Hiring & Employment Contracts

Overview

In the United States, an employer and employee may agree to memorialize the terms of their relationship in an employment contract, which becomes legally binding upon both parties. Absent such a contract, most employment is "at will," which means that employees can quit and the employer may discharge the employee for any reason. Where an employment contract exists, the employer and employee must abide by its terms.

Some states read an implied covenant of good faith and fair dealing into employment contracts. As such, the parties may not resort to technical or contrived excuses to avoid complying with the terms of the contract.

Employment agreements may contain the following elements, some of which vary in enforceability due to state laws:

Term

An employment contract may specify that the employment relationship is at-will. Alternatively, the contract may specify that employer will retain the employee for a set period of time or for the duration of a project.

Job duties

Employment contracts often state the position for which the employee is hired, the responsibilities and duties of the employee, as well as who will manage or supervise the employee.

Compensation

Employment agreements usually state how much the employer will pay the employee. Compensation may be in the form of an hourly wage, a fixed salary or a commission. Sometimes, the employment agreement will also provide for a bonus payment.

Besides base pay, employment contracts may also specify the fringe benefits that the employer will provide to the employee, such as health insurance, life insurance, automobile allowances, and moving expenses. The employment agreement may also indicate that the employee can participate in the company's incentive compensation plans, deferred compensation plans, or retirement plans.

Termination

Many employment contracts contain a termination provision, which either specifies the term of employment or requires an employee to provide a certain amount of notice before leaving the company. A termination clause allows either side to end the working relationship for any reason after giving the specific amount of notice stated in the contract. Generally, the employer has the right to terminate the employee for violating the contract in any way. If the contract sets standards for the employee's performance and grounds for termination, the employer may terminate the employee for not meeting those standards.

Some employment contracts also require the employer to provide the employee with a severance package that includes the payment of salary and benefits after the termination date, provided that the employer did not terminate the employee for cause. The employment contract will specify what acts are considered "for cause," such as felony or civil judgments against the employee for company-related business.

Confidentiality

Employment contracts may also restrict an employee's ability to reveal confidential or sensitive information about the employer's organization. Confidentiality clauses prevent the employee from disclosing the information to anyone or using it for personal gain.

An employer may wish to prevent disclosure of its operating expenses, pricing or sales data, procedures, trade secrets, new products in development or plans for future products, special equipment, and proprietary information including employee lists and customer lists. The agreement usually lasts for a specific period of time after the employee leaves the company.

Exclusivity/Noncompete clause

Employment agreements often include an exclusivity or noncompete clause if the employer needs or wants to protect trade or business secrets, or where the employer anticipates spending a great deal of time and resources training and marketing a high-level employee. For example, covenants not to compete have long been used in employment contracts with media personalities, because employers invest substantial resources to recruit, train, market, and pay on-air talent.

Where it is included, a noncompete clause bars the employee from working for the employer's competitors or starting a company that will compete with the employer for a set period of time after leaving the company and within a specific geographic area.

Sometimes, a noncompete or exclusivity clause requires an employee to agree not to do any work for a competitor while on the company's payroll, which may even include serving on the board of directors of another company or owning stock in a competitor. A separate noncompete agreement may also be used for this purpose.

State laws govern noncompete agreements, so enforceability varies from state to state; some states will not enforce them at all because of public policy reasons. A court may balance the employer's interest in restricting competition, the state's interest in free labor markets, the employee's right to work in his or her field, and any unethical behavior by the employee, such as taking customer lists to start a competing business.

Intellectual property rights

Employment contracts often require high-level researchers, engineers, software developers, and other employees who may create inventions or make discoveries as a part of their work to assign ownership of any ideas, formulas, or inventions developed while on the job to the employer. This may include the employer's right to a copyright, trademark, patent or trade secret that comes about as a result of the employee's work for the company. The contract often requires the employee to keep such developments confidential.

The terms of these clauses vary; some companies will share a percentage of royalties with the inventor-employee, but most companies retain full ownership of all inventions, though they may offer the developer a bonus.

If the employment contract does not specify who owns an employee's ideas, inventions, or discoveries, common law assigns such rights to the employee unless the company hired the employee to develop those ideas or inventions.

Dispute settlement

To facilitate the settlement of any disagreements amicably and out of court, an employment contract may contain a clause requiring both parties to arbitrate any employment disputes.

Absent an arbitration clause, the employment agreement may specify the venue or jurisdiction of the court that will hear any disputes concerning the employment agreement. Also, since the employment laws of each state vary, with some being more favorable to the employer or employee, employment agreements will often include a choice of law clause that specifies which state's law will be applied in interpreting the employment agreement.