Elements of an Employment Contract

The decision to employ someone requires an understanding of the relationship between the parties.
Elements of an Employment Contract - Articles

Updated: June 23, 2016

Elements of an Employment Contract

Introduction

An implied step in this process is to assure that both the employer and employee know and understand what the contract provisions mean to each of them and that important choices were made in selecting specific provisions for the first draft of the agreement.

Preliminary Considerations

Why should an employer devote time and resources to developing an employment contract for some or all of his employees?

Most employers would answer that question by saying that a contract offers the advantage of providing additional employment security to those employees who seek that in their employment relationship. Even in "at-will" states, the employment contract supersedes the "at-will." An employer who provides additional security to an employee may give up some control over the employment relationship, such as limiting the circumstances or situations in which the employer can terminate the relationship.

The central point is that both employers and employees seek to gain certain advantages by having an employment contract and some negotiation may be needed to determine which advantages are gained and which are negotiated away in favor of gaining more desirable advantages. Therefore, it would be wise for employers to evaluate the advantages they want to obtain through an employment contract and then prioritize the list to identify the most desirable advantages to incorporate into the agreement. Employees should also follow a similar Process

A second consideration is timing the negotiation. When should contract development occur?

Should it be before or after the decision is made to offer employment to a person? Should the process of defining the contract be made at the same time as each party evaluates the other and decides if there is enough potential for a mutually rewarding opportunity to merit pursuing negotiations further. To some employers, negotiations with prospective employees may be unfamiliar and, therefore, uncomfortable.

A third preliminary issue is that the law of employment contracts generally imposes requirements and conditions on enforcement of specific contract terms.

For example, the right to seek an employee's covenant not to compete by working for a competitor, or opening a new competing business must meet four general conditions; (1) the restrictions must relate to the employment contract; (2) the conditions must be supported by consideration; (3) the restriction must protect a legitimate interest of the employer, and (4) the restriction must be reasonably limited in territory and duration. Of these four, the most often disputed term refers to the time and duration of the restriction. In general courts have said that these restrictions must be no longer and the area no greater than that which is reasonable necessary for the protection of the employees interest. See Records Center Inc. v. Comprehensive Management, Inc, 363 Pa. Super 79, 83-84' 525 A.2d 433, 435 (1987).

Simply having a provision in the contract does not assure it will be enforced by the courts as it is written. This is particularly true of provisions intended to restrict or confine an employee's ability to seek employment with another employer in the area or to open a new business, in direct competition with the initial employer. This consideration may lead an employer to decide that an employment contract may only be appropriate for some, but not all employment situations, such as management or supervisory positions where the need to retain key employees may be greater than it would be for general workers or laborers.

Key Questions to Answer Before Drafting the Agreement

  • Is an employer-employee relationship the most advantageous relationship for the employer?
  • Will another type of relationship arrangement, such as an independent contractor relationship be more effective?
  • Is the employee currently employed under contract to another employer? If so, how does that contract affect the employee's ability to enter into this contract? Are there any restrictions or covenants in that agreement that could be interpreted as preventing the employee from entering into this agreement?
  • Will drafting an employment agreement that specifically details the employee's duties be too restrictive on the employer's ability to assign additional duties to the employee?
  • On what basis will the employee's compensation be calculated? Will it be an hourly or salaried basis? What other employee benefits will the employee be entitled to receive?
  • How will the employer's interests be affected if the employee opens a competing business or leaves this employment for that of a competitor?
  • Will the employee come in contact with the employer's important proprietary information which, if it is released, could put the employer at serious disadvantage? What is the nature of this proprietary information and is it a legitimate interest of the employer that is worthy of being protected?
  • Will the employee be able to develop items which are eligible for patent or copyright protection? If so, who should receive the benefits flowing from development of these intellectual properties?
  • Will the employee have access to the employer's funds or assets? If so, is a fidelity bond appropriate?
  • Are the parties willing to enter into an agreement to arbitrate or mediate their disagreements that may arise under the term of this agreement? If so, does either party favor one form of alternative resolution rather than another? On what basis should arbitration proceed, under common law arbitration rules or under a statutory form of arbitration, if available under applicable state law.
  • Will other special employment laws apply to the employment relationship, such as the Migrant and Seasonal Agricultural Worker Protection Act, or a state Seasonal Farm Labor Law? Does the employee need to have special licenses or qualifications to perform the essential duties of the position, such as a commercial driver's license or certification as a pesticide applicator or a nutrient management specialist?
  • How will the employment agreement's compensation and benefit package provisions affect the employer's tax situation?

Checklist of Specific Contract Provisions

  1. Identification of the parties by name and address.
  2. Description of the employer's business, the employee's professional skill level or position and employee's desire to enter into employment with the employer.
  3. Describe the term of the agreement. Note: Employment is presumed to be at-will without a signed contract. In order to rebut this presumption, the employee has the burden of proving that the agreement is one for either a specific duration, that the employee will be discharged only for "Just" cause, that the employee offered additional consideration to the employer, or that applicable and recognized public policy calls for such a result. Luteran v. Loral Fairchild Corp. 455 Pa. Super. 364, 370, 688 A.2d 211, 214 (1997).
  4. Describe the duties of the employee, and consider the need to reassign the employee to other duties or to other places of work. How much time is the employee to spend in this employment?
  5. Describe how the employee is to perform the duties of this position?
  6. Describe how the employee will be compensated for his or her work? Does it include overtime pay, bonus compensation, commissions, incentive pay and on what basis is the incentive earned? When will a salary level be reviewed? Will compensation continue during employment interruptions, such as vacation, holidays, illness, disability, military service?
  7. Describe the other employment benefits an employee is entitled to receive, such as insurance, use of vehicle, bonus arrangements, options to buy into the business? Will the employee be entitled to reimbursement for expenses incurred while performing duties of the employer?
  8. If the employee creates something that can be protected under patent or copyright provisions, Who will control the benefits that flow from the employee's efforts?
  9. Is the employee subject to a restrictive covenant prohibiting direct and indirect competition with the employer or direct or indirect solicitation of the employer's customers or customer base? What is the term and the area of the restriction?
  10. Is the employee restricted from using any trade secrets or proprietary information obtained in the course of employment employer?
  11. Under what circumstances can the employment relationship be terminated? What process must be applied to complete the termination? What effect will termination have on the employee's entitlement to particular benefits of the employment?
  12. Do the parties accept arbitration as the means of resolving disputes in the interpretation of the contract.
  13. Include general contract clauses such as the manner of giving notice to the parties, merger of all prior written and oral discussions into the agreement, stipulation as to applicable law, provisions for attorney's fees, and the amounts due deceased employees.
  14. Complete signatures of all parties witnessed by at least two individuals.

Written by John C. Becker, Professor, Agricultural Economics and Law

Authors

John Becker, Ph.D.