What is an Employment Contract?
Employment contracts are commonly used to provide job security and protect both the employer and the employee. An employment contract is a legally binding agreement between an employer and an employee that describes the terms and conditions of employment, including the rights and responsibilities of both parties. In general, employment contracts should be viewed as offers to the employee which, once accepted, become binding. Generally speaking, they govern the employment relationship between the employer and the employee and may often be incorporated into a written and/or verbal agreement. Regardless of the form of the agreement, in order for there to be an actual contract, the parties really must be "like minded." In other words, both parties must understand and agree on the essential terms.
Employment contracts vary from offer letters, which typically cover basic terms and conditions or an existing employment relationship, and this employment agreement may be amended from time-to-time . Often, the employment contract covers things like the following: Some employment contracts are really outline or plans that result in something a lot more comprehensive. Employers should take special care particularly when offering benefits. While it may be perfectly legitimate to offer a benefit, if it is not written appropriately it could bind the employer to it. Whether or not there is a legal obligation regarding a proposed benefit, if an employer does not intend for it to be a contractual requirement, it should clearly state so in the contract. Also, like other contracts, there may be no requirements that the terms be offered to all employees. However, if an employer is trying to recruit a great new employee, consider that while offering a benefit that is more generous than the employer’s normal offering may help secure the employee, the employer must be sure to clarify what will happen after the initial term of employment when the special offer period ends.
What is “At Will” Employment?
At-will employment means that the employer has the ability to terminate the employment for any reason. The policies most employers have regarding employees such as codes of conduct or job performance do not limit the ability to terminate the employment, such as requiring an employee to be terminated subject to a warning system, unless the warning system is incorporated into the employment contract. Generally, in any at-will agreement, the employer may terminate an employee for any reason and the employee may leave his or her employment with or without notice or cause. As far as the termination, the company cannot terminate one employee and keep another employee in similar circumstances if the termination violates an anti-discrimination law. However, the employer generally has no liability for terminating the employee without notice or cause. An employer may then hire another employee to replace the terminated employee who left voluntarily for personal reasons, but it can put the old position out for applicants if there is no similar position open. The employer may temporarily reassign the old position to another employee until the hiring of a new employee is finalized.
Main Differences between Contract and At-Will
One fundamental distinction between employment contracts and at-will agreements is the amount of job security each affords to the employee. While at-will employees can expect to be terminated at any time and for virtually any reason, employees who sign contracts with their employer usually obtain explicit protection against termination for specified reasons. A common example of this is an educator who secures a contract with a school district. In exchange for the employee’s commitment, the district promises not to dismiss the educator without cause until the employment contract concludes.
Contractual provisions often dovetail with exclusive grounds for termination. In other words, an employer who signs an employment contract may only terminate an employee for the reasons specified in the document. Where no specific reasons appear in the contract, employers must tread carefully to avoid possible contract disputes or employment litigation. This means that employers are much better off identifying the reasons for which a person can be fired and only dismissing that person when they realize the conditions described in the contract. For example, while at-will employees can be fired for poor performance or misconduct, an individual with an employment contract cannot be dismissed on those grounds unless the contract explicitly prohibits such behavior. Even if the employee exhibits constant tardiness, the employer still cannot terminate employment unless the contract specifically states that such conduct is grounds for dismissal.
Pros and Cons of Employment Agreements
Both employers and employees can benefit from the certain security of an employment contract, however, there’s another side to this arrangement. While employers secure the safety of knowing employees can’t leave their jobs without notice, they also can’t terminate employees without cause. Similarly, employees are assured of their position, provided they uphold the terms of their contracts, but there’s less room for performance-based complaints. If either party defaults on the contract, the other has legal recourse.
Advantages for Employees
Aside from guaranteed employment for the duration of the employment contract, which can last from a year to a few years, employees get a higher degree of security with an employment contract. Employers are less likely to make quick decisions on unwelcome behavior, like insubordination or harassment. Because termination procedures may take a long time when considering whether or not the behavior breaks the terms of the contract, employees have a longer window in which they won’t have to search for a job. In addition, performance expectations, salary, vacation time, workplace conduct and benefits are all outlined in the contract, thereby offering employees a sense of certainty that’s often unattainable in at-will agreements.
Advantages for Employers
Aside from the obvious advantage of being able to terminate employees for any reason, at any time, with no notice – employment contracts aren’t all bad for employers. Like employees, employers have a sense of security on their end when a contract is signed. It takes a lot of the guesswork out of maintaining an employment relationship. Employers also enjoy the security of not having to explain "why?" to their employees if they have to terminate the contract. When employees have contracts, they’re required to find a new job. For employers who don’t want to deal with the aftermath of a firing, this is a bonus.
Disadvantages for Employees
Aside from the initial lack of flexibility and control over one’s career, employees in employment contracts give up a lot of freedom. Whether it’s vacation time, salary increases, promotions, or work-from-home requests, they have to deal with the terms of their agreements. In some cases, this can lead to an unhappy work environment. Employee contracts also have a precedent of judicial discretion. Even though the terms of employment are outlined in the contract, judges can choose to modify or dismiss them. This is done on a case-by-case basis, meaning it’s difficult to know how a judge will respond when contractual violations are brought to court.
