Employment Agreements: An Overview
An employee agreement, also known as an “employment contract” or an “employee contract,” will generally include the conditions which the employer and the employee will abide by in addition to other terms, such as wage/salary, employment duration, work schedules, vacation time, insurance, severance pay, termination, and more. Employment agreements and contracts are generally binding on both the employer and the employee, which reduces the chance that either the employer or employee will need to take legal action against the other. Accordingly, the more detailed the agreement, the better, and the more legal protection given to both the employer and the employee alike. Generally, in states that permit employment agreements, all employees, no matter whether they are working 40 hours per week or less, should be expected to sign an employment agreement.
There is generally no need to renew an employment agreement and they will extend throughout the employee’s duration with the company unless the employment is limited to a certain time period or meant to achieve a single goal. Accordingly, there is no need to re-write new employment agreements with each passing year. However, should the employee’s duties change, or when an employee is promoted (or demoted), changes to the employment agreement might be necessary and the employer can ask their employee to sign the updated agreement.
In a state where employment agreements are valid, and an employee will not sign an employment agreement, the employee is ostensibly declining the position. Under these circumstances, the employer does not have to hire them or continue to employ them. However, depending on the situation and the potential employee or employee in question, including the employee’s experience, training, overall background and potential value to the employer, it might be worth the employer’s time to negotiate or renegotiate the agreement to ensure both the employer and employee are happy.
Employment Agreement Types
There are various agreement types that can be either written or oral (as discussed below). The employment type will typically determine what provisions will be in the employment agreement. Generally, there are 9 contract types that cover various employment scenarios, including: (1) Full-Time Agreements; (2) Part-Time Agreements; (3) Zero-Hour Agreements; (4) Casual Agreements; (5) Freelance Agreements; (6) Union Agreements; (7) Executive Agreements; (8) Fixed-Term Agreements; and (9) At-Will Agreements (which will be discussed in a separate section immediately below).
Full-Time Employment Agreements
Full-time employment agreements will generally be very robust and contain many components. This is because full-time employees have the most protection under state and Federal labor laws, which will broadly govern hours, pay, PTO, an employer’s obligation to provide insurance, etc., and because the employment is permanent or ongoing. Generally, to be considered a full-time employee by state and national standards, an employee must work 35 hours or more a week. Because this employment type generally provides the most protection, the employment terms will most likely be memorialized written employment agreement to avoid ambiguity and employer liability should a dispute arise under the agreement.
Part-Time Employment Agreements
Part-time employees generally work reduced hours (35 hours or less) and receive much less protection under state and Federal labor laws alike. This is because most employers only must provide insurance and other employment privileges to employees working over 35 hours each week. However, even though part-time employees generally do not receive as many employment privileges as those working 40 hours a week or more, part-time employees are generally viewed as more permanent or at minimum have an ongoing employment relationship with their employer.
Zero-Hour Employment Agreements
Zero-Hour agreements are employment agreements which state that the employer does not have to provide certain hours each week. Ostensibly, an employer could decide to have the employee work “zero” hours any given week, hence the name “zero-hour Agreement.” Although the employer does not have to provide an employee with any hours, the employee is supposed to remain available in the event their help is needed. This isn’t a good bargain when it comes to employees and may substantially limit their ability to work. These employment agreements are not very common in and around the U.S. and are more widely used in places like the United Kingdom. This is likely to do the vast protection extended to employees under U.S. labor laws.
Casual Employment Agreements
Casual employment agreements are generally used in the “gig economy”—think Uber drivers and people who make deliveries through Grub Hub, Door Dash, and Instacart. Note that in many states, workers such as these are considered independent contractors, and there may be no real employment agreement involved. While some casual agreements may provide the minimum working hours the employer will extend, some won’t. In this scenario, any contract is more likely to be deemed a zero-hour agreement, as discussed above. Casual agreements are like zero-hour agreements in that they generally do not promise continued work opportunities. For this reason, many people looking to work may not be interested in this setup due to work instability.
Freelance Employment Agreements
“Freelance employment agreement” is a bit misleading, as workers engaging in “Freelance” work are not really employees. Rather, they generally work with multiple employers (or clients) handling various tasks and assignments. They receive no employment privileges, such as insurance, and they pay their own taxes. They usually can set their own hours and rates. A Freelance employment agreement will generally contain provisions relating to agreed-upon timelines as to when certain tasks need to be completed by, rates, requested currency, and payment methods.
Union Employment Agreements
Union employment agreements, also known as “collective bargaining agreements” (“CBA”) are legal contracts entered into by employers and designated person(s) representing several employees. The collective bargaining agreement will contain many terms and provisions, some which are required or permissible under National Labor Relations Board, which regulates and oversees collective bargaining agreements across the U.S. Other provisions are completely prohibited, such as provisions stating that the employer will only hire union employees or involve discriminatory practices. Common subjects discussed in CBAs are wages, overtime, grievance procedures, seniority, discharge procedures, recalls, discipline, and more.
