Pros and Cons of Employment Contracts
Monday, October 6th, 2008
An employment contract is an agreement between the employer and employee to adhere to particular details pertaining to the job at hand. There are many things that may go into an employment contract including the responsibilities of the employee, the salary, term of employment, benefits, non compete clauses, non disclosure of information, rights to work made for hire, dispute resolution and termination procedures. As a general rule, most companies do not require employment contracts of most employees. However, there are typically very specific positions within the company where employment contracts make a lot of sense. Generally these involve executive level employees or highly trained technical staff where it will be more costly to replace them.
Benefits of Employment Contracts
For particular employees that will cost the company a lot of money to replace, employment contracts can be very beneficial. This is especially true in the case of highly trained specialists. The employment contract will determine the term of employment by citing a finite length of employment, giving specific notice requirements for terminating employment or assessing penalties for defaulting on the agreement. It may also address performance requirements that will give the employee incentive to be highly productive in their role.
An employment contract addressing non-compete agreements and confidentiality issues can be extremely important if the employee is privy to important trade secrets. The contract will dissuade an employee from revealing those secrets due to the penalties involved in doing so. For example, even if the term of employment is not addressed in the contract, if an employee leaves the company, they may not go to a competitor for a particular period of time nor can they disclose any confidential information without risking severe personal monetary losses.
A benefit to the employee translates equally well into a benefit for the company. Some employees like the job security an employment contract affords and would be therefore more willing to hire on with a company that is willing to supply one. This is great a great incentive for the company and there is a higher possibility of acquiring quality, skilled personnel who find he security aspect appealing.
Disadvantages of Employment Contracts
The employment contract is never one sided and it binds the company just as much as it does the employee. This may be of no concern to the employer but if the company needs are altered or there is a significant change in focus, the initial requirements for the employee may need to change drastically. The company, however, is still bound by the contract and will either need to renegotiate or abide by it even if it is no longer beneficial. If the employee does not agree to alter the terms of the agreement the company is left with either having to “buy out” the contract or see it through to the end.
An employment contract is a legally binding agreement that leaves the company open to possible litigation in the case of a disagreement or perceived breech. Even if the company prevails in a lawsuit, there are potential losses that will be incurred in the form of loss of productivity, time and legal fees. If the company is found to be in default of the agreement, higher penalties, especially monetary compensation to the employee as well as fines may be assessed which can be financially damaging to the company.
Prior to determining whether or not an employment contract is the right way to go, the benefits versus the risks must be assessed. A contract is never required but can be useful in some but not all situations. A company should not have a stringent policy regarding the use of employment contracts either way. Instead, their use should be considered on a case by case basis.
