6 Essential Clauses for Employment Contracts by Jonathan Sparks, Esq.
Choosing to not hire an attorney to review your employment contracts or hiring policies might seem like a no-brainer, but saving a little money on the front end may cost you. Having the wrong policies, or missing even a single clause in your employment agreement, can cost tens of thousands in litigation fees alone, not to mention settlements that aggrieved employees can get.
This needs to be explicitly defined in every employment contract. Make sure that the hourly rate or salary is clearly specified as well as the payment schedule. If your employees are compensated through commissions of any sort, the percentages must be easy to understand and well defined. Many small businesses that honestly forget to specify these terms have lost cases due to making “late” payments to their employees, when the date of the paychecks doesn’t match up to earlier payment schedules—read: when they got around to it.
IC or Employee?
This is an important question that must be dealt with in the employment contract. Are they an Independent Contractor (IC) or an Employee of the company? The two employment types have very different regulatory requirements from both the federal and state governments, not the least of which is knowing how much you need to be paying into worker’s comp and unemployment.
While these are usually subject to change (and you should have a clause to that effect), it is important that benefits are discussed in the contract. You don’t want to end up in a situation where the employee claims that you promised additional benefits that you did not. And if there’s a chance that you will switch healthcare companies—and therefore, coverage—make sure to include this in the agreement as well.
Employment Contract Length / Term
How long is this contract for? There are pros and cons for different time lengths. If the new-hire ends up being a bad employee, a shorter term will make it easier to get rid of them sooner. However, if they’re a strong employee, a shorter term contract might make you have to renegotiate a higher salary to keep the employee after the term is complete. As an aside, remember that many states have “employment at will” laws that allow either the employee or employer to terminate the employment arrangement early for any reason, as long as it’s not discriminatory or in retaliation to a whistleblower.
This is covered more extensively here, but you should decide at the beginning of the employment relationship whether your company prefers to arbitrate or use the local or federal court system. As discussed in a recent blog entry, the regular courts are more likely to reach the “correct” decision with respect to employer-employee disputes, because their decisions can be more easily reviewed by appeal courts. However, arbitration courts are likely the cheaper alternative. Basically, you get what you pay for. If you do end up using an arbitration clause in any employment agreement, make sure it informs the new-hire that he or she is effectively waiving the right to a jury trial if a dispute should arise.
Non-Disclosure Agreements (NDA)
These are discussed in depth here, and are crucial in any employment contract. If your business is at all successful, I guarantee that you’ve got a few business secrets up your sleeve that allow you to be profitable. These hard-won methods deserve to be protected and NDAs offer an additional layer of security. For more information on protecting your business trade secrets through NDAs and non-compete agreements, see my recent blog here.
Every employment contract—yes, even for summer interns—should include all 6 of the clauses discussed above, in addition to the boiler-plate language that every contract should have. Next time, we’ll discuss the importance of hiring policies, what to include and how to follow them.
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