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What Employers Should Include in Employment Agreements

In every employer-employee relationship, an employment contract exists. Some employment contracts are in writing, but some may be oral contracts. Employees who are hired on an at-will basis often do not have written contracts. Oral contracts are still enforceable, though their existence is harder to prove. A formal written contract may not be necessary if the employer has an employment handbook, or if there are state laws or regulations that cover certain terms. When a formal written employment contract is required, there are several common terms within it. These terms legally protect both the employee and the employer. Terms may be industry-dependent, but most employment contracts include: compensation plans, benefits or stock options, duration of the contract, grounds for termination, a non-disclosure clause, an arbitration provision, expectations and duties, and a non-compete clause. These terms are discussed more in-depth below.

Here is a sample employment agreement.

Compensation Clauses

Compensation clauses in employment agreements outline wage (i.e. hourly, salary, or commission) and hour terms. If a severance agreement does not exist elsewhere in the contract, severance pay is also included in the compensation clause. A ‘no additional compensation’ provision may state that if the employee is elected as an officer or director of the employing company, or serves on a managing committee, the employee will not be entitled to additional compensation. New employees should benchmark their salary and compensation packages with other employers or companies in the industry. The language in the compensation clause not only states the salary or wage, but also should outline annual increases in as much detail as possible. This language should include any compensation formula, stock options, and bonuses, and should be linked to any according performance goals.



Severance, Termination, and Arbitration Clauses

Termination clauses discuss grounds on termination with just cause. The language in the termination clause should describe ‘just cause’ as narrowly as possible and avoid any ambiguities. Just cause will often include serious legal infractions incurred by the employee, any fraudulent conduct relating to the employer’s business, and any misconduct that arises from the employee’s duties, such as gross neglect, intentional malfeasance, harming the employer’s image, or material harm done to the employer (and possibly investors). Additionally, any breach of the material terms to the employment agreement typically will constitute just cause.



Termination clauses discuss grounds on termination with just cause. The language in the termination clause should describe ‘just cause’ as narrowly as possible and avoid any ambiguities. Just cause will often include serious legal infractions incurred by the employee, any fraudulent conduct relating to the employer’s business, and any misconduct that arises from the employee’s duties, such as gross neglect, intentional malfeasance, harming the employer’s image, or material harm done to the employer (and possibly investors). Additionally, any breach of the material terms to the employment agreement typically will constitute just cause.



Depending on the position and employer, a severance package may be included. This type of payout is frequent with positions that are subject to changes due to mergers and acquisitions. Along with a severance package, often termination clauses in employment contracts contain an arbitration agreement. An arbitration agreement provides that the employee will settle disputes outside of court by bringing the dispute to a neutral third party and that third party decides on the issue. Arbitration is a quick resolution, and costs much less that court litigation, and may be a final decision on the issue. Negotiations are frequently involved with arbitration agreements. In some cases, even a signed arbitration agreement cannot prevent an employee from filing a lawsuit, especially through a regulatory government agency.



Non-Compete Agreements

Non-compete agreements are often included in employment contracts. When an employee leaves the employer or company, a non-compete agreement keeps them from working for a similar employer or competitor for a certain amount of time. Essentially, the non-compete clause is a contract of loyalty from the employee to the employer to prevent the departing employee from disclosing confidential information relating to the employer’s business, or from making unfavorable comments about the employer. Non-compete agreements also prevent the employee from “stealing” or soliciting consumers or customers from the employer after the employee leaves.



Exclusive employment provisions ensure that the employee will not work for anyone who is in similar type of business as long as he or she is working for the employer.



Non-Disclosure and Confidentiality Agreements

In many employment contracts, the employer includes a clause for non-disclosure or confidentiality. Through that agreement, the employee promises to keep information relating to the employer’s business (such as details of how that business is conducted) confidential. The employee is prohibited from sharing information about topics such as formulas, plans, pricing, data, formulas, strategies, or machinery used. Confidentiality agreements are fairly far-reaching in that they often are included in negotiations contracts, and even last after the employee no longer works for the employer.

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