signing a contract
From payment and benefit terms to intellectual property rights, there are several items that need to be included in your business's employment contract. — Getty Images/PeopleImages

If you could create your own fantasy Board of Directors who would be on it? CO— connects you with thought leaders from across the business spectrum and asks them to help solve your biggest business challenges. In this edition, we ask an expert what you need to include in employment contracts and agreements.

Hiring new employees can be risky. That’s why it’s important to spell out your expectations and requirement to your new hires. The best way to do that is to create an employment contract that is legally binding and protects your small business.

What information needs to be in employment contracts? It can be confusing, so we sought professional advice.

Chas Rampenthal, segment leader of LegalZoom’s attorney-assisted services answers…

Does every new hire need an employment contract?

Not all employment relationships warrant a written contract. A formal employment agreement is not technically necessary from a legal standpoint. Most employees do not have written agreements, but it is always better to have one that sets out roles and responsibilities, payment and other important aspects of the relationship between the company and employee.

For small businesses, I recommend presenting, at least, a written offer letter that sets out pertinent details, plus getting the new employee’s acknowledgement and adherence to the employee policy manual, if you have one.

Having a contract doesn’t just protect the employer—it also safeguards the employee. In every contract there is an obligation to act in “good faith” and to deal fairly with the other party. This provides important protection for employees, since it should deter the employer from breaking the contract unfairly.

What are the basic components of an employment contract?

  • The nature of the relationship: This is either “at-will” or term-based employment. Most employment agreements, unless restricted by law, are known as “at-will” employment. In many states there is no requirement that an employer has to keep the employee, and vice versa. Of course, you are not allowed to fire an employee for illegal reasons.
  • Role and responsibilities: Include details such as job title, location, full- or part-time status and a basic job description. Many employers also include a provision that the employee agrees not to “moonlight.” I try not to get too detailed when drafting these terms, and always leave open the possibility the role and job description may evolve. You don’t want to draft amendments every time there is a small change in circumstances.
  • Payment terms: This includes incentives, bonuses or equity opportunities. Again, be sure these are subject to company policies on payment, which may change.
  • Benefits: This includes offerings such as health insurance that the employer makes available to the employee.
  • Term and termination: Typically you have a termination provision to define “termination for cause.” Otherwise, you can reiterate the at-will nature of the employment. If the employment agreements contain certain benefits after termination (like severance), a “for cause” termination can take those benefits away. For most at-will contracts, the term of the agreement begins on the start date and continues until one of the parties ends the employment relationship, with or without cause.
  • Intellectual property rights: When your business has important intellectual property (trade secrets, copyrights, patent rights, etc.) as a part of the company, be certain all new work performed by your employees will be owned by the company. This also extends to any inventions the employee might create for the company. In some states, this right is limited, but the agreement should spell out the ownership rights of the company (typically work done during company time or using company assets), and any rights of the employee (typically things they do on their own time, with their own resources).
  • Non-disclosure agreement: In the employment context, an NDA can be a section of the employment agreement or a standalone document that accompanies the employment agreement. If you have company secrets that you want to protect, make sure those who have access to the information have a “need to know” and that they sign an NDA that lasts past their employment.
  • Covenants like non-solicit or non-compete: These clauses protect employers by limiting a former employee’s ability to recruit others to leave the business (no solicitation) and preventing the employee from joining or founding a new company that will compete with your business once they leave (non-compete). Both clauses, but especially non-compete clauses, should be carefully considered and artfully drafted or they risk voiding the clause or worse, the whole agreement. In some states, like California, non-competes are not enforceable except in very limited circumstances. Some employers also add procedures around the return of company property and providing notice of new employment.
  • A process for dispute resolution: This lays out the rules and procedures if the relationship ends badly, resulting in a legal fight. This can be in court or privately in arbitration and contains a choice of law clause.
  • Boilerplate: These items, such as the ability to amend and assign, plus provisions on providing notices and a host of other typical clauses found in business agreements are included in many contracts.

The most important thing for businesses to remember is the employee-employer relationship is one of the most important to a business, particularly small businesses.

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Should you incorporate company policies?

Employment policies are typically found in an employee handbook, which contains information and policies regarding the company and its relationship with employees but is not a contract. Make sure employees have an opportunity to read and understand the terms set out in the handbook to avoid surprises or problems. Then have them sign an acknowledgement stating they understand these policies and keep that acknowledgment in their file.

A good employee handbook lets employees know what is expected of them. It also lets them know they are being treated the same way as other employees—that every employee is subject to the same policies.

The most important thing for businesses to remember is the employee-employer relationship is one of the most important to a business, particularly small businesses.

There should be fairness, give and take between the employer and employee. Handbooks, agreements and policies exist to benefit the employee as much as the employer. Laying out and following these “rules of the employment game” makes sure there are no unpleasant surprises, and lets your employees know they are treated equally and fairly.

Having a set of policies and not following them religiously is sometimes worse than having no policies at all.

When do you present an agreement to the new hire?

Best practice is to lead with a formal offer letter that contains all the business details of the position. Any negotiation should happen well before drafting an agreement.

Once that is handled, move on to the formal employment agreement. It is important to have the agreement signed before the employee starts. Be sure to give your new employee sufficient time to read, understand (and negotiate, if desired) all the terms of their employment. I prefer to allow at least one week for this whenever possible.

Do you need to review employees agreements with a lawyer?

While retaining a qualified employment lawyer (one with experience drafting employment agreements) will likely lead to a highly-tailored agreement, not every employment relationship necessitates an hourly bill.

The need for detailed and intricate lawyer-drafted agreements are mostly needed for executive and key hires, due to the nature and importance of those roles.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published October 29, 2020