Executive Employment Agreements
Executive employment agreements are generally made between a high-paying, high-ranking executive, such as a CEO or a CCO, and an employer that will contain more expansive terms than a regular employment agreement between an ordinary employee and their employer. These agreements will generally contain provisions relating to a minimum employment term, guaranteed based salary, bonuses, incentives, changes in control, severance, and the option to renew the agreement.
Fixed-Term Employment Agreements
Fixed-term employment agreements are essentially exactly what they sound like: an employment agreement extending through a certain period, which generally is used with seasonal or temporary workers. However, a “termed” employment agreement is not necessarily limited to any certain period and can generally last one to three years. There may be some disadvantages when it comes to employers who want to use this agreement. For instance, employers who terminate employees prior to the term’s expiration may be required to pay the employee what they would have made had the employment not expired early.
At-Will Employment
In many states, employment agreements are not recognized as a valid contract and the employer can terminate the employee’s employment at any time so long as it is based on a legal reason. For example, an employer cannot terminate an employee’s employment based on their race, sex, ethnicity, national origin, religion, etc., as this is employment discrimination and is prohibited under law. Accordingly, termination based on discrimination would not be a legal reason to terminate an employee.
Valid reasons to terminate employment may include incompatibility amongst coworkers, poor customer service, the inability to show up to work on time, etc. However, even though the employer has the right to terminate employment at any time, the employee also has the right to resign at any time. Any employee who has entered a valid employment contract with their employer is not considered an at-will employee.
Written vs. Implied Employment Agreements
Where there is no written employment agreement between the employer and employee, there may be an implied employment agreement. This usually occurs when the employer makes certain commitments to an employee, such as a promise that the employer will provide the employee with a raise each year. However, where a verbal promise or commitment is made and that term is not contained in a written contract that is later executed, the verbal promise will generally not be held as valid. For this reason, it is important that both the employer and employee review the agreement prior to signing to ensure that all the agreed-upon terms are present in the agreement.
A verbal employment agreement is generally limited under the Statute of Frauds (we’ll abbreviate it as the “SoF” here). The SoF is designed to place limitations on certain oral contracts’ validity. For example, contracts involving property (a lease or sale), contracts guaranteeing another’s debt, contracts that cannot be completed in a year, and a contract involving goods priced at $500.00 or more, all must be in writing to be upheld as valid under the SoF. Here, with respect to employment agreements, oral or “implied” employment agreements generally do not muster protection under the SoF because most employment contracts extend beyond a year unless stated otherwise.
It is important to realize that whether the contract can be completed within a year is not based on whether it ended within a year. Rather, it is based on the employer and/or employee’s intent when the contract was created. It should also be noted that, even where no verbal promises are made, certain documents, such as employee handbooks, also serve as an implied contractual agreement. Accordingly, when an employee signs an acknowledgement agreeing that they understand and will abide by the employee handbook, an implied employment agreement is created.
Writing an Employment Agreement and What to Expect
Although it may seem very basic to include a Title on the employment agreement, this is an element that should not be overlooked. It should be clear to the employer, employee, and any third party who might need to review the agreement should a dispute arise, what the document is. It is easy to understand why naming the parties to the agreement is a good idea. It will clearly show that a contract existed between the parties and no guesswork is needed to determine who is bound by the contract’s terms. For this reason, it is also important to make sure that the parties are correctly named. Consider writing out the whole business, employer, or company name in addition to the employee’s entire name.
We will discuss the individual components that are likely to be necessary in an employment agreement below. You generally will know what to expect to see in an employment agreement with respect to terms and conditions, such as pay, a start date, whether a 401K, health insurance, and PTO will be provided, etc. However, there are less-common terms and conditions, such as non-compete and trade secret provisions that an employee could see, which will be discussed at length below.
It is important that an employee review the agreement thoroughly and ensure that they understand all provisions prior to signing; don’t be rushed to sign and ask questions when you are uncertain. As discussed above, any verbal commitments made by an employer will be eradicated by an employment agreement unless those commitments are in writing and in the employment agreement. For this reason, it is important to read the entire agreement.
3. Use Contract Terminology
Both employers and employees need to know certain contract terms prior to writing and executing an employment agreement. Here are some common terms used in an employment agreement:
Employment Agreement Components
For states that do allow employment agreements, many provisions may be required or regulated by national, state, and local provisions.
Job Responsibilities
It is important that the employment agreement clearly lays out and explains the employees’ duties and responsibilities. Doing so will not only allow the employer the opportunity to clearly explain what the employer is expecting, but also ensures that the employee knows what to expect. There are several ways employee responsibilities can be explained in an employment agreement. For example, an employer may break down an employee’s work responsibilities with percentages (i.e., 50% corresponding with clients on their accounts, 20% imputing client's data and managing their accounts, etc.).
Probationary Period Clause
Like a clause explaining what will happen should an employee not adequately meet the obligations the employer has set, it is not uncommon that an employer will include a clause conditioning continued employment on the employee’s ability to last through a probationary period, which is generally around three months. Most employers want a guarantee, or at least some evidence, that an employee can live up to the employer’s expectations consistent with the way the employer thought the employee would or in the way the employee conveyed during the interview process. Placing a probationary clause in an employment agreement is a smart, well-advised move when it comes to employers, as it will generally allow the employer to terminate the employment agreement without notice or compensation should the employee not live up to the expectations placed on them.
