Employment Contracts

In most cases, don't enter into a written employment contract with an employee unless there is a valid and compelling reason to do so. Employment contracts can interfere with the rights you have as an employer under the employment-at-will laws of most states. These laws permit you to terminate an employee, with or without cause, when you decide it’s the right thing to do. They also permit employees to quit at any time.

Even though an employment contract is generally not a good idea, there are some advantages to entering into an employment contract where circumstances make it advisable. A contract can serve as the vehicle for non-competition agreements, secrecy guarantees, or other collateral matters. It can ensure that your company has access to the expertise needed to carry out your business plans. In some situations, you may decide that it’s the only way to ensure a good relationship with a person with needed skills.

Warning

If you think you need an employment contract to guarantee that an employee will perform according to an employment agreement, find another way to obtain the necessary talent. Even a good contract can't make up for lack of trust.

If you need to gain written assurance of confidentiality from an employee, or a guarantee that he or she won't compete with you, a written contract may not be necessary. You can legitimately enter into an agreement that requires confidentiality, but doesn't guarantee that the employment will last for any particular period of time. Similarly, an employee may sign a covenant not to compete with you without having an employment contract.

If there’s a possibility that an employee may leave and open a competing business, a noncompete agreement is probably appropriate. Be sure to limit the time period during which the employee may not compete, and to restrict the agreement to just your geographic market area. Courts are unwilling to enforce agreements that unreasonably restrict a person’s right to make a living.

On the other hand, if you need to be certain that employees won't leave until a job is completed, you might want to enter into an employment contract that specifies the duration of the employment. If you do, have your attorney write the agreement so that there’s nothing in the contract that will come back to hurt you later. If you sign on to a lengthy contract, and the business opportunity justifying the contract evaporates, you may find that you've committed to expenses that can't be justified.