Employment Contracts

If I told you that you could spend $1,000 now and save $20,000 to $100,000 in ten years’ time, would you spend the money?  I think so.  However, my experience is that most business owners do not.

I used to be surprised at the number of employer clients that did not have written employment contracts with their employees.  It happens so often that I am now surprised when an employer actually has one.

The best example of how an employment contract can save you money is when you are terminating employees.  Your employment contract can limit the amount of money to pay a terminated employee.  If the contract was entered into properly, it can be a complete defense to a wrongful dismissal lawsuit.  In other words, if your fifty year old employee is terminated after twenty years of service in a middle management position, your employment contract may limit what you must pay them to, for example, four months' wages.  If the employee did not have that limitation in the employment contract, they could easily ask the courts to award them eighteen months' wages.  If your employee is paid $60,000 per year, your employment contract just saved you fourteen months’ wages, or $70,000.

The thing that most surprises employers when I give them advice about employment contracts is that many of the written employment contracts that I do see are worthless.  Sometimes it’s not the actual contract that is the problem (although some of the home-made jobs are pretty atrocious): it’s that the contract is worthless because of how it was created.

If you offer a prospective employee a job in person or on the phone and they accept the position, it does you no good to present the employee with the written contract at a later date.  That written contract is worth nothing if there is anything substantial in it which was not specifically discussed at the time the employee accepted the job.  I’ll bet you didn’t discuss the termination provisions over the phone.

The proper way to use a written employment contract is to offer a prospective employee a position and advise that the details of the position are set out in the contract of employment which they must review and sign before they accept employment and before they commence any work.  This way, you can safely say that the employee had opportunity to review the contract before they took the position and even had the opportunity to negotiate different terms.  If the terms are negotiated, is even harder for an employee to get around the written contract.