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Employment Contracts and Compensation Agreements

Note: You can review sample employment contracts and compensation agreements in FindLaw's Corporate Counsel Center.

An employment contract can take the form of a traditional written agreement that is signed and agreed to by employer and employee. More frequently, however, employment agreements are "implied" -- from verbal statements or actions taken by the employer and employee, through company memoranda or employee handbooks, or via policies adopted during the employee's employment.

Termination and "At Will" Employment

Employment contracts are most often used by employees to show that the employer's right to fire an employee was limited.  In most states, employment is generally considered "at will," meaning that the employer can terminate employment (or the employee may voluntarily leave) at any time. An employer's right to fire an employee may be limited, however, where the employee can show that the employer entered into either an explicit contract to retain the employee for a certain length of time, or an "implied contract" which dictates that employment will be terminated only for specific disciplinary reasons.  For example, an implied contract may be enforced against the employer where a policy or handbook has been distributed to the employee, and the employee, knowing the terms of the policy or handbook, has opted to continue working for the employer.

Many states also recognize that a verbal statement by an employer, such as "you'll be here as long as your sales are above budget," may create a binding contract of employment.  The enforceability of such verbal contracts is limited, however, by a legal doctrine known as the "statute of frauds," which provides that any verbal agreement that cannot be carried out in less than one year is invalid.  So, in the above example, because the employee conceivably could have fallen below budget and been fired within one year, the agreement would be enforceable, even if the employee was not actually fired. A verbal contract must also be specific in order to be enforceable.  A statement such as "You'll have a job here as long as you like" generally will not be enforced. 

Finally, a few states recognize an implied contract of employment where an employer has engaged in a "course of dealing" over a period of years, for example, by keeping employees on as long as they maintained certain standards of performance.  As a result, an employee may claim that he or she may not be fired as long as he or she continues to meet those standards.

Employment Contracts: Other Considerations

Employment contracts, whether written or implied from employee handbooks or policies, may also provide the terms and conditions of:

  • Health benefits;

  • Vacation and sick leave;

  • Employee grievance procedures;

  • Employee behavior after termination of the employment relationship

In terms of governing an employee's behavior after employment has ended, employment contracts can limit the ways in which an employee may use confidential or proprietary employer information, or restrict the employee's right to compete with the employer. Such non-competition agreements are particularly difficult to enforce, however, and many states have enacted statutes specifically limiting their effectiveness.  In general, the scope of such an agreement, whether the geographic area covered or the length of time that it lasts, must be no broader than necessary to protect the employer's business.  In addition, while a covenant not to compete may typically be imposed on a new employee as a condition of employment, if it is imposed on an existing employee it must be supported by some independent consideration beyond a simple promise of continued employment, such as a raise, a bonus payment, or improved commission terms.

Getting Legal Help with an Employment Contract

Whether you are considering entering into a written employment agreement, or would like to learn more about your rights under an "implied" employment contract, consulting an employment law attorney can go a long way towards understanding and protecting your legal rights.    

Employment contracts take many different forms.  All employees at a company may be asked to sign the same form contract, or each employee may have a unique contract with the employer, applicable just to his or her employment.  As is also common in smaller companies, an employer and an employee may simply have an oral agreement regarding the kind of work the employee will do, for how long, and at what rate of pay.  Sometimes there is no written or oral agreement, but the behavior of the employer and the employee can be viewed as an "implied" employment contract.

Most employment contracts have common elements such as the employee's start date, salary, and benefits.  Other provisions that often appear in employment contracts are listed here, so that you can think about what kind of employment contract is agreeable to you before you sign your next employment agreement. An employment law attorney can advise you about the pros and cons of agreeing to the various provisions, and may also suggest other terms to include.

1. CONFIDENTIALITY AGREEMENT.  An employee confidentiality agreement is a contract (or part of a contract) in which the employee promises not to share any information about the details of the employer's business or the employer's secret processes, plans, formulas, data, or machinery.  Usually a confidentiality agreement lasts even after the employee no longer works for the employer.

2. NONCOMPETITION AGREEMENT.  In the noncompetition clause, the employee agrees that for a certain amount of time after he or she stops working for the employer, the employee will not become employed by a rival company or any company engaged in a similar type of business, and the employee will not set up a company that will compete with the employer's business (or solicit the employer's customers). Usually the noncompetition clause is limited to a particular geographic area.

3. OWNERSHIP OF INVENTIONS.  This provision applies to employees who invent things as part of their jobs.  In this part of the contract the employee agrees that anything he or she invents at work (or during a set period of time after termination) becomes the employer's invention, not the employee's own invention.  Additionally, employees usually agree to assign their inventions to the employer, cooperate with the employer in getting inventions patented, and keep information about the invention confidential like any other trade secret.  In return, sometimes the employer agrees to share with employee-inventors a percentage of the royalties paid for inventions.

4. BEST EFFORTS.  Although it is often just assumed that the employee will work hard for the employer, sometimes employers add a best-efforts provision to the employment contract.  It states that the employee promises to work to the best of his or her ability, and to be loyal to the employer. Sometimes it also states that the employee specifically agrees to make suggestions and recommendations to the employer that will be of benefit to the company.

5. EXCLUSIVE EMPLOYMENT.  In this provision, the employee promises that as long as he or she works for the company the employee will not work for anyone else in the same or similar type of business.  It may also extend to a promise not to be a shareholder or director in a similar business, or even to provide services voluntarily to a competitor business.

6. NO ADDITIONAL COMPENSATION.  The "no additional compensation" clause states that if the employee becomes an elected director or officer of the company or serves on a company managing committee, the employee will not be entitled to additional compensation for doing that work.

7. NO AUTHORITY TO CONTRACT.  Sometimes this part of the contract is called the "agency" provision.  It makes clear that the employer and employee have an employment relationship only, not an agency relationship; the employee has no right to enter into a contract or otherwise obligate the employer, unless the employer gives express written consent to do so.

8. TERMINATION.  A standard part of any employment contract is the "termination" clause.  It states that either party may terminate the employment contract for any reason by giving a certain amount of notice, such as two weeks' notice.  It may also give the employer the right to just terminate the contract without notice if the employee violates the contract in any way.  Another aspect of the termination clause is a statement that the employer has the right to terminate the contract if the employee becomes permanently disabled because of ill health or physical or mental disability such that the employee can no longer do the job.

9. ARBITRATION.  Arbitration clauses are found in many types of contracts, including employment contracts.  In this provision, the parties agree at the onset of the relationship that, if they ever have a dispute about any aspect of the employment relationship, they will submit that dispute to arbitration rather than seek resolution by a court of law.  The "arbitration" clause may include details about the arbitration, such as whether the arbitration decision will be binding and how the parties will find an arbitrator when the time comes.

10. CHOICE OF LAW.  Employment laws vary from state to state.  Some states have laws that are generally viewed as more favorable or beneficial to employers than employees, or vice versa.  The "choice of law" provision in an employment contract is an agreement that, if the parties ever have a dispute that results in a lawsuit, the laws of a particular state will govern it, no matter where the lawsuit itself is filed.

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