One of the hallmarks of any successful business is a clear understanding of the employer-employee relationship. To outline this relationship, and to clarify expectations, many businesses use employment contracts. Employment contracts can be invaluable for keeping all stakeholders on the same page, and for protecting the legal rights of employer and employee alike.
Indeed, legality is a key consideration for any employment contract. What should HR teams know as they put employment contracts together, and as they seek to execute and enforce the terms of those contracts? Here is a comprehensive guide.
First things first: When we talk about employment contracts, exactly what are we talking about?
Simply put, an employment contract is a formal agreement that exists between employer and employee, outlining the terms and conditions of employment. Companies may structure their contracts differently, but some of the most common elements that appear in employment contracts include:
The job title and a description of all the duties and responsibilities entailed.
Details about compensation, including the salary amount, payment frequency, and bonus structures.
Expected working hours and overtime requirements.
The duration of the employment contract (that is, is it indefinite or short-term).
Information about benefits, including health insurance, vacation days or paid leave, etc.
The process by which employment might be terminated.
Procedures for resolving any disputes that arise between the employer and the employee.
Not every business uses contracts, but those that do might realize several benefits. A few of the advantages of having employment contracts in place include:
1. Clarity surrounding roles and expectations
Employment contracts help prevent misunderstandings about what the employee’s duties are, ensuring everyone is on the same page.
2. Legal protection
By clearly defining the rights and obligations of each party, an employment contract can provide legal protections should a dispute ever arise.
3. Consistency
An employment contract also helps HR teams verify that they are treating all employees consistently, promoting fairness and mitigating any risk of bias or favoritism.
4. Professionalism
Having a structured agreement in place helps both the employer and the employee to understand that they are committed to a serious, formal agreement with one another. It promotes a sense of professionalism from both sides.
These are just some of the reasons why an HR team might wish to put employment contracts into place. Now comes the question about legality. What are some of the legal considerations HR should have when developing and implementing these contracts?
Consider a few general guidelines and best practices. Note that none of what follows constitutes legal advice, and it’s always best to make employment contracts in collaboration with legal counsel. HR teams can simplify contract creation and ensure consistent compliance by using employee onboarding tools.
1. State and Local Employment Laws
Needless to say, any employment contract must adhere to the law. What makes this challenging is that employment law can vary quite a bit by jurisdiction. For this reason, when drafting an employment contract, it’s imperative for HR teams to review all relevant state and local regulations.
2. At-Will Employment
Something else to keep in mind is that, in most places, employment is presumed to be at-will, unless otherwise stated. What this means is that the employer can terminate the employee at any time and for any reason, without having to fear any legal consequences. If you wish, you can use your employment contract to spell out more specific terms for termination, which can be a useful way to ensure understanding between the employer and employees.
3. Employment Classification
To avoid legal issues down the road, it’s imperative for every employment contract to denote the employee’s classification. Specify whether the position in question is full-time, part-time, or temporary, or whether the person is not technically an employee but an independent contractor. Misclassification of your employees is one of the surest ways to generate ongoing legal woes.
4. Non-Discrimination
It’s equally important for HR teams to ensure that any employment contracts they create are fully compliant with anti-discrimination laws, which encompass things like the Americans with Disabilities Act (ADA) and Title VII. Compliance with these laws is essential for avoiding any kind of bias on the basis of race, gender, disability level, or age.
5. Confidentiality and Non-Compete Clauses
An employment contract may also include confidentiality and non-compete clauses. A quick refresher:
A confidentiality clause exists to prevent the company’s confidential or proprietary information from being disclosed to any third parties.
Non-compete clauses prohibit employees from working with a competitor or starting competing companies, within a certain time period following their termination or departure.
Both types of clauses are essential for protecting your business, but also for ensuring employees have a proper understanding of expectations moving forward.
6. Amending the Contract
What happens if you and/or your employee wish to revise the employment contract in some way? The contract itself should specify the process for amendment. Usually, adding an amendment should entail agreement and signatures from both parties.
7. Signatures
Speaking of signatures, ensure that both the employer and the employee sign off that they have received the document and agreed to its terms. This is important for ensuring that the terms of the contract are binding, and for properly handling potential disputes down the road.
One of the main reasons to use employment contracts is to shield the business from legal friction. However, even with robust contracts in place, conflicts may arise, and you may even be served a lawsuit. Irrespective of the legal merits, any lawsuit can drain resources and risk reputational damage.
There are a number of ways to mediate these risks, foremost among them the use of a Limited Liability Company (LLC) formulation.
What is an LLC?
An LLC is a business structure that establishes the company itself as a distinct legal entity, separate from the business owner. The upshot is, that an LLC allows you to keep personal interests distinct from business interests, which means you can limit personal risk exposure, even amidst litigation.
What are the Benefits of an LLC?
LLC benefits are numerous, and include:
Limits on legal liability
Pass-through taxation
Flexible management options
Ability to transfer LLC ownership
Minimal regulatory overhead
What are the Steps for Forming an LLC?
The process for LLC formation looks a little different from state to state. As such, it’s always worth researching state-specific guidelines, e.g., how to form an LLC in California. In general, though, the process unfolds like this:
Choosing the state in which you wish to register (usually the state where the business is located).
Ensuring a name that is not already in use by another LLC in the same state.
Selecting a person or organization to serve as the Registered Agent.
Completing Articles of Organization and filing them with the state.
Paying the LLC registration fee.
Creating an Operating Agreement to clarify the roles between business partners.
The bottom line: Employment contracts can be safeguards for employers and employees alike, particularly when they are developed with HR and employment laws in mind. For HR, ensuring legally compliant contracts should always be considered a foremost priority.
Author:
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing.