EMPLOYMENT CONTRACTS
Employment contracts are written agreements between an employer and an
employee that detail the workplace duties and responsibilities of the
employee and the compensation that the employer provides in return.
Employment contracts typically lay out the wages, bonuses, vacations,
medical leaves (including maternity/paternity), stock options, and other
benefits and compensation that the worker receives for fulfilling his/her
obligations to the employer. These obligations are also specified in the
contract, as is the duration of the worker-employee arrangement, the
authority of the employee, ownership of intellectual property, and dispute
resolution mechanisms. These agreements also include termination
provisions, and they may also include post-employment confidentiality,
non-compete, and non-solicitation clauses.
Employment contracts enjoyed a marked increased in popularity and
utilization during the 1990s. Previously utilized almost exclusively by
large companies in securing top executive-level talent, contracts became
more prevalent in mid-sized companies, who led a trend toward using these
types of agreements to secure the services of mid-level executives and
managers. Analysts cite benefits that accrue to both sides in accounting
for this recent surge in usage. "As the social contract between
employee and employer weakens, the employment contract has gained huge
ground," explained Gillian Flynn in
Workforce.
"A well-written contract can be a boon to both sides. Employees
feel more secure, and the company knows it has set boundaries for hiring,
firing, compensation and other sticky details."
In addition, many analysts point to small businesses as a catalyst in the
growth of such agreements. "In recent years employment
contracts—and the perks, bonuses, and stock options often provided
in those contracts—have become common and necessary for high tech,
software, online, and multimedia start-ups operating out of extra
bedrooms, garages, and sub-leased office space," observed Owen
Sietel in
Multimedia and Entertainment Law Online News.
"The success of many such companies is now well documented, as are
the riches secured by talented individuals who have tied their
compansation to the success of these companies and obtained millionaire
status without ever having to don a business suit."
Some business experts, however, contend that employment contracts can have
a negative impact on long-term business health. According to this point of
view, employment contracts undercut employee trust, loyalty, and
dedication toward employers because they are seen as cold and impersonal
documents that send an "everyone needs to look out for
oneself" message. "The new employment contract inherently
de-motivates employee spirit and, over the long term, will suboptimize
organizational performance, becoming a self-destructive business
strategy," argued Larry Hansen in
Occupational Hazards.
"Where employee buy-in and ownership is lacking, so too will be
the discretionary effort critical to success. As a consequence, a
'work-to-rule' performance standard will evolve, and
mediocrity will prevail." Critics contend that the emotional
detachment that accompanies employment contracts will lead to increased
turnover in important positions, especially since demographic trends and
the ascendancy of the information-based economy are expected to increase
the competition for experienced workers in the early part of the
twenty-first century.
CRAFTING AN EMPLOYMENT CONTRACT
Business owners who are considering introducing employment contracts into
their operations should consider the following:
-
Employment contracts that are imposed unilaterally, rather than by
genuine mutual agreement between worker and employer, are at substantial
risk in the courts. If the employee is found to have entered into the
contract under duress, the agreement will be struck down.
-
Employment contracts are an effective means of mitigating the risk of
business damage at the hands of ex-employees. "A carefully
drafted employment agreement containing noncompete, nondisclosure and/or
nonsolicitation clauses can be useful in protecting an employer's
justifiable interests in its trade secrets and customer
relationships," stated Susan Gaylord Willis in
HRMagazine.
"However, if a court believes that it is overbroad, or will
unreasonably prevent an employee from practicing an occupation, the
agreement may be struck down in whole or in part," depending on
state law.
-
Consider collaborating with the employee in order to create a
comprehensive contract. "Both parties should put great thought
into clearly defining the duties and authority of the employee to avoid
confusion and misunderstandings as to expectations," said Sietel.
"Although it is almost always impossible to clearly outline all
duties inherent in a particular position, objective specifications of
duties and standards of performance are desirable not only to avoid
confusion but also to avoid litigation."
-
Determine whether termination of the contract is "at
will," meaning that either the employer or the employee can end
it at any time, or "for cause," meaning that the agreement
between the parties can be terminated only if the employee is found to
have committed a legal offense or other stipulated act of dishonesty,
fraud, etc. Consultants typically urge businesses to make certain that
the language of the contract conveys at "at-will" message
throughout, thus avoiding legal potential legal entanglements that can
arise if the arrangement is seen as a permanent job. One key in this
regard is to limit the contract to a set period of time (contracts of
one to three years are most common).
-
Examine the regulatory/legal environment in which your company operates.
Make sure that the employment contract adheres to pertinent laws before
you introduce such agreements. Not all states have laws that provide for
such agreements.
-
Use employment contracts only for legitimate business relationships.
Compensation for services rendered should be reasonable and should be
distributed only when they are in fact completed. This element is of
particular relevance to family-owned enterprises, which sometimes turn
to employment contracts as part of their overall succession plan.
"Where the older-generation founder really does intend to stick
around for a while, and the younger-generation new owner can deal with
any ego problems and make good use of the founder's advice,
experience, and skills, such arrangements can make good economic
sense," stated CCH Inc.'s
Start, Run and Grow a Successful Small Business.
"Just be careful that you are really functioning as an employee,
to satisfy the IRS. If you do too little for your pay, the payments
won't be deductible; if you continue to do everything you used to
do as owner, the entire sales or succession transaction can be treated
as a sham by the IRS, bringing you an endless number of tax
problems."
-
Employment contracts are not "one-size-fits-all."
Employers should recognize that managers and executives can and should
be rewarded in different ways, depending on their contributions to the
company.
-
Severance arrangements should be reviewed on a regular basis to
determine their suitability for inclusion in employment contracts.
"If an employer is going to have a severance program that applies
to more than one employee, it should have a written plan that describes
the particulars of the program and gives the employer discretion to
interpret the plan and determine eligibility for the severance,"
counseled employment law expert Michael Karpeles in
Workforce.
"It'll give more protection if there's ever a
dispute later—the courts will be more deferential to their
decisions if they have a written severance plan." Most severance
packages in employment contracts are classified as ERISA (Employment
Retirement Income Security Act) welfare benefits.
-
Dispute resolution mechanisms are often incorporated into employment
contracts. This arbitration language is sometimes limited to certain
specified issues within the contract (authority of employee, divisions
of intellectual property, bonus calculations, etc.), thus leaving other
aspects of the contract to the courts. Other employment agreements,
however, include "blanket" arbitration clauses that
provide for arbitration of all disputes between the employer and the
employee under contract.
FURTHER READING:
Bernardi, Lauren M. "Contract Workers: Managing Employees in the
New World of Work."
Canadian Manager.
Fall 1997.
Butler, Timothy, and James Waldroop. "Job Sculpting: The Art of
Retaining Your Best People."
Harvard Business Review.
September/October 1999.
Employment Contracts: An Employers Guide.
Butterworth, 1991.
Falcone, Paul. "Using Employment at Will and Probationary Periods
to Withstand Termination Challenges."
Employment Relations Today.
Summer 1998.
Flynn, Gillian. "Employment Contracts Gain Ground in Corporate
America."
Workforce.
February 1999.
Hansen, Larry L. "Don't Sign the New Employment
Contract."
Occupational Hazards.
August 2000.
Jacksack, Susan M., ed.
Start, Run and Grow a Successful Small Business.
CCH Inc., 1998.
Seitel, Owen. "Signed, Sealed, Delivered: A Brief Overview of the
Employment Contract."
Multimedia and Entertainment Law Online News.
Vol. 5, no. 501, 1999.
Willis, Susan Gaylord. "Protect Your Firm Against Former
Employees' Actions."
HRMagazine.
August 1997.
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