Stay-In Contract Drawing up employment contracts can help retain key employees and protect your trade secrets-but beware of the drawbacks.

Should you enter into employment contracts with your employees?Not if you don't want to alter the "at will"relationship assumed in most states, under which you can terminatean employee at any time for any reason or no reason. Still, thereare circumstances when employment contracts make sense.

First, the advantages. An employment contract can help youattract and retain key employees. While you can't forceemployees to stay, a contract can ensure that they'll providereasonable notice prior to departure-typically 60 to 90 days.

Especially in high-tech companies, employment contracts helpprotect critical trade secrets. "Suppose you have people doingresearch and development, and you're worried about an employeeleaving and disclosing what you're working on to thecompetition," says Pat Lowry, an employment attorney with lawfirm Steel Hector & Davis in West Palm Beach, Florida. Anemployment contract can prohibit employees from revealing companysecrets, working for the competition or soliciting customers.

"You have to be very careful in drafting these, becausecourts hate them," cautions Glenn Dowd, an employment attorneywith law firm Day, Berry & Howard in Hartford, Connecticut.Because it's anticompetitive to prohibit people from earning alivelihood in their field, he says, courts generally will enforcenoncompete agreements only if they're reasonable. You can'tprohibit 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."An employment agreement assures the new owners that the keyplayers are committed for a given period," Lowry says. 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, stockoptions, rights to any inventions and patents, expense accounts andmore. You can include an "evergreen" clause stating thatthe contract automatically renews on a given day each year ifneither side provides notice of termination. (Put the dates on yourcalendar.) And an arbitration clause can ensure that anyemployment-related dispute will be subject to binding arbitrationrather than played out in court, which can be expensive andtime-consuming. (See "ArbitrationUpdate")

Now the downside. Employment contracts change the "atwill" relationship, restricting your ability to terminateemployees who aren't working out. Typically you agree only toterminate "for cause" unless you're at the end of thecontract term, which opens your decision to second-guessing by thecourts as to whether your cause 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. "This gets theemployer out of having to pay severance packages aftermisbehavior," Dowd says. Some employees might negotiate"double trigger" clauses, in which they can resign"for good reason" (such as being reassigned to anotherdepartment) and still be entitled to a severance package.

"I would not make a practice of making employmentagreements except for key employees," Dowd says. "Itintroduces a level of complexity and legality to the relationshipthat you don't need." Certainly, consult your attorneyabout clauses to include and avoid.

Steven C. Bahls, dean of Capitol University Law School inColumbus, Ohio, teaches entrepreneurship law. Freelance writer JaneEaster Bahls specializes in business and legal topics.