Federal Law > Managing Employees > Employment Agreements

Employment Agreements


At-will employment. Most employees are retained "at-will" with their employers. Where an employee does not have a contract for a set duration, the doctrine of at-will employment permits an employer to terminate an employee at any time for any nondiscriminatory reason, with or without notice. For over a hundred years, many states have followed the doctrine of employment at-will thereby providing employers with tremendous latitude in deciding which employees would be retained and which employees would be terminated. Employees, in turn, had few legal rights of recourse against an employer for terminating their employment provided it was done for a nondiscriminatory reason and they were, in fact, employed at-will.

Employment contracts may remove an employee from "at-will" employment status. Employment contracts typically set forth a duration or term of employment. The term of employment may remove the employee from "at-will" status. Also, employment contracts may provide that the employee can only be terminated for "just cause". Once the employee is no longer employed "at-will", the employer is legally bound to establish "just cause" for the employee's termination. "Just cause" is evaluated in each situation based upon the pertinent facts related to the reason for termination. Employers should carefully evaluate the need for an employment contract for a set term before deciding that one must be drafted and signed by an employee. Please consult with your risk management counsel to determine the law in your state.

Employment contracts do provide both the employer and the employee with some stability in the employment relationship. At-will employees and employers may terminate at any time for any reason. However, parties with an employment contract have some assurance that the contract term will be fulfilled. If it is not, the injured party may pursue a claim for breach of contract.

Among the terms commonly evaluated for inclusion in an employment contract are the following:

Preamble: The preamble to an employment contract generally recites the identities of the parties, the date upon which the agreement is codified, and a general summary of the reasons for the existence of the contract (i.e., the employee wishes to provide services and the employer seeks those services in furtherance of its business).

Term: The term provision in a contract recites the duration of the agreement. Once a term is set, the relationship between the parties may no longer "at-will" employment.

Description of duties and responsibilities: This section of the contract describes either in general or specific terms the duties and responsibilities assigned to the employee. Care should be taken to draft inclusive language to ensure that the employer is reaping the "benefit of the bargain" in contracting with the employee. Often, if each specific duty cannot be delineated, an employer will use a phrase like ". . .and additional responsibilities as may be assigned by the employer from time to time" to encompass the potential that additional responsibilities will be assigned at a later date.

Recital of consideration: Recital of consideration is a critical clause of an employment contract. Each party must offer consideration to the other in order for the contract to be legally binding. In the employment arrangement, typically the employee is offering the employee's efforts and services for which the employer is offering compensation. In order to ensure that adequate consideration has been offered for the employment contract, the parties will normally recite a clause which reads as follows:

"In consideration of the terms, conditions, and the mutual promises offered herein, the parties do now covenant and agree as follows:"

By utilizing such language, the employer and new employee essentially "cover the waterfront" to ensure that adequate consideration is offered for their contract.

Exclusivity clause: In order to ensure that the employee devotes his or her full-time, best efforts to the assigned responsibilities, many employment contracts contain a clause designed to ensure that the employee's full time and attention will be devoted to the job. The exclusivity clause requires that the employee's full energies, interests, abilities and time be devoted to the performance of the employment obligations and that the employee will not render services of any kind for compensation to others without express written consent of the employer.

Compensation provisions: Along with the recitation of general duties or responsibilities, the contract also contains a corresponding clause reciting the amount of compensation to be paid to the employee as full consideration for the services offered. In more sophisticated employment arrangements, a recitation of compensation can include: salary, bonuses, stock options, deferred compensation, and other incentives which broadly fall within the section on compensation.

Employee benefits: Employee benefits are handled in a variety of different ways in employment contracts. Some contracts simply recite the employee's eligibility for the usual benefits and conditions of employment generally available to similarly situated executives or employees. Other contracts define specifically the benefits which will be made available (i.e., health, life, 401-k, etc.).

Vacation: Normally a section on vacation or personal time off is also contained in an employment contract, sometimes in the benefits section.

Death benefits/retirement: Additional sections in a contract may address death benefits for the surviving spouse and a detailed recitation of retirement provisions, including percentage of salary continuation and one-time severance upon retirement.

Business expense reimbursement: For executives, there may be a clause which discusses reimbursement for reasonable business expenses.

Illness/disability compensation: Employment contracts, particularly for upper level managers and executives, will contain illness or disability compensation clauses designed to protect the manager from income loss during a specified time of temporary disability. If the company does not have a particular long-term disability insurance policy, many times the provisions in the employment contract will discuss a percentage of gross income continuation for a limited period of time.

Termination: Because most employment contracts are typically for a set duration, the contract will contain a provision which discusses the terms upon which termination of the employee may result. Some of the common terms which are articulated as "just cause" for termination include the following:

Incompetence, theft or embezzlement, insubordination, substance abuse, misrepresentation, failure to comply with applicable government regulations, etc.

On occasion, additional grounds are negotiated as providing "just cause" for termination. An employer should be careful in negotiating these types of clauses. The failure to do a comprehensive job of articulating grounds for termination could place the employer in the uncomfortable predicament of running into a termination roadblock where the contract failed to articulate the now apparent reason for discharge.

Frequently, this section of the contract will define what salary and benefits, if any, the employee will be entitled to upon termination of the contract. In addition, clauses are occasionally included which also demand the employee's ongoing cooperation with regard to business matters in which the employee was involved prior to termination.

Rights in the event of breach of contract: This section normally describes the rights of each party in the event that the other breaches the contract, including alternatives for specific performance of the contract, liquidated damages, and other remedies.

