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Should Your Employees Sign Contracts?

July 26, 2017

Posted in Business Start Ups, Employment Law

A contract is a legally binding agreement that spells out the rights and responsibilities of both parties. Employment contracts are becoming more common, especially as employers become more concerned with protecting their intellectual property and seek to channel any employment related disputes away from the courts and towards arbitration.
How far your business wants to take this is up to you. You could have all or none or your employees sign contracts or you may just target management or those whose departure may be particularly damaging to your operation if they decide to work for a competitor or start their own competing business.

On the plus side,

• In your contract you could include a sign-on bonus in exchange for a legally binding promise by the employee not to reveal confidential information he or she learns while working for you.

• You can spell out the rights and obligations of both parties at the start of the employment relationship. An employee may want spelled out the basis for any bonuses or how time off is earned while you could state that travel is required as part of the job.

• One thing to clarify is that the employment relationship is “at will” and either party can end the relationship at any time, with or without notice and for any lawful reason. A contract could spell out the fact the job is for a specific period or both sides need to give a notice of termination.

• Both sides can feel more secure because expectations are spelled out. A manager may feel more secure which may improve his or her morale, productivity and loyalty to your company. The company may feel more secure in investing in training and feel that turnover is less likely.

• Your company can better protect its interests. You could include provisions that forbid release of trade secrets. If the person is inventing or designing a product a trade secrets provision can ensure the end results are “works for hire” and his or her rights are automatically assigned to your company. A binding arbitration clause would require the parties to address any work related legal disputes through arbitration, which is normally private and less expensive and time consuming than the court system.

On the down side,

• A contract may provide an employee additional remedies if the relationship ends badly. Without a contract if an ex-employees sues you he or she would need to rely on statutory or common law (law developed by the courts over the years) for relief. If there’s a contract, a breach of contract claim could be added to the list of grievances.

• Terminating the person’s job may be more difficult. Without a contract the relationship is “at will” and either party can end it at any time, with or without notice and with or without cause. Depending on the language of the contract a court may only allow a termination if there is “good cause” to fire the person.

• There are some administrative burdens and costs. Drafting these documents can consume resources and keeping track of contracts with notice requirements or different renewal dates could be cumbersome.

• If there’s a dispute between you and the employee it may require a judge or arbitrator to interpret the contract. There are pros and cons to drafting more broad and more specific contracts. A contract may have language that’s broad in one section but specific in others. A very vague contract may not help you much but a very specific, complex, lengthy one will be more resource consuming to create and may make it less likely that the employee will sign it. Ultimately, no matter how it’s worded, a judge or arbitrator may be the one determining the parties’ rights and responsibilities, not you.

If you have any questions about employment contracts, feel you need legal counsel before creating or signing one or want to discuss the consequences of breaching an employment contract, contact our office so we can discuss the situation, your rights and responsibilities and what your options are moving forward.