A written employment contract sets forth the basic, material terms of an employee’s employment relationship with his/her employer. Whether or not your company should enter into an employment contract with an employee must be determined on a case-by-case basis.
There are basically two types of employment contracts: at-will employment contracts, and employment contracts which are for a set duration of time, which I will refer to as “set duration” employment contracts.
An at-will employment contract generally sets forth the parameters of an employee’s relationship with his/her employer, and reaffirms the company’s right, under the law, to terminate the employment relationship at any time, for any reason or no reason at all. Many times, employers include non-compete provisions into these agreements, preventing the employee from working for a competitor, or in a particular industry, or otherwise competing with the company for a period of time after the cessation of the employee’s employment with the company. However, there is no duty on the employer to employ the employee for a set period of time.
“Set duration” employment contracts, however, typically set forth the duration of the employment, information about the employee‘s responsibilities, and the “fringe” benefits of the job, such as health benefits, pension or retirement benefits, life insurance, disability insurance, etc.
Many times, these agreements will also include the circumstances in which either party can terminate the agreement. For example, some contracts state that one or both parties can terminate the employment agreement by giving the other party notice of their intention to do so, or with “cause”, which must be defined in the contract. Also, these employment contracts, like many “at-will” agreements, typically contain non-compete provisions, as well as provisions stating that the employee must keep trade secrets confidential. Finally, these contracts usually state that the company owns the employee’s “work-product” (that is, the employee’s inventions), and may also include a method, such as binding arbitration, for resolving disputes under the agreement.
There are advantages to having an employee sign a “set duration” employment contract. Some of the advantages include knowing that the employee must remain in your employ for a certain period of time, and providing for a smooth transition when he/she leaves your employ. In addition, you can be assured that the employee will not use or divulge your trade secrets and other proprietary information, either during or after his/her employment. Finally, the job security offered by such agreements, as well as the other terms of an employment contract, may entice a highly skilled/experienced employee to come work for your company.
There are, of course, disadvantages to such employment agreements. A more formal employment contract for a set period of time binds a company to an employee. It also binds the company to the other terms of the contract. For example, if the employment contract states that you must provide health insurance for the employee, you cannot cease doing so, even if your business fortunes make it difficult to do so.
The bottom line is, you must seriously weigh the advantages and disadvantages of offering a “set duration” employment contract to an employee. If you have any questions as to whether you should do so, it probably makes sense to discuss your concerns with an employment attorney. In addition, you should always hire an attorney to draft such an agreement.