Written Employment Contracts

Written Employment Contracts

What comes to mind when someone mentions a “Written Employment Contract?” Is it a written employment agreement? Or, maybe it’s a formal way to refer to an employment offer letter. Here is a hint: Offer letters and written employment contracts are not the same. Since both can contain similar details and information, they can easily be mistaken for each other. In today’s video, we’re going to give you some tools to help you to identify those similarities and differences so you can know which is which and what each is used for. Let’s get started!

Let’s start off by explaining the concept of an employment offer letter.

An employment offer letter is an invitation presented to a new employee to work for a company. The terms included in the letter do not usually hold any legal commitments to either party. An offer letter should include the anticipated start date for the employee, the position title being offered, the associated duties of the position, the person to whom they will report, work location, hours, salary, any benefit offerings or waiting periods, and in most cases, an “at-will employment statement.”

An “at-will employment statement” is a disclaimer that explains that a person’s employment with the company is over an “indefinite period.” Within this indefinite period, and at any given time, the employee or employer could end the working relationship without cause or notice.

Now let’s look at a written employee contract. A written employment contract is an agreement to be upheld by both the company and the employee. Unlike an employment offer letter, it is legally binding. There is specific language within this contract to define the terms and length of the agreement. It can also include a lot of the same elements contained in an offer letter, so I’ll point out some notable differences:

DURATION OF EMPLOYMENT/LENGTH OF CONTRACT

Unlike an offer letter containing an at-will statement, a written employment contract usually specifies a start date and end date of employment. In cases where no time period is specified, an employment contract could list an ongoing period. This could be the case for a project specialist, who is working on a project for a company. If the project end date is unknown, the language in the letter would list “ongoing” as the duration period. An employment contract could also set a minimum duration period. This could include a time period shorter than the average, such as 3 or 6 months. The shorter time period allows both parties flexibility, and can give both a chance to evaluate if there is a mutual fit. If so, the contract could be extended. If not, they part ways without liability.

RESTRICTIVE COVENANTS

The purpose of restrictive covenants is to protect the employer. When thinking of a restrictive covenant, think of restricted practices or acts that a contract employee agrees to NOT do, which, if done, could potentially harm the integrity of the business. A couple of examples of restrictive covenants are non-solicitation and non-compete agreements. With a non-compete agreement, a contract employee who works for Company A as a sales consultant wouldn’t be allowed to launch their own firm shortly after working for Company A. One of the reasons is because there is a chance the two parties could very easily end up competing for the same client base. A non-solicitation agreement would allow the sales consultant to launch their own firm, but once the firm opens and their customer foundation is built, they would not be able to restore any relationships they may have previously developed with Company A’s clients, nor could they solicit any of their services to them.

SEVERANCE AGREEMENTS

A severance agreement contains a termination agreement between the company and an employee. Severance agreements can be stand-alone or incorporated as part of a clause in an employment contract. The agreement usually includes an amount that will be paid to a terminated employee over a period of time. It also includes terms that are conditional to receiving the severance payments. Severance agreements vary considerably. Some may include a clause that frees a company from any future litigation involving the terminating employee. Others may include gag orders, or statements that prohibit a terminating employee from influencing other employees to leave the company.

DISPUTE RESOLUTION

A dispute resolution agreement within an employment contract serves as an agreement between the company and the employee to settle their differences internally or through a medium that is not involved with public courts. The goal is to discourage a contract employee from ever seeking any external legal sources to resolve any issues, even before any issue arose. For example, if the project specialist from earlier has a dispute resolution clause in their contract stating that only Human Resources can settle disputes of any kind, the project specialist must address their disputes with Human Resources, without ever escalating beyond that level.

CHANGE OF CONTROL

Yet another possible clause as part of an employment contract would be a change of control agreement. This agreement can help to protect the employee from a number of circumstances which could affect them negatively in case a change in company ownership or control takes place. For example, if the project specialist we mentioned earlier has signed an employment contract with a company and that company is later acquired by another company, the terms of the change of control agreement within the project specialist’s contract would apply. Let’s say the contract states that upon a change of control, the project specialist will be terminated with a severance agreement. The company is then obligated to follow through on those conditions. One thing to note with change of control agreements is that they do not always hold negative outcomes. A change of control agreement could positively affect an executive affected by a merger. If their contract’s change of control clause states that the executive would be retained with no decrease to their salary if a merger or acquisition takes place, those provisions are upheld.

Whether issuing an offer letter or an employment contract, Human Resources should always be prepared for counteroffers, salary negotiations, changes in terms, or any other type of compromise on the front end. Reasonable negotiation should always be practiced. Being open to proposed changes by potential employees sends a message of diplomacy and good faith. Even better, it can help to establish a positive perception of the company and those who represent it.

Now, real quick, let’s put your memory to the test. If both an employment contract and an employment offer letter were to be placed in front of you, what would be one of the first things you’d look for to distinguish the two?

Some things to keep in mind with the language in employment contracts are terms that are related to a commitment. It could be an employment duration, or detailed clauses pointing out terms that must be met. Think of those we’ve discussed, like the non-compete agreement, or the dispute resolution agreement. Then, think of the employment offer letter and how it is more informational than contractual. Remembering these details will help ensure you are creating the right kinds of documents for future employees.

I hope this review was helpful! Thanks for watching, and happy studying!

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by Mometrix Test Preparation | Last Updated: September 21, 2020