described by the company's benefit plans, the employment agreement should state that the employee "is eligible to participate in the benefit plans maintained by the company for employees in accordance with the terms and conditions of those plans." The contract may refer to the summary plan descriptions of the applicable plans for further information.
On the other hand, if the employee is to receive benefits in addition to those generally available to other employees, such as a special bonus or incentive plan, the agreement should spell out the amount of the benefit. If the bonus or incentive is not a fixed amount, the agreement should explain how it will be calculated; whether payment is discretionary; when payment is to be made; and how termination of employment would affect the calculation, payment and timing of the benefit.
Employers also should consider incorporating confidentiality provisions into their employment agreements. These clauses prohibit employees from disclosing confidential and proprietary information of the employer and its clients or customers. A well drafted clause should clearly define what constitutes confidential and proprietary information and state that the confidentiality obligation continues after termination of employment, whether the termination is initiated by the company or the employee. The clause should also require the return of all company property upon termination, including, but not limited to, originals and copies of documents, files, records, computer disks and equipment in the possession of the employee.
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