What are Employment Contracts?

An employment contract is a written agreement between an employer and an employee. It defines the employment relationship in terms of:

  • The employee’s responsibilities
  • The length of the employment
  • Employee benefits
  • The grounds for which the employee can be fired
  • Limitations on the employee’s ability to work for the employer’s competition after leaving the employer
  • The way contract disputes must be resolved

Terminating or Altering the Relationship

Employers can specify in employment contracts whether a new employee is “at-will” or not.  An “at-will” employee can be fired whenever the employer no longer needs the employee.  When an employee is not “at-will,” employment contracts usually require the employer to have some contractual basis or “cause” to fire the employee. The employer would be in breach of the contract if the employer fires the employee for a reason that is not outlined in the contract or is not somehow justified. This employment relationship differs from that between an employer and an at-will employee, who can be fired for any reason as long it is not one that is illegal under state or federal law.

Non-Compete Clauses

Many employment contracts contain non-compete clauses. Such clauses limit the employee’s ability to work for the employer’s competitor or set up their own business that competes with the employer after the employee leaves the employer.

The purpose of such clauses is to prevent the employee from using the former employer’s trade secrets or other proprietary information to his or her benefit. A court will uphold non-compete clauses if they are reasonably limited in duration, geographical scope and the prohibited type of work.

A reasonable amount of time an employee can be prohibited from working in a certain job, geographical area or industry usually ranges between six months to two years. However, an employee who has not gained any confidential or proprietary information during the employment probably cannot be prevented from working for the competition. Moreover, non-compete clauses that pose undue hardship on the employee in finding employment or do not protect a legitimate business interest of the employer will most likely be void and unenforceable.

Arbitration Clauses

Many employment contracts require that employer-employee disputes must be resolved by arbitration. Arbitration is a way to resolve disputes outside of court. The parties submit their dispute to an impartial third-party who will review the evidence and issue a decision that is legally binding for both sides. There are limited grounds to appeal an arbitrator’s decision. Usually an arbitration clause is enforceable, but there may be circumstances where it cannot be under state or federal law.

Cannot Violate Labor Laws

As a general rule, the courts will enforce employment contracts. However, the courts will not enforce an employment contract that violates state or federal labor laws, and employees cannot contract away their statutory rights. For example, under the Fair Labor Standards Act, all employees must be paid for overtime work. The court will not enforce an employment contract that states that the employee will not be paid for overtime work.

Ordinary Contract Law Governs

Employment contracts are like any other contract except with a few nuances. Standard principles of contract law govern employment contracts. Both parties must understand and agree to the terms of the employment contract, and there must be exchange of something of value. Additionally, there is an implied covenant of good faith and fair dealing, meaning that both the employer and the employee have a legal duty to deal with each other fairly.