Confidentiality: Many times, employees in executive positions will be asked to sign an employment contract which requires the non-disclosure of confidential information learned during the term of employment. Typically, the confidentiality clauses require that the employee not disclose sensitive, confidential information learned during the course of employment or for a specific period thereafter following termination. It is wise to define confidential information with some degree of specificity to ensure that the clause is understood and enforceable. An example of a typical non-disclosure clause is atthe end of this chapter.

Covenant of non-competition: Where an employee has, or will develop, unique relationships with customers, it is not uncommon for an employer to request the execution of a covenant of non-competition with the employee. Upon signing such a covenant, the employee typically agrees that he/she shall not engage in competition with the employer for a specified period of time following termination of employment. Covenants of non-competition are normally based upon the employer's perception that the employee could materially harm the success of the company's business should he/she work for competitors immediately after leaving the company. Many jurisdictions generally approve of such covenants provided they satisfy the following criteria:

A. They are clearly written and understood.

B. They have a limited geographical scope focusing on the area of the employer's business and, in particular, the business area previously assigned to the employee in which he/she has had substantial contact and has formed significant customer relationships.

C. The time limitation assigned to the covenant must also be reasonable (i.e., in many states, a reasonable period of time for the covenant restriction runs from one to three years).

D. The clause must define what "competition" is by reciting the specific acts and types of acts in which the employee must refrain from engaging.

E. The non-competition clause must define with whom the employee must refrain from engaging in business with (i.e., any person, firm, business, corporation, etc.)

Property rights: Depending upon the employee's position, some contracts also address intellectual property rights and again restrict an employee's right to use, take or otherwise disclose certain intellectual property expressly reserved as the exclusive property of the employer.

Governing law: Normally, the employment contract will specify which state law will govern any questions arising concerning the substance of the employment contract. Typically, it is the state in which the employer operates its principal place of business.

"Zipper" clause: A zipper clause is simply a clause which states expressly that the entire contract is contained in the preceding written provisions. That is, the parties have not left anything to chance and have completed their agreement in writing. With such a clause, neither party is permitted to come back later and claim that there were additional understandings which were a material part of the contract, but which were inadvertently not included. The zipper clause may also include a provision which also states that any modifications to the contract must be mutually agreed upon and placed in writing in order to be effective.

Employment contracts, similar to employee handbooks and manuals, can be extremely helpful tools in the employment relationship for carefully setting forth the terms which will govern the conditions of employment. However, because of the legal implications inherent with such documents, an employer would be well-advised to seek the assistance of legal counsel in drafting an employment contract.

Supreme Court Upholds Arbitration of Disputes: Employers Can Opt to Keep Employees Out of Court

The U.S. Supreme Court has made it easier for employers to resolve workplace disputes through the use of arbitration procedures rather than the courts. Ruling that employment agreements containing arbitration provisions are enforceable under federal law, the Supreme Court settled conflicting opinions among the lower courts as to whether employers could require employees to submit disputes to arbitration rather than file lawsuits.

The decision gives broad protection to arbitration agreements under the Federal Arbitration Act and provides employers with good reasons to consider instituting mandatory arbitration programs. Employers now have a reliable alternative to courtroom litigation as a means to redress employee complaints. Circuit City Stores, Inc. v. Adams (2001).

Supreme Court Decision. The Supreme Court decided the FAA indeed applies to all employment contracts, except those relating to employees working in interstate transportation, such as seamen and railroad employees. Since the plaintiff was not involved in transportation, the Court ruled the FAA applied and the arbitration agreement he entered into was valid and enforceable.

While the Supreme Court left open many questions about mandatory arbitration of workplace disputes, the Circuit City case certainly enhances the enforceability of agreements to arbitrate between employers and employees. Under the FAA, enforcement of agreements is streamlined and awards are confirmed. Additionally, the FAA authorizes a court to suspend a lawsuit when an issue in the case is subject to arbitration. Finally, and perhaps most importantly, the FAA preempts state laws aimed at limiting or restricting arbitration agreements. For example, the Supreme Court previously has ruled that the FAA preempted a Montana law requiring arbitration clauses in contracts to appear on the first page of the agreement and in underlined capital letters.

No guarantee of the enforceability of all arbitration agreements. The Circuit City decision does not guarantee the enforceability of all pre-dispute arbitration agreements. Until there is further clarification of the decision, there is room for exceptions depending upon the way the arbitration agreement is drafted and the process is handled. Furthermore, in states under the jurisdiction of the Ninth Circuit, discrimination claims under Title VII of the Civil Rights Act of 1964 still may be exempt. Also, the FAA expressly provides that arbitration agreements must be subject to the same defenses as other contracts and may be voided based on unconscionability, fraud, and duress.

This sample form is provided as a general guideline for your review only and with the understanding that neither the publisher nor the writers are providing legal advice or other professional service. The law changes regularly and varies from state to state, and you should not rely on or use this or any form without consultation with a competent attorney in your state.


________________ (insert employee's name) agrees that during the term of his/her employment and for one year thereafter, any information, data, figures, projections, statistics, customer lists, tax records, personnel histories, company strategic plans, promotions, accounting procedures, and business estimates shall be considered and preserved as confidential, private, privileged records of the employer and will not be divulged to any other individual or entity without prior express written authorization and approval of the President of ________________ (insert company name). The parties recognize that the employer will incur irreparable harm and will be entitled to injunctive relief by a court of competent jurisdiction should the employee breach or threaten to breach this confidentiality provision. The parties hereby stipulate that there exists no adequate remedy at law should this provision be breached. In addition, the parties recognize that confidentiality of the aforesaid information dramatically affects the successful business of _______________(insert company name) and its goodwill and that breach of the terms of this section constitutes a material breach of the employment agreement and will be grounds for termination for cause.
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