5 Things You Need in Every Employment Contract
Updated: Mar 11, 2020
If you are a senior executive--or if you're hiring one for your growing business--you're likely going to need to craft an employment contract that helps protect both the employee and the company in case the relationship doesn't work out in the end.
Employment contracts also might soon be more applicable to other types of employees inside your business, like what already exists in Europe. I think that as the war for talent intensifies here in the U.S. in the coming years due to demographics and market forces, you might need to rely on employment contracts to help attract and retain top talent.
The first thing you'll need in crafting any employment contract is a good lawyer who can help ensure that you have covered all the important legalese needed in such documents.
However, there are five key areas that you as an executive need to focus in on--whether you are hiring or getting hired.
1. The Job and the Compensation.
The first section that needs you attention is the part that defines what the work the position is expected to perform and what they will be paid. It needs to be codified in writing what the person is expected to do and how they will be compensated for it.
Understanding the non-compete clause is important for both the employer and employee. As an employee, you want to ensure that this clause is as narrow as possible in that you don't want your future employment opportunities unnecessarily limited if you choose to leave the company.
You don't want this clause to restrict you from working in "wealth management" or "software" or something too broad where it will really constrain you in your ability to earn a living.
As an employer, you want to make sure you protect yourself in the event that an employee leaves because you don't want them becoming part of the competition, at least for a year or two. The catch is that as an employer, you also have to specific what you are willing to pay the employee in return for them agreeing to the non-compete. For example, if you don't want them to work for a competitor for a year, you need to be willing to pay them a severance that lasts that same period (we'll talk more about severance in a minute).
This clause restricts an employee on, if they do leave the company, that they cannot recruit or hire other employees from the company to join them. This is usually not too controversial.
If the company decides to let an employee go, which we will cover in more detail in the next section, you need to define what kind of severance package they will receive. This should be specific about how long the severance package will last and whether it will include any pro-rated bonuses owed to the employee.
Another important part of a severance package these days is health care. While every company is obligated to offer access to their healthcare program under COBRA, you might also include whether an employee could receive company-covered care for a limited period of time as well.
A final part of the severance agreement should be whether the company will help the employee find another job by, say, hiring an outplacement firm, if they are let go. This one is more typical for senior employees.
5. Termination Clauses.
The final part of the employment contract you really need to hone in on involves the different reasons a company might let an employee go--and what that means to both the company and the employee.
There are actually four different options to consider here:
A. Voluntary termination. This involves what happens if an employee decides to leave the company on his or her own.
B. Termination for cause. This clause comes into play if a company decides that an employee is not performing their job in a satisfactory manner. This can be a tricky issue, especially when it comes to the question of whether an employee should be paid a bonus or not. Some business owners could try to avoid paying bonuses if this is not clearly defined. So, as an employee, you want to try and make this as narrow and crystal clear about what constitutes "cause."
C. Termination for convenience. In this case, the company can decide to fire an employee for any reason whatsoever. But, in doing so, they also invoke the full severance package for the employee--which is why clearly defining the severance agreement is critically important.
D. Constructive termination. The final clause here involves a situation where an employee's job evolves to the point where they are no longer doing the same job (see section 1) as when they were hired because certain key responsibilities have been taken away from them. In other words, by shrinking their job, the company has essentially fired them. While the employee could remain on, this clause also gives them the opportunity to leave the job with a full severance package.
When you consider the full cost of hiring and firing employees--on top of the fact that it's going to get harder and harder to find and keep top performers--nailing down your employment contracts could be a huge factor in how well you or your company fares in the coming talent wars.
Just remember these five key areas to make sure that your needs are covered in a way that protects your interests as best as you possibly can as an employee or an employer.