When starting a new business, you must surround yourself with highly qualified key employees. New owners without the benefit of an employment contract lawyer might not appreciate the risks of putting people into trusted positions without employee contracts.
Experienced owners might know how an employment agreement can protect them but may not know how to write an employment contract. In either case, a start-up attorney in Colorado can assess your risks and show you how to make an employment contract that protects your business interests.
What Is an Employment Contract?
The default rule under applicable law is that employees work at will. This means both the employee and employer have very little to define their relationship except state employment laws. The company can fire the worker for almost any reason. The worker can do anything not barred by law or company policies.
Employment contracts change the default rule. By entering into an employment agreement, the parties exchange the freedom of at-will employment for the security of defining the terms of the employee's employment.
These agreements do not always fit into a prewritten employment contract template. Instead, businesses and their legal counsel will tailor these employment contracts to local laws and the company's specific needs.
Common Employment Contract Types
Two of the top considerations in hiring employees involve the duration and hours of the employment.
Permanent Full-Time Employment Contract
Permanent does not necessarily mean the worker will remain permanently. Instead, it means the contract does not set an ending date. As long as the worker does not violate its terms, the contract can continue. It may also define the terms to terminate employment, such as a notice period. Full-time typically means 30-40 hours per week in Colorado.
Permanent Part-Time Employment Contract
Again, permanent means the employment is not temporary or for a fixed period. Part-time means the worker does not meet the employer's work requirements to qualify for employee benefits like health insurance and retirement plans. Under the Affordable Care Act, the IRS defines part-time as fewer than 30 hours per week or 130 hours per month.
Fixed-Term Employment Contract
When you think of independent contractors, you probably have in mind someone with a fixed-term employment agreement that lasts for a specific period. A fixed-term contract sets the date or condition, such as the completion of a project, that ends the employment relationship.
At-Will Employment Contract
Since at-will employment is the default in Colorado, at-will employees do not need a contract. But you may require that each employee agree in writing to the terms of their employment. For example, if the job calls for developing software, you need legally binding documents to make sure your company owns all intellectual property in the employee's work.
Cons and Pros of Employment Contracts
As you work with your employment lawyer, you will need to discuss the pros and cons of employment contracts and how they match up with your company's needs. Some pros of having a written employment agreement include:
- Defining the terms of the employment relationship explicitly instead of relying on an implied employment contract.
- Resolving disagreements by setting out a dispute process.
- Reducing uncertainty in the worker's job responsibilities and compensation details.
- Placing legal limits on workers' ability to use or disclose confidential information.
Employment contracts also come with a few cons:
- Keeping contracts up-to-date takes effort.
- Storing contracts takes space on your server or file room.
- Tailoring different contract templates for different types of workers may require time and money.
The most important tradeoff comes in your flexibility. Employment contracts give you certainty at the cost of freedom. Utilizing a hiring process without contracts preserves your flexibility but robs you of certainty.
What Terms and Conditions Must Be Included in an Employment Contract Template?
A well-written employment contract contains all the terms of the employment. You should not have oral side deals that are not written into the employment agreement. A clause should state that the written agreement constitutes the entire agreement and supersedes all prior verbal agreements.
This clause reduces the risk that the employee will assert promises made while they are still a job candidate. The essential elements of an employment contract include:
- Name and address of employer and employee;
- Starting and ending dates;
- Job duties;
- Hours of work;
- Pay;
- Holiday and overtime entitlement;
- Sick leave and other paid time off;
- Proprietary intellectual property rights assignment;
- Reasons for termination;
- Non-solicitation/non-compete;
- Confidentiality clause; and
- Signature page.
The foregoing is only a bare-bones description. A good employment contract will contain much more.
1. Basic Information About the Job
The four elements of an employment contract that are absolutely indispensable are the job title and general job responsibilities, the department where the employee will work, identifying who the employee will report to, and a description of how the employee's performance evaluations will be conducted. If it has a predetermined end date, state that termination date in the employee contract.
