Employment Contracts 101

What to look for and what to avoid in an employment contract

Being offered an employment contract can be a good thing or not. It all depends on whether or not you know what to look for. Who better to ask about the ins and outs of employment contracts than a contract lawyer? With this in mind I contacted Karen Myers, Karen Wackerman Myers, LLC for a little Employment Contracts 101.

Myers, who is admitted to practice law in New York and Connecticut, agreed to share her expertise with us. She also noted that while her answers are generally applicable to New York and Connecticut, some states (most notably California) have very different law relating to employer-employee relations, so having a local lawyer review your employment agreement is always advisable.

CI: What are the most important things to look for in an employment contract?

KM: The five most important things to look for in an employment contract are:

1. Does it offer severance in excess of the company severance policy? (If not, there is not much reason to sign it, since this is probably the most important thing gained by signing an employment agreement.)
2. If there is a severance package, what triggers it? Usually, termination for cause makes the employee ineligible for severance, so the definition of “cause” is very important; an employee would want that definition to be as narrow as possible so there is more of a chance to get severance if he or she is terminated. Also, you might want some situations in which the employee quits to trigger severance – what is often called “Termination by Employee for Good Reason”. For example, if the employee’s salary is drastically cut and he or she quits as a result of that, this may be viewed as similar to a termination by the company and should therefore merit severance payments.
3. Is there a clear statement of the employee’s title, duties, and line of authority? It’s a good idea to start the job with clear expectations on all sides.
4. There will almost certainly be a noncompete clause in the employment agreement, so make sure that is narrowly drawn (limited industry restraints, limited geographic area and limited time frame) so you can still make a living after leaving this job.
5. Make sure that the compensation, benefit and bonus provisions reflect what you agreed to.

CI: What are the three things to avoid in an employment contract?

KM: First, a broad definition of termination for cause, so it is very difficult to receive severance payments. Secondly, a broad noncompete provision, so the employee has few options for future employment in the near term. Finally, a broad confidentiality provision, so the employee might inadvertently violate it even if he or she is not discussing proprietary information.

CI: Who should sign an employment contract? What is the biggest benefit?

KM: Anyone who is being offered generous severance provisions in the agreement, if the other terms are fair to the employee. In general, a company will not enter into an employment agreement unless the employee is joining the company at a relatively senior level or is otherwise exceptionally important to the company. There is a cost associated with preparing an employment agreement and the company will usually have to pay more severance and benefits under the agreement, so it’s not worth it to the company to provide that unless the employee is valuable.

The biggest benefit to the employee in signing an employment agreement is the negotiation of better severance benefits. Few employment agreements promise a permanent job to the employee. Most jobs in the United States are “at will”, meaning that the employer can terminate the employee at any time and for any reason. The benefit that an employment agreement gives is a clear agreement as to the consequences of a termination. If the employer terminates the employee for no reason, the employment agreement usually provides the employee some recourse in the form of severance benefits.

CI: What’s the biggest drawback to signing an employment contract?

KM: An employment contract will almost certainly contain a noncompete agreement, which will limit the employee’s ability to work for competitors, hire away company employees, or take customers of the employer. This can severely limit the employee’s options for future employment, at least during the term of the noncompete (which is typically 1 or 2 years after the termination of employment), particularly in very specialized businesses. Wherever possible, getting severance for the period of the noncompete is helpful.

CI: What’s the best way to get an employer to give you an employment contract?

KM: Asking for an employment contract during the salary negotiations is the best time. As I mentioned above, employers will often not agree to a contract for employees at lower levels of the company. But if they do agree to one, it is best to wait until it is signed before beginning employment so there is some negotiation leverage.

For more information about Karen Wackerman Myers visit her website.