Are You Hiring? Review These 9 Employment Contract Considerations

If you’re hiring there are many employment contract options from a small business owner’s perspective.


There are numerous legal issues that can result from entering into an employment contract, and too often employers are unprepared for the consequences. Before entering into such a contract, employers should keep some very important things in mind.

1.  At-will vs. specified time for employment

Employees are generally presumed to be “at-will.” This means that employment relationships of unspecified terms can be terminated by either the employer or the employee at anytime, with or without cause. Contracts for at-will’ employees are usually unnecessary as employers typically have handbooks, policies, and procedures governing “at-will” employment. For higher- level executives, however, the employer may wish to specify the period of employment (thereby exempting them from the company’s “at-will” provisions) to ensure that they don’t terminate their employment unexpectedly.

2.  Termination Clause

Of all employment contract provisions, the termination clause can become the most significant in the event an employment relationship “goes south.” Indeed, it is this provision that establishes a legal standard by which a termination will be judged. A contract that maintains the “at-will” status provides the greatest flexibility for the employer.

If the employment relationship is not “at-will,” greater caution must be exercised. Termination standards of “gross negligence” or “serious and willful misconduct” are virtually impossible to establish in the normal employment relationship, even when performance has been severely inadequate. Therefore, the employer should use general ‘for cause” language, which gives the corporation wide latitude in the event there is a performance or economic problem.

3.  Duties, authority, responsibility, and compensation

The employer should reserve the right to set and change the employee’s duties, responsibilities, authority, and other employment conditions at any time. Such a provision minimizes the likelihood of liability should the employer’s operations change and lead to a decrease in quality of the employee’s working conditions or terms.

4.  Restrictions on outside business activities

The contract should establish the level of commitment expected of the employee. This commitment can range from a covenant to devote one’s full energy, interest, and productive time to the performance of duties as an employee to a covenant not to render services of any kind or engage in outside business activity without the prior written consent of the employer.

5.  Non- competition provisions

Employers should be very careful about using non-compete provisions in employment contracts. Many states prohibit employers from restricting an employee’s ability to seek any type of employment (including working for a competitor) after the employment relationship ends.

6.  Confidentially and intellectual property ownership provisions

Businesses with “outsourcing” opportunities, as well as those with potential for inventions, intellectual property or trademarks, should have express provisions on ownership of such property. This will both secure property rights and establish parameters of permissible and impermissible conduct.

7.  Alternative Dispute Resolution (ADR)

ADR, generally arbitration, is a method by which the parties can waive their rights to have employment disputes settled in a judicial arena. ADR is usually cheaper and quicker for dispute resolution. Beware, however: many states do not enforce ADR provisions unless they meet certain procedural requirements.

8.  Choice of law provision

In general, the parties should decide which law should govern disputes under the agreement. Of course, there must be a reasonable connection between the employment and the state whose law is chosen.

9.  The integration clause

Integration clauses confirm the extent of the parties’ agreement. That is, where there have been protracted negotiations, numerous drafts, or oral representations, an integration clause specifies which agreements or promises are intended to constitute the final agreement.

Generally, employment contracts indicate that the contract “supersedes all prior agreements, written or oral,” “sets forth the entire agreement,” and “may not be modified, renewed, or extended orally.” If prior contracts are intended to survive, the integration clause should expressly say so.

There are many factors to consider when determining whether and how to draft an employment contract. As always, seeking the advice of legal counsel will ensure that your company does not fall into any legal traps.

Related articles: 

Hiring Better Fitting Employees

Adding a New Employee Worth the Expense?

Employees Are Your Most Valuable Assets

Firing Without Getting Burned


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