Employee-employer relationships are usually “employment at-will.” This means that an employer may terminate an employee at any time (other than for an illegal reason), and an employee may resign at any time.
Employers and employees may want a written employment agreement to govern employment. Employment agreements cover matters such as wages, bonuses, and hours of work. Employment agreements are contracts. Courts enforce employment contracts if they are breached.
An employment agreement is a binding contract between an employer and that employer’s employee. The contract covers specific aspects of employment. These include wages, health insurance benefits, pension benefits, and bonuses. The agreement provides grounds for termination. The agreement may also provide for a severance package in the event the employee is terminated.
Specific provisions in an employment agreement include:
- Length of Employment. The agreement can specify a work start date and end date. The agreement can also specify how many hours the employee is to work per day, per week, or month;
- Salary. The agreement can specify how much the employee is to be paid in a given time frame. The agreement can also state the frequency of salary payment, as well as what deductions the employer will make from the salary. The agreement can also contain a provision for severance pay;
- Fringe benefits. Fringe benefits are extra benefits designed to supplement an employee’s salary. Common fringe benefits include (among others) life insurance, dental insurance, health insurance, and pension benefits (e.g., a 401k). Fringe benefits may include paid time off for employee sickness, vacation, or personal use. Other fringe benefits include use of a company car or expense account. Fringe benefits also include an employer’s contribution to an employee’s educational degree;
- Promotion. The contract may specify when an employee can be promoted, or receive a bonus;
- Resolution of Disputes. An employment agreement may contain a provision as to how disputes under the agreement are to be resolved. Disputes can be resolved in several ways. The parties choose the method they prefer. The parties may contract to have disputes submitted to mediation, or binding arbitration. The parties may provide that a dispute can be submitted to a court;
- Restrictive Covenant. The agreement may include a provision known as a restrictive covenant. Under a restrictive covenant, the employee agrees upon termination not to compete with the employer. The employee agrees not to seek employment with, or solicit, the employer’s marketplace competitors. Restrictive covenant provisions contain a geographic area in which the employee’s activities are restricted. These covenants contain an end date; and
- Non-disparagement. The employment agreement may contain a non-disparagement provision. Here, employee agrees not to speak unfavorably about the employer. In exchange, the employee receives a benefit, such as severance pay.
The parties can negotiate these provisions before employment begins. This allows the employment relationship to proceed without either party having to address issues later on. Having an agreement in place fosters cooperation going forward. This is because the terms of the agreement are binding and cannot be unilaterally revoked or changed.
An employment agreement sets clear expectations regarding what is required of each party. The agreement’s “promotion” and “termination” provisions make clear what constitutes satisfactory and unsatisfactory performance. The agreement also makes clear what the employer must do, such as provide a bonus, in the event an employee exceeds expectations.
By including provisions relating to termination, severance, and resolution of disputes, an employment agreement allows the parties to wind up their relationship in an orderly and predictable fashion. In the event that a dispute arises as to any matter, the resolution mechanism (mediation, arbitration, or litigation) provided for by the parties allows for the dispute to be settled.
One disadvantage of an employment agreement is that if one or both parties believe a provision of the agreement should be changed, the parties must work together to renegotiate the change. Parties may find renegotiation to be burdensome, especially if more than one change is wanted.
A potential disadvantage of an employment agreement is that each party, under the agreement, has an implied duty to act in good faith and to deal fairly with the other party. This means the parties must act honestly toward each other. Each party must use reasonable efforts under the contract. fulfill the contract’s purpose. A party who breaches the implied duty can be sued by the other party.
If you want guidance on whether to enter into an employment agreement, you should contact an employment law attorney. An experienced employment attorney near you can assist you in ensuring the terms of the agreement are clear and fair. The attorney can also assist you if the other party breaches the agreement.