A Beginner’s Guide to Employment Agreements

Good employees are at the heart of every business. Whenever you see a company thriving, you can be sure that great people are behind the scenes making it happen. The innovative vision of a founder is necessary to get things off the ground, but without talented employees, the journey of any new business will be a short one.

If you are getting ready to hire your first employees, or if you need to hire for key positions and want to be sure you are doing it right, employment agreements are essential. This guide will break down what an employment agreement is, why it is so important, and how to do it right. When you are ready to get started, contact an employment agreement lawyer like Fisher Stone to hit the ground running.

What is an Employment Agreement?

An employment agreement – also commonly referred to as an employment contract – is a deal that is made between an employer and an employee. This deal outlines all of the terms that are going to dictate the relationship between these two parties moving forward. While employment agreements come in many shapes and sizes depending on the situation at hand, there are some common elements that are seen from one to the next. We will talk more about those elements later on this page.

Often in business, negotiating a deal is a matter of trying to get the best possible terms on your side of the table. For instance, if you are negotiating with a supplier, you’ll try to get the lowest possible cost for the goods you are purchasing, along with any other benefits you can secure.

Negotiating an employment agreement isn’t quite so simple. In this case, you want to form a positive relationship with the other party, so it’s not so much about “winning” the deal as it is about establishing fair terms for everyone involved. An employment agreement is successful when your employee is happy with the terms, you are protected legally by the contract, and everyone can move forward to achieve the company’s goals together.

Three Big Employment Agreement Advantages

Many employers are tempted to skip the formality of an agreement and just hire their employees on an “at-will” basis (more on that later). However, some notable advantages are available if you go through the process of putting a solid agreement in place, including the three listed below –

• With a contract governing how the employee-employer relationship is going to work, there will be clarity regarding the expectations for the employee and what will be provided in exchange for their services. If the responsibilities that are filled by this role change over time in your organization, you may be able to go back and revise the agreement in order to better align with your needs.
• Legal protections. This is commonly the motivation to put a deal in place with an employee. If you have any concerns about legal complications that could come up later – whether they have to do with compensation, termination, or anything else – having a contract that you can point to when making decisions is invaluable. You can think of an employment agreement almost like insurance against future problems. The contract will outline how things are going to work and it’s far less likely that you’ll wind up in court facing a past employee when good agreements are used as standard.
• Resolve disputes quickly. This point really goes along with the last one, but it’s important enough to break it out on its own. When something comes up between your business and an employee, like a disagreement on compensation, you can quickly point to the agreement and explain why things are the way they are. Having a signed document to arbitrate such issues will save headaches, time, and frustration. It can also help to maintain a positive relationship between the parties as you will simply be enforcing an agreement that the employee signed, rather than trying to impose your own arbitrary decisions.

Make Sure Your Employment Agreements Include These Elements

Before we get too far into this section, there is one thing that needs to be stated clearly – no two employment agreements are likely to be exactly the same. Sure, they can share plenty of common elements, but the whole point is to have a contract that uniquely defines the roles and responsibilities of both parties. So, these should be customized documents, even if they start from a general template.

With that point made, let’s look at some of the important elements that you’ll almost certainly want to have in any employment agreement used in your business.

• Job title and duties. This is the obvious starting point for any contract with an employee. The agreement should clearly state the title that the individual is accepting in this role, and what responsibilities are assigned to the person with that title. There will be no ambiguity or confusion over duties when everything is outlined in the contract that is signed.
• The total compensation that is being offered in exchange for the duties described should also be included in the agreement. This includes not only salary but any benefits that are associated with the position. For employees who are going to be compensated at least in part on a commission basis, the details of how those commissions will work and how they will be paid are going to be included in the contract, as well.
• Duration of employment. Most employees are hired to work “at-will”, meaning they will continue to work for the company until one side or the other decides that it is time to move on. That’s possible with an employment agreement, as well, but it’s also possible to set a fixed term within the deal. That way, a given term will be established for the employment duration, and when that time is up, a new deal may be worked out or the parties may decide to go their separate ways.
• Termination conditions. One of the most important parts of an employment agreement is the section that outlines the conditions of termination. If the employer decides to end the relationship with the employee, or vice versa, the contract should detail how that is going to happen and what each side is responsible for in terms of providing notice, severance, etc.

Common Mistakes to Avoid

Employment agreements are excellent tools for your organization to use, but there are always ways for things to go wrong when certain points are missed. A couple of common mistakes with employment contracts seem to come up over and over again, so it’s a good idea to discuss those now.

One common issue with an employment agreement is a lack of specificity in the job description section. If the contract doesn’t clearly define what the employee will be doing, there are likely to be struggles later on regarding what is expected and what is being delivered. It takes time to build an agreement that details what work needs to be done, but going through the effort will lead you to a more meaningful, useful contract in the end.

Another mistake that is more relevant now than ever before is missing terms on where the work is going to be completed. Will this person be able to do some or all of their work remotely, or are they expected to be in the office at all times? Defining work location is another way the contract can be as specific as possible.

Finally, failing to include a probationary period in the contract is another error that can be costly. Using a probationary period is a great way to make sure the employee is a good fit before committing to the full terms of the contract. If either party doesn’t feel like the relationship is a good fit before the probationary period is up, the deal can be called off and everyone can move on cleanly.

Do All Employees Need Contracts?

You might be thinking that it sounds like a significant burden to have all of your employees sign a formal contract. And you would be right. Generally speaking, businesses don’t have all of their employees sign agreements. The employees without a contract are considered “at-will” employees and there is no obligation held on either side (by employer or employee) to maintain the relationship moving forward. When either side decides they would like to move on, they can do so.

An employment agreement is called for when the work in question is particularly important, specialized in some way, or doesn’t naturally fit into the standard arrangement of hourly work in exchange for wages and benefits. For example, because of the importance of their duties, an executive or senior manager will likely need a contract that covers their employment. Likewise, others in the business who are going to have access to sensitive information or who will be working on proprietary projects might call for a contract, as well.

Another case where an employment agreement could be called for is an employee who is going to be paid via a specialized structure that isn’t as simple as a flat salary or hourly wage. This is commonly the case for sales professionals. With income that is based mostly – or entirely – on commissions, you might choose to have contracts in place for all members of your sales team.

Don’t Take Any Chances

If you feel a little bit overwhelmed by the task of crafting proper employment agreements that provide the right protections to all parties, don’t worry – hiring an employement agreement lawyer is an easy solution. At Fisher Stone, we take pride in offering direct, accurate legal advice to our range of clients. Whether you need us to draft a new employment agreement, review an existing contact, or anything in between, we’ll be happy to help. Take a moment today to get in touch and learn more.