Your company is planning to hire a new accounting manager. You have already decided whom to hire, and you are now working on new employee orientation packet. One of the pending questions you need to resolve is whether to require the manager to sign an employment agreement.
Is an employment agreement necessary in this situation? What type of agreement is necessary and should the agreement be limited to certain provisions? The answers depend upon your company's needs. In short, not all employment relationships require employment agreements and sometimes employers are better off not executing an agreement with their employees. What are the pros and cons of employment agreements?
Solves specific needs – To attract the candidate, the employment agreement may include a provision promising to pay him a sign-on bonus. To protect your company, the employment agreement may include a provision in which the new employee promises not to disclose confidential information he learned while working at his previous employer.
Clarifies rights and obligations – The best time to clarify the rights and responsibilities of the parties is at the beginning of the employment relationship. For example, the employee may want a guarantee that his place of employment is limited to the geographical area of your company's headquarters. Your company may want to include a provision that the employee is required to travel to its different facilities and overseas as part of his job.
Includes a finite Duration – If there is no employment agreement, the employment relationship is "at will." In an at will relationship, either your company or the employee may terminate the relationship at any time, with or without notice and for any lawful reason. An employment agreement may state that the relationship is at will or set a definite duration of employment, require notice of termination and/or automatically renew for additional periods of time. With a predetermined duration of employment, both your company and the manager may prepare and plan for anticipated future events.
Therefore Provides security – By signing an employment agreement, the manager may have a sense of security, and this may increase his morale, productivity and loyalty to your company. In addition, your company may have a sense of security that it is able to invest in the employee's training and will help ensure the lack of turnover.
Protects an employer's interests – Your company may include provisions that protect its interests. For example, a restrictive covenant enables your company to require the manager not to disclose confidential information and trade secrets. If the employee will be inventing a product, a trade secrets provision will ensure that his inventions are "works for hire" and his rights are automatically assigned to your company. Other restrictive covenants could prohibit the manager from working for one of your company's competitors for a certain period of time after his employment ends and could prohibit the manager from soliciting other employees in your company to leave and work for another company. In addition, many employers include a clause requiring the parties to resolve disputes through alternative dispute resolution methods, such as arbitrations, instead of going to court.
Gives additional remedies for the employee – If there is no employment agreement and your company terminates the employment relationship, the employee may file a lawsuit under different statutes or judge-made (i.e., "common") law. However, when there is an employment agreement, the employee has contractual rights and may sue for breach of the agreement.
Makes terminations more difficult – If there is no employment agreement, the employment relationship is "at will" and either party may terminate it at any time, with or without notice and with or without cause. However, depending upon the wording of an employment agreement, a court may require your company to terminate the relationship only for "good cause." Good cause is a legal concept with many meanings, some of which could be included within the agreement. Also, depending upon the state, the courts may require "good faith and fair dealing" between your company and the manager. Thus, your company's ability to terminate the employment relationship becomes more difficult, because the manager acquires contractual rights to contest his termination.
Creates administrative burdens – Drafting employment agreements consume resources of your company to draft agreements for each employment relationship. In addition, some employment agreements contain notice requirements and different renewal dates. Keeping track of these requirements for each existing employee could be cumbersome.
Requires a court's interpretation – If a dispute arises out of the agreement's implementation, an arbitrator or court will need to interpret the contractual provisions. Unless the provisions are clearly written, disputes will occur and the third party may interpret the provisions differently than your company originally intended.
Whether to execute an employment agreement with employees is a major decision for your company, particularly because the parties may be governed by the agreement's provisions for years to come. Therefore, your company may decide to include provisions guaranteeing employment for a period of time or limit the employment agreement to specific terms, such as restrictive covenants protecting your company's confidential information and competitive advantages. The employment agreement is part of your company's Employment Tool Box. Thus, an employment agreement may be a very useful tool that enables the parties to protect their interests while creating and maintaining a mutually beneficial relationship.