Employee Contracts: What You Need to Know

Mar 11, 2021 | Business Law

Flowers are blooming, birds are singing, and you want to procrastinate on spring cleaning. Fair enough. You can ditch the broom—but how about a little contract spring cleaning instead?

Employment contracts, also known as employment agreements, are agreements between employers and employees about the nature, scope, conditions, and other relevant aspects of employment. They allow both parties to clearly understand the rights, obligations, and responsibilities of the working relationship.

The details

As a business owner, you can use employment contracts with W-2 or 1099 employees. 

Contracts vary according to the situation and type of employment, but they can include:

  • Compensation
  • Employee responsibilities or job duties
  • Benefits, such as health insurance
  • Vacation time and sick leave
  • Duration of employment
  • Probationary periods
  • Termination grounds and procedures
  • Nondisclosure agreements
  • Non-compete agreements
  • Bonuses, commissions, stock options, etc.

Beyond just knowing what to include, it’s also important to understand why certain things should be included in an employment contract, given the kind of work you’re hiring for—and what should be avoided. (More on that below.)

When contracts are a good idea

Not every employee needs to sign a contract. Texas is an “employment at will” state, which means that you or your employee can change or end the working relationship at any time, for any reason (or no reason at all), and neither of you needs to give advance notice.

So, why would you want to enter into a legally binding agreement with an employee?

If you’re hiring a professional, manager, or contract worker, an employment contract can provide protections that help avoid a situation where your business is left in a lurch. There are other scenarios where contracts make sense for the employer, too.

Keeping the MVP

If you have a valuable employee whom it would be difficult to replace, then a contract can help give you peace of mind. Even if other businesses try to recruit the employee, you’ll at least have enough notice to find and train a replacement. Particularly for specialized positions, this can be a good idea.

Reducing competition

Many business owners also remain open to the risk of an employee learning from them—and then leaving to set up a competing business. Non-compete clauses or agreements can limit this kind of risk. They mandate that if the employee stops working for your business, they have to wait a certain amount of time before opening a competing business.

The secret recipe stays secret

Non-disclosure agreements or confidentiality clauses address a similar need. These prevent employees from disclosing trade secrets and certain business information, such as ideas, finances, and customer lists.

So now, as an employer, you have a list of things you’d like your future employee to agree to, to which they might counter, “What’s in it for me?” And thus you have the employment contract, where each side gets certain concessions in writing.

Contracts are binding

Keep in mind that contracts are legally binding. So while they can be a good idea, it’s also important to know what to include, what to leave out, and the precise wording of various clauses. 

For instance, putting in the length of employment can limit your ability to terminate a working relationship with an employee—even in an “at-will” employment state, like Texas. 

Similarly, if you put termination grounds into the contract—well, you’ve just given yourself a gate to pass through, should you need to end the person’s employment with you. You’ll now have to terminate employment according to one of the causes listed—or be at risk for a wrongful termination suit.

When deciding what to put into the contract and how to phrase things, we strongly recommend working with an attorney. Having a legal document—that you’re about to sign—drawn up so that it meets the needs and goals of your unique situation can save you time, money, and heartache down the line.

If you have questions about contracts or business planning, contact us. Our experienced Texas attorneys can guide you through the process.

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