HR Management

Pros and Cons of Using Employment Contracts

Does your organization use formal employment contracts?

An employment contract is an agreement, signed by both parties, that outlines the terms of the employee-employer relationship. It usually includes things like:

  • Job expectations
  • Salary and benefit information
  • Information on relevant policies like sick days and vacation time
  • Length and other terms of the job
  • Provisions for breach of contract—i.e. when can the contract be terminated?
  • Requirements that must be met for the employee to be terminated and for the employee to leave the organization, including notice requirements and penalties for early termination in either case
  • Grievance procedures
  • Other relevant policy information, such as confidentiality, noncompete agreements, nondisclosure clauses, work output ownership clauses, and any other items relevant to the situation

When done properly, an employment contract is a legally binding contract. Let’s take a look at the pros and cons of taking this route.

Pros of Using Employment Contracts

For many employers, there are a lot of benefits to using employment contracts. Here are a few:

  • Having an employment contract creates a situation in which the employee retention timeline is less of a question. This means that high-performing employees are more likely to stay on board at least until the completion of all employment contract provisions because they will face penalties for leaving without completing the contract terms. This usually means less turnover of high performers.
  • An employment contract can be used as a recruitment tool by offering a form of job security—which can differentiate the employer from competition.
  • Some employers feel that locking in an employee for a specified time period makes it less risky to spend time and money training that individual—they have less fear that the money will be wasted on an employee who may quit too soon. This argument is also used to justify other high expenses (beyond training), such as sign-on bonuses or relocation packages; having an employment contract that requires the employee to stay on board for a specified amount of time means the employer is taking less of a risk with these high upfront costs.
  • Employment contracts can also be a way to have an additional layer of protection with individuals who will be given information that is vital to the company’s success; by keeping these individuals on board for a minimum amount of time, it lessens the risk of confidential company information being leaked. It also provides for legal recourse in some areas.
  • Some employers feel that even though there are stricter provisions that must be met before letting go of an employee with a contract, others feel that it is actually freeing because the terms are more black and white. If the employee is not meeting his or her obligations, the contract can be terminated.

Cons of Using Employment Contracts

As with most employment issues, there are also drawbacks to consider. Here are a few:

  • If termination procedures are outlined in the contract, this essentially takes away the employer’s right to terminate an employee without cause. The employer instead must follow the standards set forth in the contract. This reduces the employer’s ability to quickly adjust to changing labor needs. In essence, an employment contract directly contradicts the general presumption of employment “at will.”
  • If business needs change before the contract term has been completed, the employer may face financial penalties that must be paid to terminate the contract early.
  • Drafting a legal contract usually involves legal fees that should be taken into consideration. Remember, an employment contract is legally binding for both parties and should always be reviewed by legal counsel before proceeding. The provisions set forth in the contract should be reviewed to ensure they will be enforceable for both sides.

Have you utilized employment contracts? What has been your experience?

*This article does not constitute legal advice. Always consult legal counsel with specific questions.
 


About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.