The Pros & Cons of Employment Contracts (And What to Include)

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The last thing you need to worry about as a small business owner is a heated legal battle with an employee. Unfortunately, this becomes a reality for business owners across the country.

In some instances, the business is in the wrong, while in other cases, it’s an ordeal with a disgruntled worker. Either way, you have to safeguard your business.

Four of the top lawsuits filed by employees against employers include:

  • Wrongful termination
  • Wage law violations
  • Discrimination
  • Breach of contract

All of these problems are avoidable with the proper employment contract in place. Of course, it also requires both parties to do their part in upholding their side of the agreement.

If you’re wondering what the pros and cons are of employment contracts, then this guide is for you.

Let’s take a look.

What is an Employment Contract?

If you’re a new business owner, then you may not know what an employment contract is or what it entails. Surely, you’ve signed one before (if you’ve ever worked for any major company).

This document is critical to establishing the type of relationship you’ll have with the employee. The more detailed (and clear) it is, the better.

Now, there’s no employment law stating you have to draw up an employment contract. However, it’s a good practice to do so to ensure you don’t end up in a dispute over the legalities of your employee-employer relationship.

In the employment contract, be sure to include key details regarding the role of the employee and their wage. Here’s a quick look at what you should include in your contract:

  • How long the job is (a year, indefinite)
  • The employee’s responsibilities
  • Benefits you offer (health, dental, 401K)
  • Grounds for termination
  • Limitations to prevent the employee from competing with your business after leaving
  • Non-disclosure agreement to protect your company’s trade secrets and client list
  • Your ownership of employee’s work (i.e. books, articles, inventions, etc)
  • Resolution methods in the event of disputes

The key is to cover all corners that can potentially harm your business in the future.

A Word On At-Will Employment Agreements

As you already know, there are several working relationships you can have with your workers. There’s employees, contractors, freelancers, and so on.

With a traditional employment contract, employers have limits to their right to terminate an employee. This is the purpose of the provision regarding grounds for termination.

Yet, there are other agreements you can form with your workers if you want more freedom in this area, such as an at-will agreement.

An at-will employee is employed at will, which means they can quit anytime and be fired anytime for any reason.

In employment contracts and contractor agreements, there are terms that outline what the employee/contractor can be terminated for. This protects them from being let go before the term of their contract is up (6 mo, 2, yrs, etc.) without good cause.

Employers can include an at-will employee agreement employees can sign to affirm their general right to fire at will.

Of course, you still can’t fire an employee for illegal reasons, such as age, race, disability, and so on.

Next, let’s take a look at the advantages of using employment contracts.

Improve Retention of Your Top Performers

High churn rates aren’t good for business, especially when it involves your top talent leaving your company. With an employment contract, you can outline the term of their employment with your business.

For instance, you can have the contract set for as long as five years or as short as 3 months. If either party breaks the contract early, then there’s typically a financial penalty.

This ensures both sides hold up their end of the agreement.

Invest in Training for Employees (that Yields an ROI)

As a business owner, you want to ensure you invest all of your dollars smartly. It’s hard to do this when you have a high employee turnover rate.

Yet, you need workers who are well-trained and capable of not just meeting your expectations but exceeding them. If you’re wary about spending time and money in training employees, you can use an employment contract to lock them in for a specified amount of time.

This way, all of that training gets put to use for your business’s growth and development.

Attract More (and Better) Talent

In today’s economy, workers are looking for job security. What better way to offer this than with a contract that lasts one, two, or even five years?

This can help you to recruit more people and better talent. Advertise this in your job ads and you’ll surely have your pick of the talent pool.

Secure Business Trade Secrets

Every business has competitors, but only certain companies have actual secrets competitors would kill to have. For example, Steve Jobs and Bill Gates.

They both worked in the technology industry and battled head-to-head for consumers to buy their computers, software, and mobile devices.

All it takes is one employee to leave Apple and blab to their new employer Microsoft about what Apple has lined up for the next quarter or two.

If you have critical data, such as blueprints, designs, codes, ideas, technology, or client lists you want to safeguard, then employment contracts can benefit you.

Non-disclosure agreements protect your business by legally binding employees to refrain from sharing company trade secrets and clientele for X amount of years.

Clearly Set Out Terms of Termination

In an employment contract, you get to clearly outline exactly what the employee must do to maintain their employed status with your business.

If they don’t meet those obligations, then those are grounds for termination. This way, the employee can’t scream discrimination or another false accusation about the reason you fired them.

Now, it’s time to look at the disadvantages of having employment contracts.

You May End Up Stuck with Employees You Want to Fire

Having an employment contract is great, but only if you’re getting the best bang for your buck. But sometimes, your business needs can change at a moments notice.

This can prevent you from firing whoever you need to in order to get the right talent in your company. Instead, you have to either a) wait out the contract or b) ask the employee to resign a new contract.

The latter works best if you simply need to change the terms of your employment agreement vs. firing them.

You Can Face Financial Penalties for Breaking the Contract

In the event you break the contract with the employee, you could face financial penalties. You’ll have to pay this “cancellation fee” to the employee, which can sometimes be in the thousands or tens of thousands of dollars (in some cases more).

This means you have to be extra careful about how you word your employment contracts and really look at the direction your business is going in.

That way, you’re well-prepared for any shifts that may come in the future.

Since an employment contract is legally binding, it’s essential to have all the kinks worked out in the agreement before signing.

Having an attorney review the draft drawn up can help ensure both parties are protected. However, this will cost you a pretty penny.

But don’t overlook this because there may be provisions in your contract that aren’t enforceable.

Common Issues with Employment Contracts

At the end of the day, the purpose of an employment contract is to ensure everyone’s legally protected throughout its term. However, if you’re not careful, you could run into several issues along the way.

For instance, if you don’t update your contracts accordingly, you may fail to protect your business and the employee. This can happen if your contract is out-of-date with the current laws or there’s changes in your organization.

Then there are some businesses that try to cut corners by “borrowing” a contract from another company and recreating it. The problem here is that it could be irrelevant to your business’s needs.

It’s also important to ensure the wording in the contract is clear. Being vague or over-wordy, using unfamiliar terminology, and/or being down-right confusing is only going to lead to trouble in the future.

Finally, make sure the terms are consistent with the employee’s specific role within your company. There are cases where you may have to use different terms and conditions for different departments.

Drawing Up Your Employment Contract

There’s a lot that goes into drafting an employment contract, which we didn’t touch on in this article. But hopefully, the information provided is enough to help you determine whether or not it’s worth forgoing its use.

Once you set up your contract, you can make matters easier by using a tool like Xodo Sign to send, sign, and store your electronic contracts.

If you own a business and already use employment contracts, then let us know in the comments how you handle creating and executing them!