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Operations

The Complete Guide to Employment Contracts

Disclosure: This content is reader-supported, which means if you click on some of our links that we may earn a commission.

If your company plans on hiring employees of any type, employment contracts are a must-have. This guide will help you understand why employment contracts are necessary, how to quickly improve your current contracts, and how to implement effective employment contract strategies.

Why Employment Contracts Are So Important

Employment contracts are important because they protect employers and employees, set clear expectations, and legally establish working relationships. 

An effective employment contract will protect employers by preventing ex-employees from sharing sensitive information, soliciting clients and current employees, and/or directly competing with the company. It will also attract candidates by detailing compensation, time-off, and other non-financial benefits. 

Employers and employees will gain a clear understanding of each party’s duties after reading an employment contract. Contracts will set employee standards including job requirements, attendance expectations, and cultural traits. Employers will also gain clarity on expectations like performance feedback, safety duties, and support granted. 

Employment contracts create legal obligations for the employer and employee. This allows them to agree on things like suggested length of employment, early termination protocols, expense coverage, and other legal formalities. If lawsuits come up, employers can easily refer back to employment contracts for settling disputes. 

In 2019, Apple was able to sue a former employee for starting his own chip-design company while still working at the company. It was able to do this because it included a non-compete clause in its employment contract. The former employee initially started the company without informing Apple and later attempted to steal employees to join his venture. 

If Apple had never included this clause or failed to implement an employment contract altogether, it would not have had a solid case against him. Apple’s employment contract protected it from data theft and employee solicitation. This is a perfect example of the importance of employment contracts and how they can safeguard your company. 

Quick Tips to Improve Employment Contracts Today

Create Employment Terms

Employment contracts should include details on how long a working relationship is intended to last. If the contract is expected to last six months, include it in this section. If you don’t have an employment term length in mind, state this in the section. This ensures that employees understand how long they will be compensated and whether there is an end date expected.

Go Paperless

A traditional employment contract requires a receptionist to email the document to the new hire. The new hire then needs to print it, sign it, scan it, and email it back to the company. It’s an extremely tedious process that can be easily fixed by going paperless. For help with going paperless, consider purchasing an HR software tool like BambooHR

Digitized forms and e-signatures are the future of document management. One report found that switching to e-signatures can save a business up to 30% in paper, printing, and filing costs. BambooHR not only helps with employment contracts, but also with documents like application forms, feedback forms, evaluation forms, and time-off forms. 

BambooHR can be used to digitize contract text forms like names, addresses, dates, and checkboxes. E-signature requests can be sent to specific people or to all employees at once. To ensure contracts are signed on time, you can set up automatic email reminders. Its Sign Documents Report feature shows users exactly who has signed a document and who hasn’t yet. 

Using outdated technology can make a poor impression on new hires. A paperless system can increase offer acceptances and improve your brand. New hires can use the documents tab to view previous contracts signed. Going paperless obviously has a positive impact on the environment and saves time as well. 

Clarify Outside Employment Options

An outside employment section is important because it sets boundaries on how current employees can earn wages outside of your contract. Some companies are okay with employees freelancing for other companies or working part-time jobs. However, many companies like to prevent employees from working for or starting their own companies during employment. 

Make sure to think about which outside employment types are acceptable and which are not. Then, include these details in your employment contract. 

For example, you may be fine with a current employee earning a side income by driving for a taxi company on the weekends. However, you might want to limit his or her number of hours to 20 per week. This will ensure that the part-time job does not compromise the employee’s ability to work for your company. 

If your company sells furniture, make sure to include an agreement that prevents current employees from starting their own furniture stores. Failing to do so can result in a conflict of interest for current employees. 

Describe Expense Protocols

Expenses can be a regular part of an employee’s workday. These include travel expenses, client events, study materials, convention tickets, and parking fees. It is critical to state exactly which expenses are to be covered by the employer, and which expenses that employees are responsible for. 

For example, an employee wants to take a client out to dinner in another city. Instead of simply writing, “travel expenses are covered”, add more details. Maybe your company will cover dinner fees, the hotel room, and the plane ticket. However, the employee may be responsible for his or her taxi rides and gas expenses. 

Add Early Termination Details

If you don’t already have specific details on early employment termination, you should consider adding them to your contracts. This will create clear expectations on what would happen in every termination scenario. There are different types of terminations, and the protocols for each are important to include. 

A “good reason” termination is when an employee’s role changes in a negative way, or when the employer is not able to pay the employee any longer. In this case, the employee can resign for “good reason” and usually receives some sort of compensation. A normal resignation is initiated when an employee wants to leave and is usually paid until his or her last day. 

A “for cause” termination is when an employee performs an action that gives the employer enough reason to fire him or her. When including these details, make sure to include exactly what triggers a “for cause” termination. Examples include felony charges, failing to show up for work, breaching contracts, misconduct, or consistent tardiness. 

A “without cause” termination is when an employee is let go without doing anything wrong. In most cases, employees are paid until the day they are terminated. There should also be a section included for death and disability. This will outline the compensation amounts that would be granted to the former employee or his or her estate. 