PTO, Holiday and Overtime Pay, Insurance
It is quite common to see provisions relating to PTO and holiday pay in an employment agreement. This not only helps the employer place limits on pay during these periods, but it also allows them more control over when employees must work and how much an employer must pay them. When examining provisions related to overtime pay in an employment agreement, it is important to understand what regulations an employer must abide by. The Fair Labor Standards Act (“FLSA”) generally governs overtime.
Under the FLSA, exempt employees are not required to receive overtime pay. Exempt employees are salaried employees, or those employees who receive the same amount each week, month, or year, without regard to how many hours are worked. Nonexempt employees, or those employees who are not salaried, must be paid overtime pay when they work over 40 hours per week. However, a new provision in the FLSA, passed on January 1, 2020, requires overtime pay with respect to both exempt and nonexempt employees that earn less than $35,568.00 annually. However, the FLSA, like all national regulations, only set minimum requirements and state and local laws may provide additional regulations, or increased protections, to both exempt and nonexempt employees.
Non-Compete Clause
Many times, employers will put non-compete clauses in their employment contracts to prevent an employee’s ability to leave their company and work in direct competition with the employer. However, a non-compete agreement does have limitations and is not open-ended; a non-compete clause must be limited by time and geographic location. For example, a no-compete clause cannot broadly restrict the employee’s ability to ever work in the same industry again. However, the clause may require that the employee not work with the employer’s competitors during a six-month period, which would likely be seen as reasonable. As it concerns geographic location, the same idea applies. An employer cannot broadly require that the employee not work at any similar company in the U.S. However, an employer may be able to place restrictions on the employee’s ability to work at a similar company in the industry within 30 miles during the stated period.
Trade Secrets
Trade secrets are generally known as anything unique to a business that would provide a competitive advantage to another person or business. Trade secrets can include certain designs, processes, algorithms, instruments, patterns, commercial methods, advertising strategies—almost anything, really. The key to determining what might be considered a trade secret is not so much connected to the actual algorithm, pattern, etc.; it’s whether the data would provide other businesses with a competitive advantage. Considerations that should be made in determining whether the data at issue could be legally protected as a trade secret include: (1) the steps taken the guard its secrecy; (2) how much money, time, and resources have been expended to developing it; (3) how well known it is outside the employer’s business; (4) its potential value to other businesses; (5) the ease in duplication, and more.
Interestingly, a particular language or an enumerated clause is not necessarily needed to protect trade secrets or create this duty owed to employers. All employees are obligated to be loyal to their employer and cannot divulge proprietary data belonging to their employers. Doing so would impliedly breach the employee’s contract with their employer. In this sense, the employer is not necessarily obligated to prove that the employee’s conduct was wrong in this regard and common law will automatically provide a remedy. However, the employer is obligated to prove that the proprietary data involved constitutes a trade secret, and that can generally be proven using the considerations listed above.
Disputes and Arbitration
Many employment agreements will contain clauses explaining what the procedure will be when an employer and their employee(s) can’t agree. A common way to handle an in-house dispute is through arbitration, a voluntary, consensual process which is like a court hearing in many ways. An arbitrator is a neutral third party who will make a binding decision based on the circumstances presented to them. This can be contrasted with mediation, which, although voluntary, is not binding, meaning either party can withdraw their consent to agree. Generally, the parties may pick their arbitrators, to avoid the opportunity to have partiality shown to any one party.
Employment Agreements: Advantages and Disadvantages
Advantages
Probably the most recognizable advantage in utilizing employment agreements is that it tends to deter employees from leaving to work at or with another company, as doing so would be breaching a contract and could result in the employer suing the employee and obtaining money damages. An employment agreement can also allow the employer to have more control over the employee’s work-related duties and responsibilities by spelling each duty and obligation out in the agreement. While under these circumstances an employment agreement serves as an advantage to employers, an employment agreement can also serve as an advantage to employees by giving them employment security. When an employee has more than one possible employment prospect, a company that presents a lucrative contract may have an advantage over a company that doesn’t.
Disadvantages
The downside in electing to use employment agreements is that there is little an employer can do should they be negatively impacted by the economy or experience other related issues or when the employee does not live up to the employer’s expectations once the agreement has been executed. Because the employment agreement is binding on both the employer and employee, any termination inconsistent with the agreement’s terms will likely constitute a breach and monetary penalties can be imposed on the employer. Accordingly, even when the need to terminate the employee is based on a valid reason, or even if there is a situation over which the employer has no control over that necessarily should result in the employee being terminated, an employer can likely only attempt to renegotiate the agreement with the employee.
Consulting with an Employment Attorney
Both employers and employees should consider having a labor and employment law attorney review their employment agreements. Employers should make sure that the agreements they intend to execute are compliant with national and state regulations to avoid liability. With respect to employees, although most employees can rest assured that it isn’t necessary to have an attorney review an employment agreement prior to signing it, an employee should consider consulting with an employment and labor law attorney should they, or when they, have any concerns prior, or after, signing an employment agreement.
