The concept of an employment contract seems simple enough: “You work for me and I pay you for that work.” But there are some very important contractual nuances to the relationship between employers and employees which all human resources professionals should be aware of and prepared to deal with.
First, not all contracts are written pieces of paper filed in a drawer in the boss man’s office. For a slew of reasons, courts can find one party to an employment relationship liable to the other party, even in the absence of a written contract. For example, a large number of states allow an applicant for a position to sue an employer if an “implied contract” was created between the two.
Second, in the absence of any written contract an employee is generally considered to be employed “at will.” The rule of at-will employment evolved through centuries of judicial decisions. It provides that if two parties agree on an employment relationship in which no definite duration is stated, then either party can terminate the employment at any time for any legal reason. When is a firing illegal? Firing an employee for discrimination or whistleblowing are the most abundant examples.
Written contracts typically limit an employer’s ability to discipline or fire an employee in the future. For this reason, many lawyers don’t recommend them. But they recognize that to hire top-level executives or technical specialists, employers are going to have to offer attractive employment contracts in some cases — complete with benefits such as stock options, severance packages, and more. Entering into this type of high-level contract will cost employers money and time. It’s imperative that you protect your investment in contractual employees by having your lawyer draft a contract that takes into account your specific objectives and the pros and cons involved.
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One of the most common contractual provisions to retain top-level employees is the covenant not to compete or “restrictive covenant.” These clauses serve to dissuade employees from leaving after you have invested a lot of time and money in them and limit their ability to compete with you after they leave.
Restrictive covenants can be absolutely vital in protecting your investment in a new employee and guarding your proprietary secrets. And because most people want to honor their commitments, they can be a powerful incentive for your best employees to stay. For the most part, they should be reserved only for high-level employees whose competitive knowledge or skill could damage your business if used elsewhere.
Although there are some general rules of thumb for whether a court will find a contested restricted covenant enforceable or not, the degree to which these courts will back a restrictive covenant differs significantly from state to state.