Important Elements of Employment Contracts

Employment contracts take many forms. Small business owners may use an employment contract template to create a form contract. Larger companies may have their own employee agreement or collective bargaining agreement.

Employee contracts have common elements and specialty clauses depending on their purpose. This article reviews some of the most frequent clauses.

Scope of Employment

Any written employment contract should contain a brief job description and the basic terms of employment, including:

• Start date, end date, and hourly wages. The employee's initial pay rate should always be part of the contract.
• Employee benefits and their start date. For instance, if the employer offers health insurance after the probationary period, the contract should give the approximate date health benefits will begin.
• If other benefits, like sick days and vacation time, accrue after a certain period, the contract should state when that begins.

If these details are not in the contract, you should have an employee handbook with this information.

At-Will Employment Clause

Even an at-will employee should have an employment contract. The employment agreement can include a clause stating that the employment relationship is at will. Either party can end it for any reason with no notice.

An at-will clause enables employers to give all new hires the same contract with other company policies and employee benefits.

Confidentiality Clause

A confidentiality clause protects sensitive information. This covers any processes, plans, formulas, or data the employee might disclose to competitors. Employers in competitive markets use these clauses to protect trade secrets and confidential information.

Employers can attach a non-disclosure agreement to an employee agreement during their employment. A confidentiality agreement may outlast the term of employment.

Non-Compete Clause

A non-compete clause restricts the employee from working for a rival company or a similar business after they leave their current employer. Some states will not enforce noncompetition clauses. Those that do will only enforce those that are narrowly written and limited to a specific term or geographic area.

A related term is the non-solicitation clause. This prevents former employees from taking customers from the employer when they leave the company. For instance, an attorney leaving a law firm would violate a non-solicitation clause if they called clients to their new firm.

An "exclusivity" clause prevents workers from seeking employment while working for the company. Courts frown on exclusivity clauses unless the employee is highly compensated or the clause is very narrowly drawn. These clauses can stop executives from serving on boards of other corporations.

Intellectual Property Ownership

This is sometimes known as an "assignment" clause. It makes anything the employee develops during work hours the employer's property. The employee assigns all ownership rights to the company and waives any right to royalties, patents, or trademarks.

Intellectual property covers anything the employee creates during their term of employment. It gets used most often in the computer industry, where disputes arise between programmers and software companies.

Best Effort

Best-effort clauses are typically seen in professional contracts and consulting agreements. "Best efforts" in an employment contract means something beyond daily work or reasonable effort. An example would be a legal firm making its best effort to secure a merger.

Best-effort clauses are not usually necessary for ordinary employment agreements.

Extra Compensation

These clauses limit an employee's pay or compensation to the contract's agreed-upon amount. The employee cannot receive any other payment for extra services unless other clauses provide for it.

More compensation clauses are helpful in independent contractor agreements. These terms limit the contractor to the agreed-upon sum for a set period. Any extra compensation would need another agreement.

Agency

If an employee can act on the employer's behalf, their contract should include an "agency" clause. This stand-alone clause creates a unique agency relationship between the employer and the employee. An employee with agency can enter into other contracts or transact business on behalf of the employer.

If an employee is not an agent of the company, their contract does not need an agency clause.

Termination

A standard part of any employment contract is the termination clause. The clause should state:

• If either party must give notice
• If there is a disciplinary policy
• If there are any grounds for immediate termination

Arbitration

Many contracts contain arbitration clauses. Arbitration and mediation are types of dispute resolution used instead of litigation. An arbitration clause determines when to use mediation or arbitration, who has the right to choose the arbitrator, and whether the decision will be binding on the parties.

The Equal Employment Opportunity Commission (EEOC) states that even with an arbitration clause, employees may still file individual claims against employers for federal and state law violations.

Jurisdiction

In general, companies can get sued in their state of incorporation or in the location where they have their "principal place of business." For small businesses, this is usually the same state. A jurisdiction clause states that the contract will be governed and interpreted by the laws of the state of incorporation.

A jurisdiction clause means that litigation will occur in the state mentioned in the contract. This avoids jurisdiction and venue problems if a former employee sues an employer later from another state.

Get Legal Help Drafting Your Employment Contract

An employment contract should outline the relationship between employer and employee. The business owner's goal should be a clear, legal document crafted for each employee's job. Contact a local employment law attorney to ensure that your employment contract is legal and protects you, your business, and your employees.