- Employment contracts are vital for employers and employees because they stipulate the expectations for both parties.
- It’s important for prospective employees to thoroughly review all aspects of the contract before signing it.
- An employee may want to enlist an attorney for negotiation assistance or dispute resolution.
- This article is for job seekers and employees who want to understand employment contracts better.
When you’re celebrating a new employment offer, it can be easy to get caught up in the excitement and rush through the new-hire paperwork. However, you should review a handful of items before agreeing to an employment contract. Find out what to look for and when to ask for professional help in unpacking all of the conditions and clauses.
What is an employment contract?
An employment contract is an agreement between an employer and an employee that spells out the terms and conditions of employment. This written and signed document is crucial to understanding the expectations and inner workings of a job and serves as legal protection for both employee and employer.
“When I am representing a company, the contract often will set a precedent for numerous other individuals that are subsequently hired in similar positions,” said Jeffrey Scolaro, an attorney at Daley Mohan Groble and a Legal Services Link member. “The company will not likely know for years whether they have adequately protected their intellectual property, trade secrets, customer lists and business relationships.” [Related article: Tips to Avoid Intellectual Property Infringement]
Because of this knowledge gap, it’s essential business owners have a robust business liability policy in place. An employment contract can only go so far in protecting the employer – but it’s just as critical for an employee to have some protection.
It’s not advisable to work without a contract or some type of formal employment agreement – and time may be of the essence. Don’t wait to ask for changes or additions after you have been hired, as you have the greatest amount of leverage to change anything in your contract prior to your start date.
What information is included in an employment contract?
A typical employment contract contains details such as the start and end dates of employment, compensation, job duties, and other expectations of both the employer and the employee. In terms of compensation, the employment contract should spell out whether the employee will be exempt or nonexempt, which affects how they’re paid and whether they are eligible for overtime pay.
The employment contract should also indicate whether the person is an at-will employee, meaning the employer can dismiss them for any reason, or classified as something else. That alone will dictate how the employee can be terminated and certain obligations they must adhere to.
Did you know?: In some at-will states, employment contracts act as an exception, allowing employers and employees to circumvent at-will employment requirements. This has its pros and cons, so read your contract carefully and consult a lawyer if needed.
What should you review in your employment contract?
If you are offered an employment contract, carefully review the following items before signing it.
- Job description: A clear job description can prevent employees from feeling overloaded or misled regarding what is expected of them. A company may desire a vague job description, but most employees want a detailed one. Without a comprehensive document outlining your duties, an employer will have a lot of leeway in saying you aren’t doing your job properly. Be sure to ask for clarification if there are any areas in which you are unclear.
- Term: If there is a term on the contract, it is vital to know the specifics of the term and, at the same time, the grounds for termination in advance of the contract’s expiration. In addition to knowing the basis for termination, make sure you have a strong understanding of the mechanisms available for extending the contract.
- Restrictive covenants: Businesses often attempt to protect themselves through restrictive covenants, including noncompete agreements, nonsolicitation, confidentiality and nondisclosure clauses. Each of these covenants attempts to restrict an employee during and after their employment. Noncompete clauses are likely the most important because they affect an employee’s ability to work or start their own business in the same industry for a period of time after their employment term ends. If the contract includes a noncompete clause, be sure to find out the compensation that will be provided for you during the forced dark period. It is not advisable to take a position where you would be unable to work for a significant amount of time after leaving the job if the firm does not provide compensation during that time.
- Compensation: For many, this is the most critical aspect of any employment contract. A compensation plan often refers to more than just biweekly payments or a salary. It also may include a complicated bonus structure or a profit-sharing plan that could be tied to performance and commission structures. Ensure that any additional compensation, such as bonuses and equity awards, is outlined clearly. You should know what performance measures are necessary to trigger the additional compensation. Do not accept an answer like “We’ll figure it out down the road.”
There is no set etiquette for suggesting changes to a proposed employment contract. Doing so, and whether you’re successful, could depend on the level of the position, the relationship between you and the employer, and the stage of the process in which you find yourself. Though it may be uncomfortable, it’s important to have these potentially difficult conversations before signing anything. Once you have signed the document, it will become even more of a challenge to secure any changes.
What are the advantages and disadvantages of signing an employment contract?
Like anything in business, employment contracts come with various benefits and drawbacks. Here are the most relevant ones for employees.
