Hiring employees is a fairly straightforward task–at least,most of the time. Most states assume an “at will” relationship,under which you can terminate an employee at any time for anyreason or no reason. (Or alternately, your employee can quit forany reason.) But there are circumstances under which employmentcontracts make sense.
First, the advantages. An employment contract can help youattract and retain key employees. While you can’t force employeesto stay, a contract can ensure that they’ll provide reasonablenotice prior to departure–typically 60 to 90 days.
Employment contracts also help protect critical trade secrets,and are especially critical in high-tech companies. An employmentcontract can prohibit employees from revealing company secrets,working for the competition or soliciting customers. Noncompeteagreements can be difficult to hold up in court, so you must becareful in drafting them. Because it’s anticompetitive to prohibitpeople from earning a livelihood in their field, courts generallywill enforce noncompete agreements only if they’re reasonable. Youcan’t prohibit employees from ever working for a competing businessanywhere in the country, but you might be able to enforce anagreement that they not work for a competing business within a30-mile radius of your company for two years, or that they notsolicit your company’s customers for a year.
Employment contracts are also useful when you’re buying orselling a business to make sure key people don’t leave. You canoffer employees a retention bonus for staying or let them knowthey’ll be forfeiting a valuable severance package if theyleave.
Contracts also clarify individual jobs by spelling outemployees’ responsibilities, compensation, bonuses, stock options,rights to any inventions and patents, expense accounts and more.You can include an “evergreen” clause stating that the contractautomatically renews on a given day each year if neither sideprovides notice of termination. And an arbitration clause canensure that any employment-related dispute will be subject tobinding arbitration rather than played out in court, which can beexpensive and time-consuming.
Now the downside. Employment contracts change the “at will”relationship, restricting your ability to terminate employees whoaren’t working out. Typically you agree only to terminate “forcause” unless you’re at the end of the contract term, which opensyour decision to second-guessing by the courts as to whether yourcause was adequate.
If you draft an employment contract, pay special attention tothe termination section. You might want a clause denying certainbenefits if you terminate for cause–such as committing a felony oracting in a way that’s clearly harmful. Some employees mightnegotiate “double trigger” clauses, in which they can resign “forgood reason” (such as being reassigned to another department) andstill be entitled to a severance package.
Given the complexity and issues involved, you can understand whyemployment contracts are usually reserved for key employees.Certainly, always consult your attorney about clauses to includeand avoid.
