Employment Contracts

Unlike many years ago, when employers and employees began the working relationship with a simple trusting handshake, today's employment often begins with lengthy employment contracts and careful scrutinizing, discussion, and negotiation. Such contracts are often necessary to reduce the potential for expensive litigation on a multitude of issues, although in many cases, it is advantageous for an employer not to have to deal with the restrictions and obligations that a contract may create. For this reason, not every prospective employee will be successful in obtaining an employment contract. Until recently, employment contracts were used almost solely for executives. Today, many employees, particularly managers and professionals with special expertise, look to employment contracts as a hedge against job loss brought on by mergers and corporate “housecleaning” and as a way to negotiate greater predictability in their work lives.

This entry provides a checklist of some of the more important issues to consider at the time of establishing an employment contract. It is not intended as legal advice. The law pertaining to employment contracts and the enforceability of particular provisions vary substantially from one state to another. Therefore, an individual should seek the advice of a knowledgeable attorney before deciding on the content and language of an employment contract.

A well-drafted employment contract clearly states the agreement between employer and employee and reduces the potential for future litigation. It should start with the basics, such as job title and a description of the level of responsibility the employee will assume. If the employee wants to remain in a particular location or desires to avoid extensive travel, these issues should be addressed in the contract. Generally, employees are hired for an indefinite period of time. However, in many states, a contract is unenforceable if a definite term is not stated. The parties should consider whether extensions to the contract term will be permitted and under what conditions.

The salary and total compensation package should be addressed in an employment contract. This would include the following: base pay, bonus, commissions, cost-of-living salary adjustments, pension, life/medical/dental/disability insurance (address who pays what percentage), 401(k), stock, profit-sharing, incentive pay, expense account, company car, vacation, parking, use of company property, associations/club memberships, mobile phone, tuition (self, dependents), moving costs, low-interest loans, severance pay, tax/legal/financial counseling, child care, and employee discounts. Just [Page 276]because an employer does not state that a particular item is available as a benefit does not mean that a well-qualified applicant cannot use his or her qualifications as leverage to negotiate for and receive that benefit.

In an individual employment contract, there is often a clause listing the specific reasons that will justify termination. If the contract does not address valid reasons for termination, the employee is generally considered to be an employee at will. The doctrine of employment at will holds that unless there is a contract stating otherwise, employers have the legal right to terminate an employee for any reason as long as the basis for termination does not violate state or federal law. This doctrine is generally followed in all states, subject to some exceptions that vary from state to state.

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