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While the majority of employees work “at will,” employers of all sizes can use employment contracts to protect their interests. For employers, employment contracts can serve a variety of purposes—although, if they aren’t careful, employers that use employment contracts can expose themselves to a variety of risks as well.
As with other types of business contracts, when it comes to drafting employment contracts, comprehensiveness is key. While oversights can create risks that could (and should) have been avoided, employment contracts that address all pertinent risk factors can provide critical protections both immediately and in the future.
7 Key Risk-Related Considerations When Drafting Employment Contracts
Employment contracts can (and should) include several provisions that are focused specifically on mitigating the employer’s risks arising out of the employment relationship. Here are seven examples:
1. Clarifying the Employee’s Responsibilities
Entering into employment contracts allows companies to clearly establish their employees’ responsibilities. Not only can this be important for managing a company’s day-to-day operations, but it can also be important for managing a company’s employment-related risk. For example, if an employee underperforms to the extent that termination (or some other form of adverse employment action) is warranted and it is clear that the employee has underperformed based on the terms of his or her contract, this can help mitigate the risk of facing allegations of discrimination or other unlawful employment practices.
2. Clarifying the Employee’s Expectations
Entering into employment contracts also allows companies to manage their employees’ expectations. For example, even if an employee doesn’t allege discrimination or other unlawful conduct, if the employee is dissatisfied with his or her compensation or advancement over time, this can lead to dissatisfaction, attrition and the added costs of finding a replacement employee. By clearly outlining what employees are entitled to expect from their employment, companies can manage their employees’ expectations from the outset and improve their retention rate for high-performing workers.
3. Protecting the Company’s Intellectual Property (IP)
Whether an employee creates intellectual property (IP) or has access to a company’s existing IP, entering into an employment contract can be critical for protecting a company’s intangible assets. Common IP-related protections in employment contracts include:
- Work-for-hire and assignment agreements
- Non-disclosure covenants
- Non-competition covenants
While these types of clauses can provide employers with clear grounds to go to court when necessary, they can also protect companies’ IP-related interests simply by clarifying employees’ obligations. For example, many employees are not aware that the ideas behind their work product become (or can become) their employer’s intellectual property. As a result, simply putting this in writing can help prevent employees from infringing when they might otherwise be inclined to do so.
4. Protecting the Company’s Business Relationships
Along with protecting companies’ intellectual property, employment contracts can also help protect companies’ business relationships. For employees in sales, business development, and other outward-facing positions, non-solicitation clauses can be essential tools for making sure that these employees do not try to take their connections with them when they leave.
Companies can use non-solicitation clauses to prevent employees from attempting to entice their coworkers to leave as well. For example, if an employee leaves to launch a startup, having a non-solicitation clause in place can help ensure that the employee does not attempt to take his or her coworkers along for the ride.
5. Addressing Termination of the Employment Relationship
For obvious reasons, termination of the employment relationship is typically when the relationship is its most fraught. Employees who lose their jobs can (and do) sue for various reasons. As discussed above, companies can use employment contracts to help mitigate their risk of being sued based on allegations of discrimination and other unlawful employment practices—or to defend against these allegations if necessary.
Companies can use employment contracts to address other aspects of termination as well. For example, employers can specify the terms of an employee’s severance in advance, and they can also specify the circumstances in which withholding severance pay is warranted.
6. Addressing Dispute Resolution and Other Common Issues in Business Contracts
The employment relationship shares many similarities with business-to-business relationships, and this means that employment contracts should share many similarities with other types of business contracts. For example, employment contracts should include provisions that address things like dispute resolution, jurisdiction and venue, and governing law. These provisions mitigate companies’ risk by providing certainty; and, in the event of a dispute, they can provide practical and strategic advantages as well.
7. Ensuring Contract Enforceability
When using employment contracts to manage risk, it is critical for companies to ensure that their employment contracts are enforceable. Different states have different laws regarding the enforceability of employment contracts, and certain terms—like non-compete clauses—are often subject to special rules, restrictions and requirements (and prohibitions in some cases).
Ensuring enforceability requires a clear understanding of the governing law, and this makes it essential to work with legal counsel who has specific experience drafting employment contracts in the relevant jurisdiction. If an employment contract isn’t enforceable—or even if its enforceability is questionable—this can prevent the contract from serving its intended risk management purposes.
Again, these are just examples. These are not the only provisions that employers can (and should) use to manage their employment-related risk. Just as comprehensiveness is key, customization is key as well—and these ultimately go hand-in-hand. By identifying their specific risks and then addressing each of these risks appropriately, employers can confidently rely on their employment contracts to help insulate them from liability.
Learn More from an Employment Contract Lawyer at Rendigs
Do you have questions about how your company can (and should) be using comprehensive employment contracts to help manage its employment-related risk? If so, we invite you to get in touch. We have extensive experience drafting and negotiating employment contracts for our clients, and we have extensive experience in employment-related litigation as well. To speak with an experienced employment contract lawyer at Rendigs in confidence, please call 513-381-9200 or contact us online today.