One of the biggest advantages for both employees and employers is the clarity an employment contract provides. As a potential employee, you have an opportunity to fully review and understand what will be expected of you, the compensation structure and any terms of limitations being placed upon you by the employer. All of this information can feel overwhelming, but this transparency is vital as you begin the employment relationship. It eliminates surprises, as there should be no questions about how you will be paid and what you will be doing.
Significantly, these contracts provide some legal protections for employees. If an employer breaches the agreement, a worker may be legally entitled to damages or payout of their full contract value.
Having an employment contract in place does remove some flexibility for the employee. If they want to adjust the terms of their employment contract after they have signed and started the job, the employer will generally have to agree to revise the agreement, and that may be a hard ask with a cold reception.
Other downsides largely depend on the contents of the contract itself. As mentioned, a lot of employment contracts include noncompete clauses, which can be limiting to employees, particularly if their industry is small. Most employment contracts also transfer ownership of any creations or inventions that the employee produces as part of their employment; the intellectual property will belong to the company, not the employee. This is fairly standard, but if you have a groundbreaking idea, it can be frustrating not to retain the rights to it.
“By signing any employment agreement, the employee could also be obligating themselves to other restrictive terms regarding potential future commissions, vesting in company shares and many other compensation terms that are, of course, vitally important to any employee,” Scolaro said.
Tip: Carefully consider whether a noncompete clause could hinder your ability to find work after your employment at this company ends. It may not be a huge burden in large industries and regions, but if you work in a smaller niche or hope to start your own business down the road, it may be worth negotiating this aspect of your employment contract.
Should you have an attorney review your employment contract before signing it?
It’s a great idea to have an attorney review your employment contract before you sign it. A lawyer can help you better understand what you are agreeing to. In some cases, they may also be able to advise you on how to request changes or help negotiate with an employer on your behalf.
“Each attorney will approach agreements differently and advise ways, but the important thing is following that advice and asking questions when you are confused by something,” Scolaro said. “Failing to ask about something that does not appear clear can lead to misunderstandings and larger problems in the future.”
Scolaro cautioned that the potential employer-employee relationship is in its infancy at this point, and many workers do not want to appear aggressive or difficult by injecting a lawyer into the process immediately.
“However, typically, the more sophisticated the employee might be, such as executive-level employees, the expectation can often be that an attorney will negotiate on their behalf from the start,” he said.
What should you do if you get into an employment contract dispute?
Ideally, minor disputes regarding an employment contract can be resolved through communication with the employer, much like any other workplace conflict. However, employment contract issues can quickly escalate into serious legal matters.
In that case, you will want to consult an attorney. If you’re not ready to flex your negotiation skills, an attorney can negotiate on your behalf to get the best possible outcome. If you feel that the employer has breached your employment contract, a lawyer can help you recover any money you are entitled to.
One thing that you’ll want to consider – preferably before a dispute actually occurs and before you sign the agreement – is whether there are any dispute resolution procedures or clauses included in the employment contract. Some business owners include binding arbitration agreements in employment contracts. If one is in your contract and you have already signed it, you will likely have to enter arbitration to resolve the contract dispute rather than pursuing it directly through the traditional court process.
Can you be employed without an employment contract?
While it is possible to be employed without a contract, it is not advisable in most cases. You’d be giving up potential benefits and legal protections if you agreed to join a company without a contract governing the employer-employee relationship. If you are considering an employment situation that does not include a contract, it is even more crucial to review all of your options with an attorney.
Why shouldn’t you sign an employment contract quickly?
Receiving a job offer and an employment contract is exciting, but it’s important not to get caught up in the initial joy and rush to sign the document. It is perfectly fine, and largely expected, for you to request time to review and consider the contract before providing your final signature. You don’t want to agree to all of the terms and conditions without thoroughly reading and understanding them.
Contracts of all types can be intimidating and complex. If you don’t feel you fully comprehend what you are about to agree to, pause and consult with an attorney or another trusted person with experience in employment contracts. If there is something in the agreement you aren’t happy with, don’t be afraid to bring this up to the employer. Negotiations are a normal part of most contract and employment processes. It’s better to delay your acceptance while you adequately review or negotiate than end up in an employment contract dispute down the line that could’ve been prevented with some due diligence.
Adam Uzialko contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.