Disadvantages for Employers
While employees can expect some sort of severance, employers really don’t. It doesn’t matter how egregious an employee’s behavior is when they default on the contract, they’ll only see 50%, or even 25% if the former employer is lucky. There’s also the fact the burden of proof goes to employers when defending themselves for firing an employee under an employment contract. This is when the clauses of the contract become important. While they’re designed to protect employers, they can more easily be undermined than in at-will situations. Finally, work-arounds like accepting an employee’s resignation or lay-offs don’t apply in this case. If an employee with a contract needs to be let go, employers have to do so legally and according to the terms of the contract.
Pros and Cons of “At Will” Employment
For employers, at-will contracts offer flexibility and the ability to terminate employment when needed. Since no cause is needed, companies that change in circumstances or direction do not have to be concerned about hiring or firing costs. Employers can also quickly adjust their workforce to respond to supplier needs and customer demands.
However, for employees, there are downsides to at-will employment contracts as well. While an employee may be through with an organization, it is closer to the beginning than the end. At-will employment agreements provide no assurances that the employee will continue to be employed, even if they are doing a good job. Since no cause is needed, an organization can terminate based on any number of reasons, or even based on no reason at all . Such a situation is frustrating for a dedicated employee who may not have time or the inclination of finding a new position quickly.
Another drawback for employees relates to opportunities for advancement. Employers can tell an employee that the person is not a good fit for management or that the position that they applied for is no longer available. Employees may not be able to receive promotions or pay increases based on the assertion that the organization is tightening its hiring or spending budget.
Employees should be wary of any representation that an organization will not fire them for any reason. When signing an at-will employment agreement, however, they should be aware that their employment can come to an end at any time with little to no notice.
Legal Aspects and Protections
Employment Contracts come with a "Just Cause" provision that protects employees from being terminated for unsatisfactory performance. If the employer does not have a "Just Cause," and later terminates the employee, a lawsuit may follow against the employer. The law involves the burden of proof, which is a fancy way of saying that it is upon the employer to prove there was "Just Cause" for the termination. If not, the employer may be subject to significant damages.
At will employment, on the other hand, means an employer need not even tell the employee why they are being terminated. "An employer may terminate an at will employee for no reason whatsoever." Kauffman v. 1 800 Flowers, Inc., 2014 U.S. Dist. LEXIS 171492 (E.D. Pa. Dec. 10, 2014). Workplaces that practice at will employment have a large amount of discretion over their employees and how they are treated.
Despite having more freedom in how they run their business, employers who practice at will employment are not protected if the current law of at will employment applies. Where the courts will look at the circumstances surrounding the employment relationship, such as if the employee was targeted because of a protected group status, to determine if there is a wrongful termination claim, even if the employee worked under an at-will employment theory.
When to Use Contracts Rather than At-Will
There are a number of scenarios when employment contracts might make more sense than at-will agreements. For example, if you are a large and well known company seeking to hire a position that is elite relative to the industry at large, it may be more prudent to establish an employment contract rather than an at-will agreement – especially since it would likely not cost more money or resources to negotiate a contract than it would to just have a well drafted at-will document prepared for the employee that includes a number of provisions (i.e., non-compete, non-solicitiation, confidentiality, etc.) that would otherwise be covered in the employment contract anyway.
The same might be true for high level executive employees, like a Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, etc., who might appreciate the deterrent effect and lack of ambiguity associated with an employment contract to assure his or her job security as long as the employee meets performance requirements, complies with reasonable policies and procedures, and is generally a good cultural fit. In contrast, other employees may not place as much value on an employment contract because they may overly fixate upon the contract’s typical focus on termination rights.
How to Make the Switch: From At-Will to a Contract
Once you have determined that you or your employer have identified a need for a contract, how do you proceed? First, prior to handing in your formal resignation, even if you and your employer agree to start the transition process, you need to update your previously signed documents to reflect the new arrangement.
A stock "change-in-terms" document that has been pre-approved by the employer’s legal and human resources department can be helpful. You may also need to sign a "separation" agreement that forecloses you from bringing prior employment claims, e.g. discrimination or wrongful termination, against your employer. It is extremely important to ask the well-founded question, "When does my employment actually end?" In general, employment at will ends the moment you give notice of resignation, but that may not be the case with a new employment contract that includes a notice provision with a specific duration . Additionally, the relationship under the new contract does not begin until both you and your employer sign the new employment contract.
Next, you should have a discussion with your employer about the terms of your employment contract. It is important to document all agreements made by phone or in person so that there is no confusion later on.
It is important to take these steps prior to ending the employment-at-will relationship because any remaining leave, for example, may be used in connection with the transition to contractor status and the date of hire as a contractor will not be known until the employment contract is executed. Therefore, if you are out on paid parental leave when you are hired as a contractor, you may still receive your leave pay during the remainder of the leave.
Last, it is always wise to contact an employment attorney who can assist with the transition.