Employment Contracts – Are Employment Contracts Important To Companies? Find Out

By | May 5, 2023

Parties enter into written agreement or contracts in order to manage expectations. A contract should clearly specify the parties’ rights, duties, and obligations. The contract is an insurance policy against a party’s failure to act in accordance with the contract terms. That said, deciding on whether to enter into employment contract with an employee is not like deciding to enter into any other type of contract. That’s because common-law already provides the foundation (i.e., the rights, duties and obligations) for the relationship between an employer and employee. That foundation is the employment at-will doctrine.Some employees (and most unions) consider an employer’s power to discharge as being too great. Of course, no one ever questions an employee’s absolute right to terminate his or her employment at any time and for any reason. In part, this is the basis of the bargain between an employer and employee that can be stated in an employment contract.So what does this have to do with deciding whether or not to enter into an employment contract? Everything! It makes no sense whatsoever for an employer to enter into an employment contract with 99% of employees. That’s because an employer has no need to manage expectations-he has the right to demand an employee’s adherence. It may sound like common sense, but it’s not. It’s just a well understood workplace rule. Entering into an employment contract with most employees is an unnecessary exercise that provides an employer with no greater protection than it would otherwise already have.That’s not to say that employment contracts never make sense. There is that 1% of employees who present a problem. They are almost always high-level executives, sales employees, or employees with other technical expertise. These employees possess classified information and savoir faire, so you enter into an employment contract with these employees in order to protect yourself against future competitive disadvantage. Stated simply, you don’t want your competitors to get their hands on these employees or the information they possess. The contract adds a layer of protection that you otherwise would not have: a restriction on the employee’s ability to harm you or to aid your competitors.While the contract may contain clauses that provide obligations on the employer, the main focus of the contract is to restrict an employee’s ability in a few key areas:1. Competition. A non-compete clause restricts an employee’s right to accept employment with a competitor or start his own competitive venture.2. Solicitation. A non-solicitation clause is also designed to prevent a former employee from competing against you, but by limiting his ability to solicit your clients, customers or suppliers.3. Disclosure of Information. A nondisclosure clause restricts an employee’s right to divulge nonpublic or proprietary information. To be enforceable, the contract should define what constitutes confidential information.4. Hiring Current Employees. An anti-raiding provision restricts an employee’s right to solicit current employees from leaving their employment.5. Vilification. An anti-disparagement provision prohibits an employee from making statements that are contrary the company’s best interests or the best interests of your current executives.The Bottom LineCompanies rarely need to enter into written employment contracts with the overwhelming majority of their employees. There are the situations, however, when a written employment contract is not only recommended but necessary. As always, the decision on whether to enter into a written employment contract should be made in consultation with your employment attorney. Drafting this type of contract is not something that should be done in a careless manner, but takes thoughtful consideration and the help of an expert in the field, most probably your company lawyer.