Employment Contracts Offer a Variety of Benefits—When Done Right

Let’s put it in writing. It’s a phrase being uttered not just by executive candidates anymore—now it’s heard from the mouths of employers eager to wrap themselves in another layer of legal cushioning.

Employment contracts, when done right, can ward off all sorts of nasties—from wrongful termination suits to trade-secret swapping. When done wrong, they can lead to scores of ex-employees living the good life—at the company’s expense. Brian Clemow, partner at the Hartford, Connecticut-based law firm of Shipman & Goodwin, offers advice on what you should include in the fine print of an employment contract.

To begin with, what’s the benefit to an employer of offering a contract?
Employers often want to make sure they spell out how the employee will be treated if the situation doesn’t work out. Also, there are more likely to be concerns at higher levels about trade secrets or other confidential business information. The employer will want to protect itself against employees taking that kind of information with them or using it after they leave the company—no matter how long they stay.

In addition to protecting a company against trade secret leaks, can an employment contract have a non-compete agreement?
There may be similar concerns about competition. More and more employers are asking key employees to enter into non-competition agreements so after they leave the company, they won’t go to work for a primary competitor. Issues like that lead people to consider employment agreements at the higher level.

Would you say offering an employment agreement would help in recruitment—that high-level employees would feel more comfortable signing on with a company that offers one?
The higher the level of employee, the more appropriate it may be to consider a contract of employment. The higher-level employees are often brought in from other locations (relocating) or they’re making other kinds of commitments which involve substantial financial risk. So these folks [will be more cautious] than a lower-level employee who can find another job easily if his or her secretarial position or word-processing job doesn’t work out. If you’ve been brought in to be the vice president of a utilities company, and things don’t work out, the chances of you being able to find another, similar job in the same geographic area are not terribly great.

[On the other hand], most employment agreements I know of contain a clause in them which gives the employer the right to terminate the employee without having to show just cause. Consequently, while it may be comforting to the employee to have his or her benefits spelled out in a contract, it may be uncomfortable for the employee to read the clause that says, “We can terminate you on two weeks’ notice if we wish to.”

If you offer a contract to an employee at one level, do you have to offer it to others, or should you determine this on a case-by-case basis?
Most employers that I’m aware of will either offer it to all employees at a certain level or to certain types of employees. For example, some employers may use employment contracts at the officer level, but then may also use contracts that have non-compete and non-disclosure agreements for people who are in positions that are either creative or that have to do with product development or things like that, even if they may not be highly placed employees.

If a company does decide to offer an employment agreement, is there anything that should definitely be covered in it?
Certainly the nuts and bolts would be to include when employment is to begin and how long the contract is to last. Also, is it to have an expiration date—not all contracts do. You should also cover what the employee’s salary and benefits will be, and the rights of the employee—and more importantly the employer—concerning separation from employment.

What would the terms of separation cover?
For instance, is this a situation in which the employer can terminate the employee at any time just by giving two weeks’ severance pay? Or can the employer only terminate the employee for certain stated reasons, such as elimination of the position or certain kinds of misconduct or demonstrated incompetence? Or something in between? Some employment contracts say employers can terminate the employee for misconduct or other similar causes at any time, but otherwise will give him or her x weeks’ or months’ or sometimes years’ advance notice of separation, or provide pay in lieu of notice. The terms of separation are an important element in the agreement.

What else should a contract specify?
Some of the other things that are common (or at least considered, although they may not be appropriate for all levels of employment) are: nondisclosure of confidential company information and non-competition, at least during the duration of employment, but often for some reasonable period of time afterwards. Some contracts also spell out what the duties and responsibilities of the position are, although, surprisingly, in my experience that’s relatively unusual. Instead, it just says, “We hire you in the position of x.” Other things which might be included in an employment agreement, depending upon the type of job it is, would be allowances like a car allowance or moving allowance to relocate. Employers often cover issues such as travel and entertainment expenses if it’s a job of that type—especially if it’s a sales job. Many address issues such as education programs, speaking engagements executive employees might have—do they get time off to do that? There may also be a blanket reference to the employer’s policies and procedures—something like “anything not spelled out in this contract will be governed by our standard employment policies and practices applicable to our other employees at your level.”

Is there any danger in providing an employment contract—things that may come back to haunt a company?
The standard drawback is that, at least in many jurisdictions, a contract of employment may well be considered enforceable, even though the circumstances or conditions of the company have changed. People, being human, tend not to anticipate every possible problem that may come along. You may enter into a contract that says you’re going to employ a particular individual for an initial period of five years. In the contract, you may spell out certain grounds for which you can terminate the employee, but you forget to state what happens if the company runs into financial problems and the position has to be eliminated, or if the whole outfit has to shut down. The employee can then possibly turn around and sue the employer and say, “That’s your problem—I’ve got a contract that says you’re going to employ me for five years, so I want you to pay me for five years.”

What other specifications may get a company in trouble?
Another kind of issue is that once you’ve spelled out a particular set of working conditions, you can’t change them without the agreement of the employee. So, for example, you may spell out what your current health benefits are. Then next year you want to change the program from a standard indemnity plan to an HMO, and you find you’ve got some executives with employment contracts that guarantee them you’re going to continue with the existing plan. That can be a big problem, obviously. Same if you made reference to a pension plan and later wanted to go from a defined benefit to a defined contribution plan.

What should a company keep in mind in drafting a contract to make it as beneficial as possible?
Two things: When drafting a contract you want to make sure you don’t get locked into something that ends up being applicable only to the fortunate few who have these contracts, and everybody else is subject to whatever changes the employer wants to make.

I guess the other problem is that in many cases, when you offer someone an employment contract, the individual will come back and say, “Well that looks fine as far as it goes, but I’d like to see this change or that addition,” and you end up negotiating individual by individual what their terms and conditions are. Pretty soon, you find that instead of having a fairly standard set of policies and practices that apply to all employees, you’ve got each individual having cut his or her own deal, which can be a nightmare to administrate.

Any other ways a company can benefit from having an employment contract?
Yes. More and more jurisdictions are coming down with court decisions that say even though there may not be a written contract between a particular employee and a particular company, there is an implied contract of employment. This [implied contract] may arise from some policy or practice of the employer. It may arise from something the interviewer told the applicant in order to induce him or her to come to the company—or it may arise when an employee who’s been terminated wants to claim that the termination violates some kind of implied contract of employment. Many states right now are recognizing this principle. [So that creates] a back-handed benefit to having an employment agreement.

How does an employment contract help protect against this?
If you have a written contract of employment, you can at least say there is no implied contract. Many employers include a provision at the end of the contract that says, “This is the entire agreement between us, and it supersedes anything else that may have been discussed with you or offered to you. This is the whole deal.” Another such clause might be the employment-at-will provision, which says the employer reserves the right to terminate the agreement at any time for any reason. If you have a contract that has provisions like that then you’re really better off than having no contract at all, because then the employee can’t come back and claim, “When I was hired, the interviewer told me that people at executive levels get five weeks’ vacation,” or said “As long as I do my job I’ll never be laid off.” Trying to disprove that those statements were made is real tough unless you have an employment contract that says, “Here’s what we’re giving you and this is all we’re giving you.” That’s another benefit of having an employment contract.