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Employment Contracts and Compensation Agreements

An employment contract can take the form of a traditional written agreement that is signed and agreed to by the employer and employee. However, more often employment agreements are "implied" from verbal statements or actions taken by the employer and employee, company memoranda or employee handbooks, or policies adopted during employment.

One of the advantages of formal agreements is that the employer and the prospective employee can get an understanding of the job responsibilities and expectations before the job begins. Whether the employment agreement involves independent contractors or full-time employment, it could be essential to have clear definitions and explanations of the duties and obligations of both parties.

Termination and "At-Will" Employment

Employees often use employment contracts to show that the employer's right to fire an employee was limited. In most states, employment is generally considered "at will," meaning that the employer can fire the employee at any time. However, an employer's right to fire an employee may be limited where the employee can show that the employer entered into an explicit contract to retain the employee for a certain length of time. Alternatively, "implied contract" may dictate that employment will be terminated only for cause.

Many states also recognize that a verbal statement by an employer, such as "you'll be here as long as your sales are above budget," may create a binding contract of employment. However, the enforceability of such verbal agreements is limited by a legal doctrine known as the "statute of frauds," which provides that an oral agreement that cannot be carried out in less than one year is invalid.

In the above example, because the employee conceivably could have fallen below budget and been fired within one year, the agreement would be enforceable, even if the employee was not fired. A verbal contract must also be specified to be enforceable. A statement such as "You'll have a job here as long as you like" generally will not be enforced.

Finally, a few states recognize an implied contract of employment where an employer has engaged in a "course of dealing" over the years, for example, by keeping employees on as long as they maintained specific performance standards. As a result, an employee may claim that they may not be fired as long as they continue to meet those standards.

Employment Contracts: Other Considerations

Employment contracts, whether written or implied from employee handbooks or policies, may also have provisions concerning:

  • Base salary
  • Term of employment
  • Health insurance
  • Vacation and sick leave
  • Employee grievance procedures
  • Termination of employment
  • Employee behavior after termination of the employment relationship

In general, the scope of such an agreement, whether the geographic area covered or the length of time it lasts, must be no broader than necessary to protect the employer's business. In addition, while a covenant not to compete may typically be imposed on a new employee as a condition of employment, if it is imposed on an existing employee, it must be supported by some independent consideration beyond a simple promise of continued work, such as a raise, a bonus payment, or improved commission terms.

Types of Employment Contracts and Compensation Agreements

1. CONFIDENTIALITY AGREEMENT: An employee confidentiality agreement is a contract (or part of a contract). The employee promises not to share any information about the employer's business or the employer's secret processes, plans, formulas, data, or machinery. Usually, a confidentiality agreement lasts even after the employee no longer works for the employer.

2. NONCOMPETITION AGREEMENT: In the non-competition clause, the employee agrees that for a certain amount of time after they stop working for the employer, the employee will not become employed by a rival company or any company engaged in a similar type of business. The employee will not set up a company that will compete with the employer's business (or solicit the employer's customers). Usually, the non-compete clause is limited to a particular geographic area.

3. OWNERSHIP OF INVENTIONS: This provision applies to employees who invent things as part of their jobs. In this part of the contract, the employee agrees that anything they create at work (or during a set period of time after termination) becomes the employer's invention, not the employee's invention. Additionally, employees usually agree to assign their inventions to the employer, cooperate to get inventions patented, and keep information about the invention confidential like any other trade secret.

4. BEST EFFORTS: Although it is often assumed that the employee will work hard for the employer, sometimes employers add a best-efforts clause to the employment contract. It states that the employee promises to work to the best of their ability and remain loyal to the employer. Sometimes it also says that the employee specifically agrees to make suggestions and recommendations to the employer that will benefit the company.

5. EXCLUSIVE EMPLOYMENT: In this provision, the employee promises that as long as they work for the company, they will not work for anyone else in the same or similar type of business. It may also extend to a promise not to be a shareholder or director in a similar company or even provide services voluntarily to a competitor business.

6. NO ADDITIONAL COMPENSATION: The "no additional compensation" clause states that if the employee becomes an elected director or officer of the company or serves on a company managing committee, the employee will not be entitled to additional compensation for doing that work.

7. NO AUTHORITY TO CONTRACT: Sometimes, this part of the contract is called the "agency" provision. It clarifies that the employer and employee have an employment relationship only, not an agency relationship; the employee has no right to enter into a contract or otherwise obligate the employer unless the employer gives express written consent.

8. TERMINATION: A standard part of any employment contract is the "termination" clause. It states that either party may terminate the employment contract for any reason by giving reasonable notice, such as two weeks' notice. It may also provide the employer the right to terminate the contract without notice if the employee violates the agreement in any way. Another aspect of the termination clause is that the employer has the right to terminate the contract if the employee becomes permanently disabled because of ill health or physical or mental disability such that the employee can no longer do the job.

9. ARBITRATION: Arbitration clauses are found in many types of contracts, including employment contracts. In this provision, the parties agree at the onset of the relationship that, if they ever have a dispute about any aspect of the employment relationship, they will submit that dispute to arbitration rather than seek a resolution by a court of law. The "arbitration" clause may include details about the arbitration, such as whether the arbitration decision will be binding and how the parties will find an arbitrator when the time comes.

10. CHOICE OF LAW: Employment laws vary from state to state. Some states have laws generally viewed as more favorable or beneficial to employers than employees, or vice versa. The "choice of law" provision in an employment contract is an agreement that, if the parties ever have a dispute that results in a lawsuit, the laws of a particular state will govern it, no matter where the suit itself is filed.

Get a Legal Evaluation of Your Employment Contract

There are advantages and disadvantages to employment agreements. It's essential to weigh your options and make sure that the contract terms are fair. If you're afraid that you might be locked into obligations or duties that won't be fair to you, you might want to seek advice from a lawyer. Find an employment attorney today to review your contract.

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