Issue: Drafting a legally sound employment contract and avoiding "implied contract" claims.
Benefit/risk: While employment contracts can offer your organization additional legal rights, they also expose you to new legal headaches.
Action: Structure agreements carefully to avoid giving up employer rights. Make sure your job promises don't create a contract.
THE LAW. A written employment contract between you and an employee spells out the terms of your relationship. While no single law governs those pacts, they can give rise to several important legal issues, including at-will employment, implied contracts and the concept of good faith.
Employment contract advantages: They lock in compensation deals, protect trade secrets, give you more control over employees' ability to quit, outline specific grounds for dismissal and set limits on the employee competing with you when he leaves.
But employment contracts aren't one-way streets. They bind both you and the employee, which could make it hard for you to alter the employment terms when needed. If you want to modify the terms, renegotiate the contract.
Also, employees in most states work at the employer's discretion, which means you can dismiss them "at will," or without cause. But once you sign certain contracts, you erase the at-will relationship, so you can fire the employee only for causes described in the contract.
WHAT'S NEW. Employment contracts are typically used for high-level executive jobs and as deal makers to attract sought-after recruits. But they're also used more with certain part-timers or temporary workers.
In recent years, layoffs and firings sparked by the recent sour economy have caused more employees with employment contracts to sue for breach of contract and. According to one tally, the average settlement award runs $890,000 in those lawsuits.
HOW TO COMPLY. First, weigh whether you even need an employment contract for specific employees. An employment contract could compromise your ability to fire the worker at-will (as explained earlier).
If you do ink an agreement, avoid the common mistake of giving away far too many rights and preserving far too few. If the employee doesn't work out, unexpected commitments can make the separation expensive.
Before entering into any employment contract, seek legal advice on its merits and judicial soundness. Contracts should typically include the items in the box at right.
Prevent accidental contracts
Many people assume that contracts must be written to be legal. Wrong! Unfortunately, legal "contracts" are easy to get into, but hard to get out of.
Depending on state law, a court may conclude you've entered into an "implied contract" with employees if employee handbooks, policy manuals and oral statements directly or indirectly allude to job security.
Here's a court-case example: An employee manual said employees could be terminated without notice during their probationary period. But employees became "permanent" after that.
The lesson: Remove statements in your employee manuals that could make unintended job security promises. Hiring managers must also avoid such statements.
Another threat: Beware that courts may be stricter in enforcing such an implied contract when applicants make special sacrifices (moving long distances, etc.) to take the job.
5 ways to avoid implied contracts
To make it difficult for employees to claim an implied contract, take these steps:
1. Review your policies, recruitment ads and other company literature for language that could imply a contractual relationship. Include an at-will statement in your employee handbook that asserts's right to fire at its own discretion. And add a disclaimer to the book stating that it doesn't constitute a contract.
2. Don't 'oversell' the company when recruiting. Give precise instructions to hiring managers on the type of promises to avoid, such as "You'll have lots of job security here" or "You'll be with us as long as you can do your job well."
3. Eliminate all references to firing 'for cause only' from your employee handbook or from hiring managers' lips.
4. Require applicants to sign an at-will statement saying they understand that their potential employment can end at any time for any reason.
5. Delegate hiring authority to a few managers. Written job offers should specify that they supersede any verbal agreements.
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