Include a No Implied Waiver

No implied waivers let employees know that even if one party doesn’t enforce the other party’s obligations in one instance, they can still enforce it later. Including one can free you from the burden of enforcing every obligation every time. No implied waivers are still relevant regardless of the length of time the party fails to enforce an obligation.

For example, a company requires an employee to sell 100 units per month. In January, he only sells 85, but his supervisor decides to overlook the shortfall. The no implied waiver on the employment contract would give the supervisor the right to continue enforcing the units sold requirement during the months of February, March, and so on, even though he hadn’t enforced it in January. 

Have a Governing Law Provision (if applicable)

Governing law provisions are essential if you are in one state, but an employee is working in another. Adding this to your employment contracts clarifies which state’s laws would be used to interpret the contract. Failing to add this to your contract could result in issues, especially if the two states have major legal differences. 

Long-Term Strategies for Employment Contracts

In addition to quick fixes, it’s valuable to look at your employment contract strategy from a broader perspective. There are foundational aspects of creating effective contracts, and they include protecting your business, setting employment expectations, and looking after your employees. 

Protect Your Company

A large reason employment contracts exist is to protect companies from their employees. Companies share valuable information, clients, and skills with their employees. Employment contracts can be created in a way that prevents employees from exploiting these. This is done through non-disclosure, non-solicitation, and non-compete agreements. 

A non-disclosure agreement prevents employees from sharing sensitive information with the public or other companies. This can apply to specific aspects or entire business strategies. Including this in your employment contract can stop research analysts from sharing trade secrets, chefs from reusing secret recipes, and coaches from giving away game strategies. 

A non-solicitation agreement is used to stop former workers from attempting to steal your clients or current employees. For example, this can prevent a former employee from using your email list to promote his or her new products. It also will keep former workers from attempting to convince former co-workers to leave your company and join theirs. 

A non-compete agreement is a way to stop former employees from directly competing with you for a select period. Let’s say that three years ago, you hired a new salesperson and spent six months training her into a sales master. One day, she decides to leave the company. A non-compete clause would prevent her from taking her talents to your biggest competitor for a select period.

When adding these agreements to your employment contract, make sure to be as specific as possible. Protect your information by stating exactly what can be shared and what cannot be shared externally. Prevent client and employee solicitation through a clear non-solicitation agreement. State exactly how long a non-compete agreement should last. 

Set Clear Employee Standards

Another foundational aspect of employment contracts is the mutual understanding of employee and employer standards. A contract should clearly tell new workers how they are expected to perform to stay employed. It should also set the standard for how companies operate in relation to their employees. 

Employee standards can include specific requirements like arriving on time to work or wearing a certain attire. Behavioral-based standards can ensure that employees know to act in an honest and professional manner. Standards can also be performance-based, requiring employees to hit certain metrics like sales targets met, software coded, or units produced. 

Employer standards should give your workers a general idea of what to expect from you. Role-specific standards include training materials provided, equipment used, and support given. Other employer standards include safety protocols, timely wage payments, and performance feedback. Standards can also shed light on a company’s culture and what it values. 

Setting your standards on an employment contract eliminates uncertainty. The more specific you are, the better employees know what’s expected of them. If you’re clear on expectations, you can easily justify the termination of a lackluster employee. Employer standards show workers that you care about meeting their expectations too, which brings us to our next point…

Take Care of Your Employees

Simply describing your company’s standards is not enough. Tell your employees specifically what benefits they will receive in your employment contract. If you don’t already have a vast number of benefits, start to slowly incorporate them into your company. Presenting benefits on an employment contract will enhance loyalty from new hires and increase the probability that candidates will sign.

The first benefits mentioned should be salary details. These should include a base salary and how often employees will receive payment. Is it monthly, bi-monthly, weekly, or daily? You should also include performance-based compensation depending on the role. For example, many sales representatives receive a commission based on a percentage of sales. 

Signing bonuses are optional, but they are an excellent way to take care of new employees. On an employment contract, the signing bonus amount and date of payment should be stated. This section should also require employees to stay on board for a certain period to qualify. This will prevent new hires from taking the bonus and quickly leaving for another job. 

After compensation, you should throw in some desirable non-salary benefits. These can include relocation expenses for out-of-town employees, 401(k) matching, or gym memberships. Another thing to add here is the number of vacation days, sick days, personal days, and holidays. Stock options are something you can offer to employees after they’ve been on board a couple of years. 

Next Steps

Now that you have a better understanding of employment contracts, it’s time to develop a strategy of your own. The most important thing to remember is to include all necessary details and to be as specific as possible. If there is any question of whether to add details on a contract, it’s better to include them. 

For information on software tools that help manage contracts, check out our helpful guide here. It can also be beneficial to invest in a comprehensive HR tool. We compiled a list of the best available in this article. Employment contracts are a crucial part of the hiring process, and drafting an effective contract will provide protection, clarity, and legitimacy for you and your employees. 


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