Employment Contracts: Usually Unnecessary Documents Trying To Be Something They Are Not

Posted: September 10, 2016

Many companies unnecessarily use employment contracts with all their employees.  Instead of these documents providing specific legal protections for the company (the very reason to utilize a contract), many documents I see in my practice are often trying to be something they are not and are more of a hassle for the employer in the long run.  Take away?  Unless the new hire is a senior executive with a complex compensation package and, perhaps, a “golden parachute” (a type of severance arrangement), or other similar guarantees, or a sales employee with a commission component to their compensation, your company would probably be better off not having typical employment contracts with your employees.

Often, the employment contracts I see are trying to do the job of an employee handbook and an offer letter combined—with sometimes elements of a job description thrown in as well.  For example, if the contract sets forth information regarding company policy that the employee is expected to abide by and also includes employee benefits, it is trying to be an employee handbook.  The company would be better protected with a handbook distributed to all employees, and containing uniform policy and benefits.  Otherwise, any time the company wants to change a general policy or benefit it has to modify each and every employment contract.

For example, if the company has included individual employee benefits in the employee contracts, but then wants to change a benefit (or if, for example, the insurance company changes the health insurance policy and/or insurance premiums required), the company will need to change each individual contract for the employees affected.  There also could be issues raised if an employee refuses to sign a new contract and demands the old benefits, but the company is not in a position to provide them.  It is better for the company to have global employment policy and benefit issues addressed through a general employee handbook that is applicable to everyone—which can be changed whenever the employer desires to do so.

An offer letter is a better vehicle to use to set forth the basic terms and conditions of employment—start date, base compensation, eligibility for bonuses, etc.   Such a letter can indicate that employment is conditioned upon the employee signing other types of agreements, usually on the employee’s first day of work.  For example, if the employee is going to receive commissions, a separate commission agreement may be advisable.  If the company is concerned about confidentiality, non-competition and non-solicitation of employees and/or clients/customers, a separate agreement containing these “restrictive covenants” is called for.

Having restrictive covenants reflected in a contract executed by employees is in fact vital if the company ever wants to enforce those provisions.  Employers can go to court to enforce a breach of a confidentiality provision in a contract, but cannot base a lawsuit on merely a policy in a handbook.

Additionally, employees in the U.S. should be hired at will.  As you probably know, that means that the employment relationship exists as long as the employee and employer “will it”—as long as they want it to exist.  If an employee is at will, when the employee wants to leave, he or she can quit.  When the employer doesn’t want the employee to work for the company any more, the employer can let the employee go.  Employment contracts are often structured for certain durations; for a term of a number of years.  Including an expected duration of the term of employment destroys an employee’s at will status—which can be vital for the company to maintain.  Employees who are employed at will have no duration for the term of their employment.  It lasts as long as the employer and employee both want it to.  Thus, using employment contracts often inadvertently destroys an employee’s at will status.

While there are a number of pit falls with utilizing employment contracts with your employees, there are certainly some specific situations where they might be warranted.  If you determine that you want to utilize an employment contract for your business, it is probably a good idea to have it reviewed by a management side employment lawyer familiar with the law where your business is located.  That will ensure that you have not inadvertently included any provisions in the contract that could be counter to the company’s interests and cause the contract to be more trouble than it is worth in the long run.