2. Base and Variable Compensation and Benefits
Among the minimum requirements for an employment contract is a description of compensation and benefits. You need to describe salary or hourly wage (depending on how the employee is to be paid), including the employee's overtime pay, raises, bonuses, holiday pay, and benefits, and how the employee qualifies for these benefits. You also need to describe all non-monetary benefits such as health insurance, retirement benefits, etc. as well as which portion of these expenses the employee must pay.
3. Information on Time Off, Sick Days, and Vacations
Time off policy is one of the critical parts of an employment contract. Such provision of the contract should describe in detail the accrual of vacation days, any increase in vacation days due to seniority, sick leave, family emergencies, and unpaid leave. Can the employee make up for lost work time by working overtime?
4. Employee Classification
One of the most essential elements of a written contract of employment is the way that you classify employees. You must make it clear that you are hiring a new employee, not an independent contractor. It is important to recognize, however, that it is the content of the company's rights and obligations that determine this classification, not what label or job description you use.
5. Schedule and Period of Employment
One of the key features of an employment contract is a clause stating whether the employee's term of employment is indefinite or for a set term. It should specify the number of hours the employee is expected to work and whether remote or out-of-town work is possible or expected as essential job functions. If night or weekend work is expected, the contract should specify this.
6. Confidentiality Agreement
In most cases, a confidentiality agreement is one of the key requirements for a valid employment contract. Place a confidentiality agreement within the text of the overall employment contract and include a way for the employee to sign it digitally. It is important that the employee agrees to provide a separate signature to this clause if confidentiality is a critical concern for your business.
7. Privacy Policy
Is it OK for your employees to update their social media accounts using company-supplied devices, even on their lunch breaks? If not, state this clearly. May employees speak critically of the company without your written consent on their own time, using their own devices? Again, if not, make sure to say so within the employment contract.
8. Termination Conditions
Under what conditions may the employer terminate the employee? Should the employee provide written notice before quitting? Should notice be in writing?
9. Severance Pay and Outplacement Plans
Will the employer provide the employee with severance pay in the event of employee contract termination? Will it provide outplacement assistance?
10. Claims After Termination
Are you placing any restrictions or mandates on the employee after you part ways? For example, do you intend to forbid the employee from working in the same industry for a period following termination to protect your company's trade secrets? If so, state these restrictions and employer desires clearly. Remember, however, that legal limits exist on your ability to do this.
Legal Considerations When Drafting an Employment Contract
Employment contracts can present several legal issues. You must comply with federal, state, and local employment laws. These laws deal with issues such as:
- Workers' rights and whistleblower protections;
- Safety;
- Anti-discrimination and civil rights;
- Minimum wage, overtime, and other compensation details;
- Intellectual property ownership.
Even if you have experience running a business, you should consult a lawyer before trying to create a contract of employment. Your business could face severe consequences if your employment contracts violate the law.
Common Mistakes to Avoid in Employment Contracts
Most companies do not try to draft their own employment contract. But if you choose to try to write an employment contract, some common mistakes to avoid include the following:
- Using vague language that leads to misinterpretation of the contractual terms.
- Writing overly restrictive and unenforceable covenants under state law.
- Omitting assignments of intellectual property rights.
- Neglecting dispute resolution processes like mandatory arbitration.
Remember, a well-written contract might provide valuable legal protection against employee lawsuits and may even prevent employee breaches of their employment terms.
Need an Employment Contract Lawyer?
An employment lawyer has experience with federal and state laws that govern how you hire, employ, compensate, and fire your workers. A contract lawyer in Denver, CO, knows the issues that can arise and writes contracts to proactively prevent them from triggering a legal action that costs your business time, money, and reputation. We can advise you about resolving disputes that have already arisen.
Sequoia Legal has experience providing legal counsel, document drafting, and advocacy for employers. Contact us for a free consultation by calling 303-993-0932 or contacting us online.
