The main advantage of an employment contract is that it provides certainty by defining the essential terms of the employment relationship. Terms that aren’t defined in the contract can be defined by the parties later, and these later agreements serve as modifications of the original agreement.
A well-drafted employment contract should try to anticipate questions that might arise between the parties later to minimize the likelihood of future disputes.
Here are 4 major reasons employers benefit from employment contracts:
- Prepares for termination of employment. A well-drafted employment contract should anticipate the termination of the agreement and specify the employee’s and employer’s powers of termination and what consequences will occur in the event of termination. Often, this means that the employer will choose to have an employment contract that expressly states that employment is terminable at will.
- Attracts and retains employees for special purposes. Another reason an employer may choose to use an employment contract is to “lock up” the talents of an employee with special skills or knowledge for a period of time. Note that Lab C §2855(a) generally prohibits enforcing a contract for personal services against an employee for more than 7 years.
- Protects employer’s intellectual property. A vital component of employment contracts is protection of the employer’s intellectual property. Either the employment contract itself or a separate confidentiality and nondisclosure agreement should contain provisions restricting the improper disclosure and use of confidential or proprietary information both during employment and after employment ends. Because the employee usually can’t be prohibited from competing with the employer after termination of employment, carefully draft restrictions on post-termination behavior.
- Provides for arbitration of disputes. Employment contracts may provide the ability to resolve disputes outside the court system. Arbitration is often speedier and more private than civil litigation.
Before drafting an employment contract for your client, gather all relevant information, e.g., letter of intent or offer letter, correspondence with the prospective employee, internal memos, company policies pertaining to employment, job description, and information about any similarly situated employees.
Be sensitive to the potentially conflicting interests of the employer and employee. If you’re drafting the contract for the employer, you may need to advise the employee to seek the advice of outside counsel. See Cal Rules of Prof Cond 3-310 (proposed Rule 1.7), which prohibits the representation of conflicting interests, and ABA Model Rule 4.3.
For everything you need to know about employment contracts, including form contract provisions, turn to CEB’s outstanding new book, Drafting Employment Documents for California Employers, chap 3. For more on this book, check out the video of my conversation with Lorraine P. Ocheltree, one of its authors.
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