Getting An Employment Contract That Works

By Eric Meermann | Author's Blog Jan 6, 2014, 5:16 PM 

The job market is still slowly recovering from the Great Recession, and even under easier circumstances, few people enjoy job hunting. Receiving a job offer about which you are excited often means that you hurry to accept.

As an employee, however, you are responsible for seeing that you and your employer are on the same page about job duties, compensation, benefits and the other parameters of the job. If an employer offers you a contract, it is vital to ensure that it includes everything you expect and no unpleasant surprises.

Many American workers don’t have contracts as such. This practice varies widely by industry, and some employers provide candidates with offer letters instead. Offer letters and contracts have many characteristics in common, and both put down in writing the terms of employment at the outset. Some offer letters, like contracts, are meant to create binding legal agreements between the parties. Others may simply summarize the terms of employment that have already been discussed. Independent contractors, high-level executives, government workers and commission-based sales workers are more likely to hold contract-based positions. Whichever document you receive, be sure you understand whether it is a legally binding agreement or simply a reference point for you and your potential employer.

If you want a contract in an industry that doesn’t treat them as a given, it is worth discussing the possibility during the salary negotiation phase of the recruitment process. While this article reviews what an employee should look for in a contract, many of these principles also apply to offer letters.

When you first see an employment contract, go over it in detail. Once you’ve signed it, just as with any other contract, you have agreed to the terms, so it is important to understand all of them. While a contract can provide security, you want to be sure that you are obtaining a position that reflects what you expect and that you are comfortable with the commitment. Having an attorney look it over with you is not a bad idea, if doing so is practical or if the contract contains a great deal of technical language you feel unqualified to interpret.

Some of the things you will want to look for in a contract will depend on your career path. Certain positions or industries come with legal norms that don’t apply elsewhere. For example, in businesses where revenue is relationship-based, an employer is much more likely to insist on formal noncompete agreements. These are common in sales positions, some sorts of medical practice, and technology and research positions, among others. Noncompete agreements typically must have a set term, and state law varies on how restrictive they can be and remain legally binding. It is worth educating yourself on your state’s requirements to make sure any such agreement is in line with the rules. Employees, of course, tend to prefer that agreements be as permissive as possible, because in some industries, the restrictions can make it hard to get a new position.

Some employment contracts will also include nonsolicitation clauses, which restrict employees from soliciting either other employees or customers. Usually, like a noncompete clause, these agreements are meant to protect a business after an employee leaves, though they can also apply to independent contractors whose current business interests overlap with their employers’. They should also have a set term, and may only apply within a certain geographic area. Be sure you identify and understand any nonsolicitation or noncompete language in your contract, and determine that you do not find it overly burdensome or likely to hurt your future job prospects.

If you are likely to generate intellectual property as part of your job, understand your legal rights in connection with that property. This applies to creative positions, such as technical writers and graphic designers, but also to software and application developers, pharmaceutical researchers, and all sorts of other research and development positions. In most cases, an employee’s work automatically belongs to the employer if it is performed as part of the worker’s normal job duties (that is, within the “scope of employment”). But the issue is murkier for independent contractors or for employees who make discoveries, inventions or other creative works on their own time that somehow relate to their employers’ businesses. Independent contractors often have a “work made for hire” agreement in their contracts, specifying that the creative work in question belongs to the employer. Both employees and independent contractors should understand at the outset who retains the right to intellectual property generated in the course of the job. Employees should make sure employers are not overly broad in their classification of what work for hire or the scope of employment entails.

If you plan to hold a second job, run a side business or pursue other business opportunities, be sure your contract allows for such moonlighting. If your other work clearly falls in the same industry as that of your employer, you could run afoul of a noncompete clause. You may also risk creating a conflict of interest in some situations. Be sure you are not creating a choice between a legal headache and giving up your side business later on if you intend to keep it once you begin work.

An employee contract will generally specify the position’s job title, and outline basic duties. The amount of detail largely depends on the job and the industry. In some cases, you will want very specific descriptions of what your job will and will not entail. For other positions, such rigid definitions would be restrictive and counterproductive. If you do not know offhand the typical practice within your industry, it might make sense to consult a colleague or mentor in your field who can tell you what to expect. How much specificity you seek will also be a matter of personal preference to some extent. However, it is essential that the title and duties in the contract conform with your understanding of the position based on your interview and other conversations with your potential employer. If you notice a discrepancy, speak up before you sign the contract.

Regardless of industry, contracts should outline the basic terms of your employment with the business. These should include whether you are a full-time employee, a part-time employee or an independent contractor. (As my colleague Melinda Kibler observed in her Sentinel article, “Employee Or Independent Contractor?”, the difference between the two is dictated by statute, not your employer’s preference; make sure your classification aligns with the factors that determine it, such as when and how you work.) If you are an employee, it should also be clear what hours you are expected to work; whether flextime is allowed and, if so, how it is structured; and whether and to what extent you will be allowed to work remotely.

The Fair Labor Standards Act (FLSA) covers most jobs. Those positions are classified as “exempt” or “nonexempt,” and it should be clear in your contract which one you will be. Nonexempt employees are entitled to overtime pay, while exempt employees are not. As with employees and independent contractors, the difference between exempt and nonexempt employees is largely determined by legal rules, not employer preferences. Exempt employees must generally be paid as salaried, not hourly, workers. They must also have an annual income over a certain threshold and perform relatively high-level job duties, as defined by the FLSA. If the contract specifies that you will be exempt, or does not allow for overtime, make sure you qualify as an exempt employee.

Other matters of compensation should be spelled out in your contract, as well. The document should clearly outline not only your salary level, but your compensation structure, expectations regarding overtime if you are entitled to it and whether bonuses are guaranteed or discretionary, along with how performance will be measured if bonuses are performance-based. If you were offered a signing bonus, it should be stated in writing that you will receive it. The contract should also set out any relocation costs or education funding that you and the employer negotiated. Matters of compensation also include vacation days and sick leave, and the contract should clearly explain all benefits, including health care, disability or malpractice insurance if applicable, and the company’s retirement plan structure and vesting rules. You will also want to understand, and have outlined, whether your rights to these benefits lapse after some time or whether you are entitled to accrue benefits for future use. In general, if there is anything you discussed in the interview or negotiations about pay or compensation, expect to see it in the contract, and ask if it seems to be absent.

While few people have termination on their minds amid the excitement of landing a new job, carefully review the contract for rules about your departure. A contract should have a start date and, in some cases, an end date. Even for an open-ended position, there may be an end date for the contract, at which point it will be renewed or renegotiated. Many contracts for long-term positions have an “evergreen” provision, stating that the contract will be automatically renewed unless either party chooses to terminate it.

One of the main reasons some workers seek out legally enforceable contracts is to secure a more lucrative severance package for termination without cause than the employer’s general policy. Some employers are willing to lock in an employee they want for a certain term, during which the employee will only be let go for cause (which should be clearly defined in the contract). On the other end of the spectrum, at will employment means either you or the employer can end the relationship without legal penalty; while this provides less security, it also means you may leave when and how you wish.

Every job is different, and every employment contract will be different too. The most important thing is to take time to properly digest the contract’s terms, seek guidance on anything that is unclear and discuss with your prospective employer any terms that unsettle you. A good employer will have put significant time and thought into the contract in front of you; you should do the same before signing on the dotted line.

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