Written Employment Contracts: Pros and Cons
A written employment contract is a document that you and your employee sign that sets forth the terms of your
relationship. You don't have to enter into a written contract with every employee you hire -- in fact, written
employment contracts are generally the exception, rather than the rule. In some situations, however, it makes good
sense to ask an employee to sign a contract.

What Goes in an Employment Contract

In addition to clearly describing what the employee is going to do for you (the job) and what you are going to do for the
employee (the salary), the contract can -- if you want it to -- address a number of other issues, including:

  • duration of the job (one year, two years, or indefinitely)
  • information about the employee's responsibilities
  • what benefits (such as health insurance, vacation leave, disability leave, and so on) the employee will receive
  • grounds for termination
  • limitations on the employee's ability to compete with your business once the employee leaves
  • protection of your trade secrets and client lists
  • your ownership of the employee's work product (for example, if the employee writes books or invents gadgets for
    you), or
  • a method for resolving any disputes.

What About Written At-Will Agreements?

When we refer to written employment contracts, we mean a contract that limits the employer's right to fire the
employee -- usually by detailing the grounds for termination or setting a term of employment (for example, one or two
years).

Some employers require employees to sign a written agreement stating that they are employed at will -- that is, that
they can quit at any time, and can be fired at any time, for any reason that is not illegal. Employers might ask
employees to sign an offer letter, handbook acknowledgment, or other document agreeing to at-will employment, for
example. These documents do not limit the employer's right to fire the employee. Instead, they affirm the employer's
general right to fire at will.

Advantages of Using Contracts

Employment contracts can be very beneficial if you want control over the employee's ability to leave your business. For
example, if finding or training a replacement will be very costly or time-consuming for your company, you might want a
written contract. It can lock the employee into a specific term (for example, two years), or it can require the employee
to give you enough notice to find and train a suitable replacement (for example, 90 days' notice). While you can't force
someone to keep working for you, an employee is likely to comply with the agreement's terms if there's a penalty for
not doing so.

Employment contracts might also make sense if the employee will be learning confidential and sensitive information
about your business. You can insert confidentiality clauses that prevent the employee from disclosing the information
or using it for personal gain. Similarly, a contract can protect you by preventing an employee from competing against
you after leaving your company.

Sometimes, you can use an employment contract as a way to entice a highly skilled individual to come work for you
instead of the competition. By promising the individual job security and beneficial terms in an employment contract,
you can "sweeten the deal," so to speak.

Finally, using an employment contract can give you greater control over the employee. For example, if the contract
specifies standards for the employee's performance and grounds for termination, you may have an easier time
terminating an employee who doesn't live up to your standards.

Disadvantages

An employment contract is not a one-way street. The contract binds both you and the employee, so it limits your
flexibility. This may pose a problem if you later decide that you don't like the contract terms and want to get out of
them, or the needs of your business change. In those circumstances, if you want to change the contract terms, you'll
have to renegotiate the contract.

For example, if you decide you want to end a two-year contract after six months because you don't really need the
employee after all, you can't simply terminate the employee -- this would be a breach of contract. Similarly, if the
contract promises the employee health benefits, you can't later stop paying for these health benefits as a way to save
money. The only way to change the terms of the contract is to renegotiate them. This can be done, but it's time-
consuming and requires the employee's consent.

Another disadvantage of using employment contracts is that they bring with them a special obligation to deal fairly with
the employee. In legal terms, this is called the "covenant of good faith and fair dealing." If you end up treating the
employee in a way that seems unfair, you may be legally responsible not only for violating the contract, but also for
breaching your duty to act in good faith.


© 2010 Nolo
Reprinted with permission from the publisher, Nolo, Copyright 2009,
http://www.nolo.com

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L
urie Law Firm LLC represents employees and employers throughout Northern New Jersey and Central New Jersey, including  Montclair,
Livingston, Caldwell, West Orange, Newark, Morristown, Hackensack, Newark, Elizabeth, New Brunswick, Paterson, Jersey City,
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Morris, Union, Sussex, Warren, Hudson and Mercer.
Know when you should -- and should not -- ask a new employee to sign a written employment contract