Pros and Cons of Written Employee Contracts

There is no legal requirement to have a written employment agreement for every employee. However, in some situations, an employment contract is essential for defining the employment relationship between worker and employer. This article focuses on the advantages and disadvantages of written contracts for small business owners. An employment law attorney​ can help draft these contracts.

What’s in a Written Employment Contract?

A basic written employment contract​ includes the job description, start date, starting pay rate or salary, and job title. A standard contract may include:

• The term of employment, if there is a completion date
• Employee benefits, such as health insurance or 401(k) participation
• Disciplinary policies and grounds for termination
• Nondisclosure or noncompete clauses
• Dispute resolution clause, specifying arbitration or mediation

The contract must conform to the union requirements if it’s part of a collective bargaining agreement. If you use an employment contract template, you should remove any clauses that don’t apply to your business. Otherwise, you may be bound by the terms.

Employee Contracts: Pros

In today’s volatile employment climate, employees want job security. A contract that spells out job requirements and grounds for termination provides clarity. Set pay scales and promotion opportunities create an environment of trust between employees and employers.

Other advantages to written employment contracts include:

• Confidentiality agreements: Written contracts protect trade secrets​ by advising employees of legal action if they breach confidentiality. A confidentiality agreement can be separate from the standard contract or appended if the worker moves to a new position that puts them in contact with sensitive information.
• Noncompete agreements: Written contracts often include noncompetition clauses. A covenant not to compete​ prevents workers from working for a competitor or starting a new business in direct competition with yours. Because enforceability varies dramatically and some states (like California, Minnesota, and others) ban them outright, consult your state’s laws before including a noncompete clause.
• Grounds for departure or termination: A written contract limits employees’ ability to leave without notice or penalty. Rather than making these clauses punitive, employers may make remaining with the company attractive, such as severance pay after a certain period. You also protect yourself with a clear discipline and termination policy. Laying out and following steps from violation to termination prevents claims of discrimination or wrongful termination.

If you’re not sure about the legality of a clause you want to include, consider speaking with an employment law attorney for legal advice.

Employee Contracts: Cons

An employment contract runs both ways. Both the employer and employee have rights and responsibilities under a contract. Once you sign the contract, you’re bound by the terms of the agreement until it ends or the other party breaches it. 

An employee agreement is a contract. If the case goes to court, anything not in the contract essentially doesn’t exist. To avoid this, include a clause stating that the contract is supplemented by the company’s employee handbook, which should contain detailed policies that may be updated from time to time.

Other downsides to having a written contract can include:

• Limiting your ability to change the terms of employment: Once both parties sign the contract, they must agree before any terms change. Although state laws generally allow an employer to terminate an employee during their probationary period, you won’t have that luxury after that.
• Contract terms must be perfect: Unless you know your employee contract template is flawless, you should have an employment law attorney review it before your employees sign. That can be expensive.

Have an employment law attorney review your employee contract before you sign it or present it to a new hire for signature.

Employment Contract vs. At-Will Employment

Every state except Montana recognizes at-will employment. This allows either the employer or employee to terminate the work relationship at any time for any legal reason without penalty. A written contract can modify or replace this default arrangement.

Even in an at-will state, employers cannot terminate an employee based on race, religion, sexual orientation, gender identity, or national origin. A contract ensures that employees have legal protection against wrongful termination.

Employment Contract vs. Independent Contractor Agreement

An independent contractor agreement governs a business service relationship with a self-employed worker. An employment contract governs an employment relationship in which the company generally has more control over the worker and assumes payroll, tax, and legal obligations.

The rise of remote work has led more small businesses to use freelancers and independent contractors​ for part-time work or full-time projects with a set end date. If you decide this is a good idea for your business, here are a few aspects to consider:

• Independent contractors are not employees: Misclassifying an employee as an independent contractor​ can land you in trouble with the IRS. Independent contractors are taxed differently and fall under a separate category in labor law guidelines.
• Your agreement will differ based on how much control you have over the contractor: IRS guidelines focus on the employer’s control over the worker’s hours of work, benefits, pay, and many other factors. These are often clearly defined.
• Be careful about how much control you exert: If you place too many restrictions on when and how the contractor does their work, they may fall under the legal definition of employees. In most contracts, you can assign independent contractors work but not dictate what time of day they must work on it.

Make sure you’re not exceeding your authority with independent contractors, as it can result in fines and other sanctions.

Get Legal Help With Employment Contracts

A well-written employment contract benefits small business owners, but it can be risky. Before writing any employment contract or other employment agreement, contact a local employment law attorney​ to review your contract needs.