The frustration and heartburn due to costly errors in the employment contract are avoidable. Before putting fingers to keyboard or the traditional pen to paper, you have to define the musts – the essential terms – for the employment contract.
The essential terms are defined by the context and reasons for entering into the contract. Are you hiring a new employee or entering into a new agreement with one of your current employees?
Contractual Terms for all Employment Contracts
Regardless of the reasons for entering into an employment contract, there are some common and essential contractual terms you must capture in all employment agreements.
- Compensation: Whether you are hiring a new employee or promoting your star employee, they need to perform some services in exchange for compensation. Capturing the responsibilities and compensation is very important for all employment contracts. The challenge is capturing variable compensation with components like bonuses and commissions. Employers have to consider how the commission will be enumerated and whether the bonus is discretionary or nondiscretionary.
- Confidentiality: All employment contracts should define confidentiality in the context of the nature of business. Also, ownership of intellectual property during employment should be outlined clearly in the contract. To protect your business interests from departing employees, you have to include enforceable restrictive covenants.
- Terms of termination: You can’t get into an agreement that does not allow you to opt-out, right? You should define the formula for termination clearly and precisely to ensure enforceability. A contract can be terminated with a just cause like corruption or without just cause if the employer limits termination entitlements to applicable employment standards legislation. Employee resignation also leads to termination of the contract.
- Severability provision: Popularly known as the “Humpty Dumpty provision,” severability provision is a must-have for all contracts to ensure that a small contradiction does not render the entire contract null and void. If a small section of the contract like one paragraph is found to be null and void, judges and lawyers debating the legality of the contract should analyze voided sections separately to ensure the contract does not fall apart completely.
The Musts for New Hire Contracts
Special intricacies in hiring a new employee should be captured precisely in the employment contract. To avoid issues in the future, the contract must include:
- Confirm freewill: If the employee being hired is employed in another organization, the contract has to confirm that they are leaving other employment to join the company voluntarily. New hires should confirm that they are joining the company without any inducement to leave their prior employer.
- Probationary period: All employment contracts should include a probationary period for the employer to get to know the new hire. The clause should stipulate that the employer will assess the suitability of the newly employed before awarding long-term employment or terminate the contract during the period under applicable employment standards legislation.
- Lack of breach or non-compete: Newly hired employees have to warrant that they are not breaching any non-competition agreement or restrictive covenants with previous employers. The employment contract should also capture new hire’s warrant that they will breach, disclose, or use confidential information of former employers in their current employment.
The Musts for Contracts with Existing Employees
There are several contractual terms to consider when presenting an existing employee with a new employment contract. The musts for this employment contract include:
- Consideration: A new contract should address consideration by highlighting a new offer by the employer to the employee in exchange for them to enter into the new contract. A contract that does not have anything new to offer is unenforceable. Considerations are not only monetary but can also be anything new, practical, and sufficient for the employee to agree to enter into the new contract.
- Legal advice: Employees should be offered the opportunity to seek independent legal advice. This offer should be captured and confirmed in the employment contract in writing. Also, it should indicate whether the employee received or waived the right to obtain independent legal advice.
- New and old clauses: If old clauses from a previous contract remain in force in the new contract, the employer should highlight the clauses clearly and precisely. The new contract should include any clauses introduced by the employer for the first time.
Regardless of the context, all employment contracts must record the terms and conditions agreed upon by the employer and the employee in a clear and precise language to ensure enforceability.