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Employment Contracts

Employment Contract

An employment contract is an agreement that is formed between an employer and employee regarding an employment situation. The employer and employee are the parties to the contract. An employment contract contains terms and provisions regarding the employment relationship. For example, it might state that the employee will work for the employer for a certain number of hours for an hourly wage or yearly salary.

An employment contract might specify benefits, such as paid time off or the provision of health insurance. The contract might state what the grounds are for termination and how much notice each party must give if they want to terminate the contract.

Employment contracts are not entered into in every employment situation. If the employment is not informal, however, it is usually good to have one. Employment contracts do not have to be written. They can be oral. If the parties are serious about the contract, however, it should probably be in written form. If a dispute arises between an employer and employee, the contract is available to help resolve it.

An employment contract becomes legally binding when certain requirements are met. They are as follows:

  • Offer and acceptance – the first step in making a contract is for one party make an offer to another party that is accepted;
  • Consideration – this is a legal term which means that the two parties agree to exchange something of value, e.g. in the employment context, this usually means that the employer offers monetary value in exchange for the employee's labor and expertise;
  • Legality – the exchange defined in the contract must be legally enforceable, so a contract for the employee to work in the employer's illegal drug trade business would not be allowed; no court would enforce the contract;
  • Capacity – both parties must be old enough and mentally fit enough to enter into a contract.

In addition, some courts have held that an employee must have time to contemplate the terms of the employment contract before starting the job. Handing the employee the contract to sign after the employee has begun working or on the first day of the job is probably not good practice.

Additionally, as with any contract, the agreement may not be signed as a result of duress, coercion, misrepresentation, or undue influence.

A sales representative is a type of employee who is likely to have a formal written employment contract. The contract might identify the key accounts to which the sales representative will sell the employer's products or services. The contract might also specify other duties, such as attendance at sales meetings and training sessions. The contract will specify the salary and the commission that the sales representative will be paid. The commission will probably be a percentage of the amount of sales the representative concludes. The contract is also likely to include sales goals.

Once an employment contract is made, it is binding on both the employer and the employee. This means that if either party fails to perform as promised in the contract, then that party can be held legally responsible in court.

What is Usually Included in an Employment Contract?

An employment contract usually includes important details regarding the employee's work-related responsibilities. It addresses such important features of the employment relationship as wages, benefits, termination procedures, and the duties of both the employer and the employee.

An employment contract typically has terms and conditions that address the following:

  • Job Title – The contract will state the employee's job title and provide a complete description of the employee's duties;
  • Time Frame – A time frame may be added to the contract for anything ranging from a start date to an employee's work schedule, to the length of a particular project and an employment end date (i.e., term of employment);
  • Salary – An employment contract can specify the type of salary the employer will pay the employee, whether is will be a salary, wage, commission for sales volume or some other kind of monetary value; the contract should state how much will be paid, when and how, whether bi-weekly, monthly annually or other;
  • Benefits – The contract may also state the types of benefits that the employee can receive. For example, the employer may provide health, dental and vision insurance, and access to a 401K savings plan and the like;
  • Vacation and Sick Leave – An employer may include its company's policies for taking days off as part of the contract provisions, such as vacation or holiday breaks, and sick or disability leave;
  • Confidentiality Clauses – A contract may contain confidentiality clauses, also known as non-disclosure agreements (NDAs), to ensure that an employee does not provide any proprietary information to competitors of the employer;
  • Dispute Resolutions – It may define a method for resolving employment disputes, for example, arbitration or mediation, rather than a complaint in a court of law;
  • Termination – The contract may describe what actions will be grounds for termination;
  • Covenants Not to Compete – It may have provisions concerning covenants not to compete. These are clauses that prevent an employee from working for a competitor of the employer for a certain amount of time;
  • Severance – A contract might discuss severance details, which involves any financial amount or other benefit that an employee may be entitled to when they leave the job.

While this list includes most items that can be found in standard employment contracts, it is not comprehensive. An employee and an employer can add any provisions they want to the contract, as long as the terms are not fraudulent, illegal, or against public policy. 

Advantages of an Employment Agreement

As previously mentioned, there may be several advantages and disadvantages to signing an employment agreement. One of the main advantages that an employment agreement can offer is that it will enable the parties to describe an employee's position in explicit detail. So, for example, if an employer wants to ensure that an employee can only ask for a raise once per year, then the parties can specifically include this condition in the employment agreement.

