13 Essential Employment Contract Provisions
Get familiar with what you should include in your next employment contract by looking over this handy guide.
There are as many types of employment agreements as there are industries. A machinist, a college professor, and a non-profit director will all have unique contracts specific to their vocation. But there are universal provisions off of which each unique contract builds. Things like scope of work, compensation, term and termination are indispensable in any employment agreement because they come into play 10 times out of 10. Other provisions like non-competition, works for hire, and confidentiality are protective measures. Still others act as incentives for valuable employees.
Below, we’ll discuss each type of essential employment contract provision that you should include when hiring.
Provision No. 1: Scope of employment. Each employment contract should contain a job description with particulars about the employee’s responsibilities. This provision should identify whether the employee can be demoted, transferred to a position with different responsibilities, or have their existing responsibilities modified or increased. Travel and relocation should also be discussed.
Provision No. 2: Compensation. The compensation provision will list out base salary, signing and production bonuses, and base benefits such as pension plans and health, life, vision, and dental insurance. It will also address the circumstances where employee salary can be reduced; these may include suspension or termination of an applicable professional license or the company coming under qualifying financial distress.
Provision No. 3: Term and termination. No contract lasts forever, but ideally we’d like to keep the good employees for the long run and weed out the bad ones. If your business isn’t employing at-will (meaning it can terminate at any time for any reason or no reason at all), there are several mechanisms to achieve this. One is a term-based contract with renewal provisions; renewals can be automatic with options not to renew, or can be elective by both parties mutually.
The flip side of that coin is to consider how an employment contract might be terminated before its natural end. Typical grounds for termination include employee’s criminal conduct or breach of the employment agreement; other grounds for termination can be added based on acts that are detrimental to the business, such as revocation of a practice license. Keep in mind that if you’re granting company equity to an employee, you may want to include a claw back provision in the case of termination for cause.
Provision No. 4: Probationary period. Some employment starts with a feeling-out process, a trial run to see if the applicant fits your business before offering him or her the benefits of a long-term contract. If you hire your employees on this basis, be sure to address all the conditions and guidelines of the probation period. These include the duration of the probation, training guidelines, and assessment standards. In all cases, notify the applicant of the results at the end of the probationary period to avoid an implication that they have (or have not) been retained long-term.
Many of these provisions center around retaining and maintaining the value that employees bring to the business. When a company invests in an employee, protective provisions ensure that the company remains in control of that investment.
Provision No. 5: Non-competition. Very common in employment contracts, “non-competes” prevent an employee from taking a position with the employer’s competitor, investing in a competitor, or establishing a competing business during employment and for a certain time afterward. The non-compete must be reasonable in time and geographical scope to be binding; a conservative non-compete might be for two years after employment and prohibit competition in a five-mile radius of the employer’s place(s) of business. If your non-compete is aggressive, you may want to include a blue-pencil clause in your contract.
Provision No. 6: Non-solicitation. The non-solicitation provision is an extension of the non-compete. It prevents an employee from soliciting, discussing, or accepting employment for competing business from another agent or employee of the employer.
Provision No. 7: Work for hire. This provision states that an employee who creates products, methods, or any other work that is ripe for intellectual property protection as part of employment automatically assigns ownership to the employer. In this way, the employer owns the creation and the underlying intellectual property at the outset.
Provision No. 8: Assignment. An assignment agreement is a catch-all that supplements the work for hire provision. It states that the employee also agrees to assign any creations made by the employee that fall outside the scope of the work for hire provision. This is an especially important provision if a personal creation was made using company equipment, funds, or on company time.
Provision No. 9: Best efforts. A best efforts provision reaffirms the employee’s dedication to benefiting the employer and devoting his or her full attention to business during work hours.
Provision No. 10: Confidentiality. Oftentimes an employee will need to be briefed on confidential or sensitive information in order to perform his or her work. Under a confidentiality agreement, the employee promises never to disclose this information to an outsider and to take reasonable steps to prevent inadvertent disclosure. This type of provision usually lasts well beyond the employment itself, in perpetuity unless and until the information itself ceases to become secret.
Provision No. 11: Alternative dispute resolution. If a conflict arises over the employment agreement, employers will often require mediation before either party can sue. This encourages a candid out-of-court discussion and can save significantly on time and legal expenses. If mediation doesn’t solve the issue, some contracts call for the dispute to be handled by binding arbitration rather than litigation for a more expedient, cost-efficient resolution.
Provision No. 12: Employee benefits. Benefits make for a more attractive job offer, and can often sway a potential employee where salary alone cannot. In addition to insurance and pension, companies sometimes offer stock options – or outright equity – to high-level employees. The equity may be granted according to a vesting schedule as part of a “golden handcuff,” or as an option with a fixed price. Most incentive packages have a one-year cliff before the employee can begin to realize any equitable benefit. If you’re offering equity, consider including a tax distribution to cover the employee’s additional taxes as a result of receiving the benefits.
Provision No. 13: Employee Liability Protection. Extending a limited liability company’s protection to an employee takes the pressure off when they have to make important decisions with a company-wide effect. Being free to make tough decisions without risking their personal well-being is essential to productive employment for a manager or director. Employee limited liability has two components: director’s and officer’s insurance (D&O insurance) and bylaws that provide for agent indemnification.
Mark Turner is an attorney at The Gertsburg Law Firm. Get more legal tips for your business on The Gertsburg Law Firm blog, with new articles every week.