Employment contracts and compensation agreements are documents that you and your employees sign outlining the terms of the employment relationship. However, a written contract is not necessary for every employee you hire. In fact, written employment contracts and compensation agreements are typically the exception. In some circumstances, such as hiring high-level executives, it makes sense to require an employee to sign a contract.
Features of Employment Contract and Compensation Agreements
In addition to clearly describing the role employees will perform and how you will compensate them, the contracts can explain many other features of the employment relationship:
- Grounds for termination
- Your claim to the employee’s work results
- Details about the employee’s responsibilities
- Protection of your client lists and trade secrets
- Duration of the job, such as one year or indefinitely
- Method for settling any disputes that occur regarding the agreement
- Limitations on the employee’s capacity to compete with your brand after the employee resigns
- Benefits the employee will receive, such as vacation and sick time, disability leave, and health insurance
Written employment contracts and compensation agreements refer to a contract that restricts the employer’s right to discharge the employee, usually by specifying the grounds for termination or establishing an employment term.
Advantages of Using Contracts
Employment contracts and compensation agreements are useful if you require control over the employee’s ability to resign from your company. For instance, if locating and training a replacement may be time-consuming for your business, you might want to consider a written contract with the employee. It can compel the employee to provide you with sufficient notice to find and train a suitable replacement, such as 90 days’ notice or locking the employee into a definite term of employment, such as two years. Although you cannot force employees to continue working for you, they are likely to comply with the agreement’s specifications if a penalty exists for not satisfying the agreed-upon terms.
Employment contracts and compensation agreements might also be a good idea if the employee will be privy to sensitive and confidential information about your company. You can include confidentiality clauses to prevent the employee from using the information for personal gain or disclosing it to others outside of the organization. Often employment contracts are useful for enticing a highly skilled candidate to leave your competition and work for you instead. By promising the individual job security and other beneficial features in an employment contract, you can present an attractive offer. Finally, using a written employment contract and compensation agreement provides you with greater control over the employee. If the contract stipulates standards for the employee’s productivity and designates grounds for termination, you may have a smoother experience terminating an employee who does not meet the job criteria.
Disadvantages of Written Contracts and Agreements
An employment contract and compensation agreement is a two-way street. The contract obliges both you and the employee to comply with the terms agreed upon, so it restricts your flexibility. This may present a predicament if the needs of your company change, or you decide later that you do not approve of the contract terms. In those instances, to change the contract or terminate it early you will have to renegotiate it with the employee, and there is no assurance that the employee will agree to the changes you propose.
Another significant disadvantage of working with employment contracts and compensation agreements is that they bring with them a unique obligation to deal equitably with the employee. In legal terms, this is known as a covenant of fair dealing and good faith. If you handle the employee in a manner that a jury or judge determines unfair, you may be legally liable for violating the contract and also for breaking your agreement to act in good faith.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.