Having the freedom to incorporate these kinds of provisions in a contract is important since it will allow the parties to negotiate with one another until they reach a compromise. Being able to tailor agreements to include minute details can be particularly useful for employers who need to protect specific aspects of their business, such as trade secrets and patented or copyrighted materials.

Another advantage to creating an employment agreement is that if a dispute arises over the terms of employment (e.g., how often an employee should be paid), the parties can quickly review the terms of their agreement in order to resolve the issue as opposed to having to ask a court or lawyer to intervene.

Additionally, in cases where the parties cannot resolve their employment dispute by simply reading the terms of an employment agreement, the agreement itself can be submitted to the court as evidence if necessary.

One other advantage to having an employment agreement is that it can be used to establish a favorable work relationship between the employer and an employee. For instance, employers tend to believe that having an employment agreement in place provides the employee with a clear set of objectives and structure in the workplace, whereas for an employee it can demonstrate job security and offers a sense of employment stability.

Some examples of provisions that may be beneficial to incorporate in an employment agreement for both employers and employees include the following:

  • Dispute resolution clause: An employment agreement should contain a clause regarding how to resolve employment-related disputes. Although the parties may reach an agreement as to how they would like to resolve a dispute if one should arise, many employment agreements typically use arbitration as their primary method of dispute resolution. However, the parties can also agree to resolve disputes through mediation or through the courts instead.
  • Fringe benefits provisions: Fringe benefits are various kinds of work benefits that an employee may receive in addition to their salary. For instance, health insurance, pension benefits, life insurance, and/or dental insurance are all types of fringe benefits. Fringe benefits can also include vacation time, paid time off, sick days, expense accounts, and/or use of an employer's vehicle like a company car.
  • Non-disparagement clause: The parties may also agree to incorporate a non-disparagement clause in their employment agreement. A non-disparagement clause provides that an employee will promise to not speak ill of an employer in exchange for receiving a benefit, such as a severance package, in the event they are fired.
  • Restrictive covenants: In an employment context, a restrictive covenant usually refers to a provision wherein an employee agrees not to compete with an employer. These covenants are sometimes called, “non-compete provisions.” Regardless of which title is used, both terms mean that an employee agrees not to compete against their employer within a particular geographic region for a certain time frame if they leave their job.
    • Depending on the state, this could mean that an employee agrees not to work with or solicit any of their employer's marketplace competitors. On the other hand, in some states like California, restrictive covenants are mostly forbidden or unenforceable. 

Disadvantages of an Employment Agreement

One of the main disadvantages of an employment agreement is that its terms may place certain restrictions on the flexibility of the employer-employee relationship, which can make it difficult for the parties to renegotiate or modify their agreement. Of course, this type of disadvantage will largely be contingent on the provisions of a particular employment agreement.

Another disadvantage to having an employment agreement is that employees who wish to leave an employer for a better or different opportunity may be hindered from doing so if their agreement specifies a set period of time for when an employee's position ends. In which case, an employee may need to finish out their contract before they can leave their employer or else face legal consequences (e.g., breach of contract).

While an employee who finds themselves in such a situation may be able to amend or renegotiate the terms of their employment agreement, there is no guarantee that an employer will not seek damages for breach of contract or that their new opportunity will not be gone by the time their current employment agreement expires.

One last disadvantage of having an employment agreement is that it forms an implied promise between the parties to act in an honest and fair manner when forging an employer-employee relationship. Although this may sound like a positive feature, in legal terms, it actually refers to an obligation that binds both parties to the agreement and can result in legal ramifications if either party breaches the terms.

Different Types of Employment Contracts

There are three types of employment contracts. First is the written contract which is the official document signed by both parties. The employer and the employee agree to the terms of employment. Furthermore, an employer can also establish an oral valid employment contract. If an employer promises an employee that they will not be fired without a good cause in the interview then this would be considered a valid oral agreement. Courts will uphold these brief conversations if they pass the valid contract test. Therefore, not every employment contract has to be in writing.

Another type of contract is implied contract, which is determined through implications by an employer to the employee rather than express terms. For example, if an employer states specific terms in the employment handbook regarding the job, it is implied that it applies to the current employer regardless of a contract existing between them. However, courts are reluctant to enforce implied contracts between employer and employee. But they may enforce them along with the oral contract in some cases.

