Advantages and Disadvantages of Employment Agreements

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 What is an Employment Agreement?

In the U.S., most employee-employer relationships are considered “at-will” arrangements. This means that the employer may terminate their employee at any time and for any reason, so long as that reason is not illegal, unconscionable, and/or against public policy. It also means that an employee may resign from their position at any time and for any reason as well.

Oftentimes, these two parties will enter into an employment agreement to outline the obligations that each party has to the other within this professional relationship. Thus, an employment agreement is simply a type of contract formed between an employee and employer, which governs the terms of employment. Once both parties have signed the employment agreement, the contract will become binding and legally enforceable in court.

For example, an employment agreement may contain provisions that tell an employee their salary, how often they should be paid, and the number of hours they are expected to work each week. If an employer refuses to pay an employee the agreed upon amount or repeatedly fails to pay an employee at the end of each pay period, then the employee may sue their employer for breach of contract.

It should be noted that while not every employment arrangement may be governed by such an agreement, it can be useful to have one in place in order to clarify the parties’ responsibilities and to quickly resolve any potential disputes that may arise in the future between the two parties, such as the example in the above scenario.

Lastly, as is the case with any sort of contract, there may be both advantages and disadvantages to entering into an employment agreement. Therefore, if you are starting a new job and need to sign or would like to draft an employment agreement, you should speak to a local employment lawyer first about the benefits and risks of creating such a contract.

What Are the Advantages of an Employment Agreement?

As previously mentioned, there may be several advantages and disadvantages to signing an employment agreement. One of the main advantages that an employment agreement can offer is that it will enable the parties to describe an employee’s position in explicit detail. So, for example, if an employer wants to ensure that an employee can only ask for a raise once per year, then the parties can specifically include this condition in the employment agreement.

Having the freedom to incorporate these kinds of provisions in a contract is important since it will allow the parties to negotiate with one another until they reach a compromise. Being able to tailor agreements to include minute details can be particularly useful for employers who need to protect specific aspects of their business, such as trade secrets and patented or copyrighted materials.

Another advantage to creating an employment agreement is that if a dispute arises over the terms of employment (e.g., how often an employee should be paid), the parties can quickly review the terms of their agreement in order to resolve the issue as opposed to having to ask a court or lawyer to intervene.

Additionally, in cases where the parties cannot resolve their employment dispute by simply reading the terms of an employment agreement, the agreement itself can be submitted to the court as evidence if necessary.

One other advantage to having an employment agreement is that it can be used to establish a favorable work relationship between the employer and an employee. For instance, employers tend to believe that having an employment agreement in place provides the employee with a clear set of objectives and structure in the workplace, whereas for an employee it can demonstrate job security and offers a sense of employment stability.

Some examples of provisions that may be beneficial to incorporate in an employment agreement for both employers and employees include the following:

  • Dispute resolution clause: An employment agreement should contain a clause regarding how to resolve employment-related disputes. Although the parties may reach an agreement as to how they would like to resolve a dispute if one should arise, many employment agreements typically use arbitration as their primary method of dispute resolution. However, the parties can also agree to resolve disputes through mediation or through the courts instead.
  • Fringe benefits provisions: Fringe benefits are various kinds of work benefits that an employee may receive in addition to their salary. For instance, health insurance, pension benefits, life insurance, and/or dental insurance are all types of fringe benefits. Fringe benefits can also include vacation time, paid time off, sick days, expense accounts, and/or use of an employer’s vehicle like a company car.
  • Non-disparagement clause: The parties may also agree to incorporate a non-disparagement clause in their employment agreement. A non-disparagement clause provides that an employee will promise to not speak ill of an employer in exchange for receiving a benefit, such as a severance package, in the event they are fired.
  • Restrictive covenants: In an employment context, a restrictive covenant usually refers to a provision wherein an employee agrees not to compete with an employer. These covenants are sometimes called, “non-compete provisions.” Regardless of which title is used, both terms mean that an employee agrees not to compete against their employer within a particular geographic region for a certain time frame if they leave their job.
    • Depending on the state, this could mean that an employee agrees not to work with or solicit any of their employer’s marketplace competitors. On the other hand, in some states like California, restrictive covenants are mostly forbidden or unenforceable.

What are the Disadvantages of an Employment Agreement?

One of the main disadvantages of an employment agreement is that its terms may place certain restrictions on the flexibility of the employer-employee relationship, which can make it difficult for the parties to renegotiate or modify their agreement. Of course, this type of disadvantage will largely be contingent on the provisions of a particular employment agreement.

Another disadvantage to having an employment agreement is that employees who wish to leave an employer for a better or different opportunity may be hindered from doing so if their agreement specifies a set period of time for when an employee’s position ends. In which case, an employee may need to finish out their contract before they can leave their employer or else face legal consequences (e.g., breach of contract).

While an employee who finds themselves in such a situation may be able to amend or renegotiate the terms of their employment agreement, there is no guarantee that an employer will not seek damages for breach of contract or that their new opportunity will not be gone by the time their current employment agreement expires.

One last disadvantage of having an employment agreement is that it forms an implied promise between the parties to act in an honest and fair manner when forging an employer-employee relationship. Although this may sound like a positive feature, in legal terms, it actually refers to an obligation that binds both parties to the agreement and can result in legal ramifications if either party breaches the terms.

Do I Need a Lawyer for Help with Employment Agreement Issues?

As discussed above, there are many advantages and disadvantages to signing an employment agreement. Again, once the agreement is signed, it will become a legally binding contract. Therefore, you should strongly consider hiring a local employment contract attorney to review the terms of your employment agreement before you sign.

An employment law attorney can make sure that the agreement is fair and legally enforceable. Your attorney can also ensure that it contains the specific provisions that you want, and if not, can assist you in negotiating or renegotiating a more favorable set of terms.

In addition, if you have been accused of breaching an employment agreement or would like to file a lawsuit against another party for breaching an employment contract, your attorney can help you with either one of these procedures as well.

On a final note, it is extremely important that each party retains their own separate attorney to review an employment agreement. This can help protect you from future legal disputes over an employment arrangement and/or signing an employment agreement that has unfavorable or unconscionable terms.


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