Written Employment Agreements Help Businesses Manage Risk. One of the most common relationships that individuals enter into is formed in the context of their employment. It is also one of the most complex. Among other things, the complexity of the relationship between employee and employer arises out of the sheer number of issues, whether they are of a legal, interpersonal, or social nature. One of the best, and least expensive, things an employer can do to protect its interests throughout the employment relationship is to have a written employment agreement. A properly drafted agreement goes a long way towards giving the employer the flexibility and certainty that is required for a successful operation of a business and efficient management of a workforce.
Where the Value Lies: An employment contract exists between an employer and an employee whether or not the terms of this contract are set out in writing. The primary benefit of a properly drafted, written contract is the reduction of the uncertainty that inevitably arises when the relationship is not explicitly defined. A written employment contract establishes a certain degree of stability while minimizing the potentially costly effects of the relationship coming to an end. Perhaps the most important advantage of a written employment contract is that it affords the employer a greater degree of control over the effects of termination by defining the employer’s exposure and obligations upon termination of employment.
Without a written contract, the employee’s entitlements are grounded not only in statutory minimum standards, but the common law as well. In some circumstances, the courts have awarded common law entitlements of up to 24 months of pay to dismissed employees. Pay can include not only wages and benefits, but under the common law, bonuses and commissions as well. These are amounts that most employers expect do not continue beyond the end of the relationship.
The contract can explicitly detail the specific grounds for termination, including conduct that will justify termination for cause, and can also set out the specifics of the employee’s benefits entitlements, and their severance and termination pay. Bonus amounts can clearly be taken out of the severance formula with clear and well drafted language. The element of certainty is of particular interest to employers in the realm of actions by employees for constructive dismissal. In an action for constructive dismissal, the employee can claim that the employment relationship was terminated if an employer unilaterally alters a fundamental term of the employment contract, resulting in the employee leaving his or her job.
Changes to a fundamental term of the employment contract can include a change in job function, pay or geographical location of employment. Employers can limit the possibility of successful claims for constructive dismissal using written employment contracts by, for example, explicitly including sufficiently clear job descriptions, detailed explanations of pay structures and by allowing the employer flexibility to change the terms of the contract as needed.
Written contracts of employment can also control, to an extent, an employee’s conduct after termination of employment. For example, former employees can be restricted from working in the same industry as their former employer and from soliciting their former employer’s existing customers. Former employees can also be held to a strict duty of confidentiality in respect of, for example, trade secrets and client lists. In the event of post-termination conflict, these contractual terms, typically referred to as “restrictive covenants”, are scrutinized heavily by the courts. This warning, however, is not meant to discourage the use of these clauses, but rather to ensure that employers are aware that the effectiveness of a written contract is inextricably linked to the skill with which it is drafted.
A written employment contract can also limit the ability of the employee to claim entitlements based on allegations of verbal promises made by the employer, for example, a verbal promise to be promoted or to receive an increase in pay. Employers can limit the potential for liability arising during the course of the employment relationship by defining the entire scope of the employment relationship explicitly and in its entirety, while explicitly precluding these types of allegations. Properly drafted contracts will be also include a provision that affords the employee an opportunity to obtain independent legal advice prior to signing the contract. While the courts retain the discretion to assess the totality of the circumstances of the employment relationship rather than just its form, this provision can help to bolster the enforceability of the contract in the event of conflict because it can have the effect of minimizing the disparity in bargaining power typically associated with employer-employee relationships.
Concluding Comments: A written contract of employment is a valuable element of an employer’s proactive approach to people management in the workplace. It can be a useful tool in managing the vastly complex and uncertain relationship between employers and employees. The vast majority of workplaces would greatly benefit from having a written employment agreement. Such agreements, however, are best entered into before the start of the employment relationship. In an effort to make workplaces as stable and as productive as possible, employers should give serious thought to the use of written employment contracts for the purpose of defining the parameters of their employment relationships.