What Are Employment Contracts Good For?
Employment contracts have limited use, are often meaningless and can damage moral. Here is a quote from the Signals v. Noise blog in which the people at 37 Signals question the need for employment agreements:
"The [employment] contract is about five pages. It outlines some basic responsibilities we have to the employee and the employee has to the company. Starting salary, an overview of benefits, vacation time, confidentiality, and general expectations on both sides. But that’s really only a paragraph or two. Everything else is legal-cover-your-ass-speak. Like most contracts, it’s basically a big “I don’t trust you and you don’t trust me” document. What a terrible way to welcome someone to the team."
The guys at 37 Signals make a good point. What bother with an employment agreement anyway. What benefit does an employment agreement provide to the company or the employee? Typically, not much. Here is why.
First, all employees are presumed to be at-will. All at-will employees can be fired at any time and for any reason. At-will employees have virtually no rights. But, it is a two way street and at-will employees are free to quit any time and for any reason. Basically, the at-will doctrine is a lot like dating. You can break up and leave at any time and for any reason with no strings attached. You just pack your bags and go. Easy, but the downside is the lack of commitment.
Most employment contracts do not change the at-will doctrine and simply confirm that the at-will doctrine controls. So why bother with an employment contract if it does not change the fundamentals? In many cases, there is no need for an employment agreement. However, an employment agreement is useful in the follow situations:
1. Remove the At-Will Doctrine.
The parties want to remove themselves from the employment at-will doctrine. You can alter the employment at-will doctrine easily. All you need to do is provide that the employment is not at-will and instead is for a set time period and define the circumstances that provide cause to end the employment relationship.
2. Set Out Complicated Compensation Terms
An employment agreement is useful if the parties wish to add benefits such as stock options, bonuses, equity in the company, commissions or any other creative or complex compensation terms.
3. Non-Competition or Non-Solicitation
An employment agreement is necessary to add a non-competition or non-solicitation provision.
4. Provide a Set Severance Agreement
Typically, high level executives require employment agreements to set out, among other things, a set severance payment plan.
