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Do You Need an Employment Contract?

Today, many employers use employment contracts for their employees that address a number of different issues.  From confidentiality, ownership of inventions, and post-employment covenants, employment contracts can be a key part of protecting your company’s assets. Frequently, many small businesses incorrectly assume that employment contracts are only for very large organizations or for their most highly compensated employees.  Even the smallest organizations can benefit from an employment contract.

Every employee (and independent contractor) you have likely should have at least a minimal form of an employment agreement.  Obviously, the more senior and important the employee to the organization, the more significant the issues to address in an employment agreement.  What follows are three questions you should ask yourself before you consider whether an employment contract is right for your business.

The first question you should ask is whether or not you will have any employees creating anything as part of their employment?  Do not assume that just because you are not working with a secret formula that your employees are not creating works. Are they revising computer code, working on a design, developing methodologies or refining processes?  If so, then those employees need agreements to assign these creations – known as intellectual property – created during their employment to the company.  Simply put, if they are being paid by you to create, revise or refine something as part of their employment, then whatever results from this should remain the property of the company.  Bonus point:  If you have employees that have access to your intellectual property, be sure that you have termination protocols to ensure that this access is suspended and the property is returned to the company.The second question you should ask is do you have any confidential information in your work place such as client lists, vendor pricing, client markup, or similar key information?  Do you have any trade secrets?  If so, at a minimum, every employee you have should sign a confidentiality agreement that protects this information during their employment and for a period after their employment.  In addition, each independent contractor you have that gets access to this information should also be required to sign this type of an agreement.   Bonus point:  The more important the information, the more important it is to have security such as passwords or encryption on the information.  The more you protect it, the more likely a court will consider it valuable enough to protect.  Double bonus point:  Most states protect trade secrets even without an employment contract.The third question you should ask is whether or not you are concerned about employees leaving your company and then soliciting or diverting your employees or customers?  If so, then  you should consider a restrictive covenant.  Typically, restrictive covenants can limit competition, limit solicitation of your clients and employees, and even vendors.  Agreements which exceed two years are difficult to enforce as are agreements that prohibit an employee from being employed anywhere.  Talk to your counsel about these issues if you think a restrictive covenant is needed.  Drafting restrictive covenants is not a task to undertake without legal counsel.

If the answer to all of these question is no – and it would be surprising if you answered no to all of them – then it is likely that you do not need an employment contract. Even still, you should still have a solid employment handbook which addresses some of the issues above, but that is a column for another day. Keep in mind that just because you have an employment contract does not mean that your employees will no longer be employed at-will.  Careful drafting of your contracts is essential.