Can An Employer Legally Terminate An Employee With An Employment Contract?

Generally most employers need a good cause to fire the employee who has any sort of employment contract with the employer. Good cause is usually defined as a permissive reason to fire an employee. Below describe some circumstances which are considered meet the standards of firing an employee:

  • Low productivity;
  • Inadequate work performance;
  • Failure to follow instructions;
  • Violating company rules;
  • Illegal acts;
  • Harassment;
  • Engaging in dishonesty;
  • Constantly are tardy;
  • Endangering health and safety of their coworkers;
  • Revealing company trade secrets and;
  • Disrupting the work environment.

Additionally, the employer must be fair and deal with them in good faith. Courts can step in to ensure that an employer is dealing justly and not taking advantage of its employees.

Purpose of Employment Contracts

An employment contract limits the employer right to fire at will. For any employee to be rightfully fired there must be a showing of good cause for the termination. Otherwise, the termination will be considered a wrongful termination. The following reasons explain why some employers use employment contracts:

  • To secure a highly skilled employee that will open up many opportunities for the company;
  • To draft non-compete clauses that are created to ensure the employee does not work for a competing business during a period of time after leaving the company;
  • Written employment contracts are easier to uphold in court because it is more clear on the agreements of the terms of an employment and;
  • The employment contract protects the rights of both the employer and employee.

Approaching An Employee Regarding Termination

For an employer it is generally difficult to decide how and when to terminate an employee. There is no easy way to fire someone. It is crucial to plan the meeting according to the company's procedures to protect the employer from future liability from the employees. The following procedures may help in minimizing those liabilities:

  • The employer can create a space for a private conservation to limit employee's exposure and embarrassment;
  • Having a human resources representative present in the meeting will be useful for future disputes and serve as a witness for information shared during that meeting;
  • Be concise in providing the explanation for terminating the employee;
  • Be professional and show the employee appreciation for their contributions made to the company thus far;
  • Provide a detailed description about what happens after their termination in terms of wages and bonuses;

Generally, if you are mindful about these practices on firing an employee, then you may succeed in lowering your exposure to liability in future employee disputes. 

Breach of an Employment Contract

A party commits a breach of an employment contract if they do either one of two things. The first is to fail to do what is promised in the contract. The second is to do an act that is prohibited by the contract.

For example, a contract might require an employee to give notice of 30 days if they plan to terminate their employment. If the employee leaves without giving 30 days' notice, it is a breach of the contract. The employee may have to pay money damages to the employer for this failure to do as promised.

A valid employment contract can be enforced in a court of law. Some contracts specify a different process for resolving disputes about the contract. The contract might say that the parties must go through arbitration or mediation rather than turning to a court of law if one party claims a breach of the contract.

A party who breaches an employment contract can have to pay money damages to the other party. Sometimes the contract itself specifies the amount of damages.

When it comes to breach of an employment contract, it is important to seek the advice of a good employment contract lawyer to represent your best interests. Also, when negotiating an employment contract, it is a good idea to pay attention to the terms and conditions for resolution of disputes or claims of breach. The contract may require the parties to give up important rights, such as the right to trial by jury. It is important to consult an employment law attorney regarding the conditions for resolution of disputes or claims of breach of the contract

How Can A Lawyer Help Me With My Contract Issues?

An employment lawyer can be a great help to parties who are negotiating an employment contract. A lawyer can explain to you the advantages and disadvantages of having an employment contract.

A lawyer can help you negotiate terms and conditions that best protect your interests in the employment situation. A good contract lawyer should be able to deploy effective negotiating tactics and strategies so that you get the contract you want. Finally, it is crucial that both parties retain a separate lawyer, so that the terms of the employment contract are fair and just.

A legally binding employment contract can be enforced by a court. So you need an experienced lawyer if you are entering into an employment contract.

If you already have an employment contract, a qualified contract attorney can review it and explain the legal effect of its terms and conditions. If you have been accused of breaching your employment contract, an attorney can help you defend against the claim of breach and represent you in court, if necessary.

An attorney can also represent you in a mediation or arbitration. It is always a good idea to consult with an employment contract lawyer if you have a serious dispute with an employer about an employment contract.

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