Hiring and the Law – Do I Need an Employment Contract?

Devora L. Lindeman, Esq., Partner at Greenwald Doherty LLP, is providing us with insight and information regarding the hiring process. Ms. Lindeman is a management-side employment lawyer and has exclusively represented managers and companies in federal and state agencies and courts with regard to their labor and employment needs for many years.

Questions addressed to Ms. Lindeman may be addressed in this column.

Hiring and the Law
By Devora L. Lindeman, Esq.*

Question: I’m hiring a new employee. Do I need an employment contract?

Answer: Probably not.  Unless the new hire is a senior executive with a complex compensation package and, perhaps, a “golden parachute” (a type of severance arrangement), or other similar guarantees, your company would probably be better off not having employment contracts with your employees.

Often, the employment contracts I see are trying to do the job of an employee handbook and an offer letter combined.  For example, sometimes the contract sets forth information regarding company policy that the employee is expected to abide by and also includes employee benefits.  The company would be better protected with an employee handbook that provides the company policy and the benefits being offered at the time the handbook is published. This handbook would of course be distributed to all employees.

If the company has included individual employee benefits in the employee contracts, but then wants to change a benefit (or if, for example, the insurance company changes the health insurance policy and/or insurance premiums required), the company will need to change each individual contract for the employees affected.  There also could be issues raised if an employee refuses to sign a new contract and demands the old benefits, but the company is not in a position to provide them.  It is better for the company to have such global employment policy and benefit issues addressed through a general employee handbook that is applicable to everyone.  Employee handbooks should be able to be changed whenever the employer desires to do so.

An offer letter is a better vehicle to use to set forth the basic terms and conditions of employment—start date, base compensation, eligibility for bonuses or commissions, etc.  If the employee is going to receive commissions, a separate commission agreement may be advisable.  If the company is concerned about confidentiality, non-competition and non-solicitation of employees and/or clients/customers, a separate agreement containing these “restrictive covenants” is called for.  If a company is going to use an employee contract or agreement, it should be based around these restrictions, not the employee’s employment, generally.

The offer letter should be conditioned upon the employee signing any other types of agreements, usually on the employee’s first day of work.  The offer of employment also should be conditioned upon passing any physical exam the employer requires for people entering that new hire’s position, or upon passing any required drug test, as well as upon the employee’s ability to demonstrate his or her eligibility to work in the U.S.

Additionally, employees in the U.S. should be hired at will.  That means that the employment relationship exists as long as the employee and employer “will it”—as long as they want it to exist.  If an employee is at will, when the employee wants to leave, he or she can quit.  When the employer doesn’t want the employee to work for the company any more, the employer can let the employee go.  Employment contracts are often structured with certain durations, for a term of a number of years.  Including an expected duration of the term of employment destroys an employee’s at will status—which can be vital for the company to maintain.  Employees who are employed at will have no duration for the term of their employment.  It lasts as long as the employer and employee both want it to.

Thus, there are a number of pit falls with utilizing employment contracts with your employees.  If you determine that you want to do so for your business, it is probably a good idea to have it reviewed by a management side employment lawyer familiar with the law where your business is located.  That will ensure that you have not inadvertently included any provisions in the contract that could be counter to the company’s interests and be more trouble than they are worth in the long run.

*Ms. Lindeman is a Partner at Greenwald Doherty LLP, a law firm that exclusively represents businesses in all aspects of labor and employment law.  These columns are intended to be general information regarding the topic discussed and are not to be considered legal advice regarding a specific situation. Contact a management-side employment attorney familiar with the law of your jurisdiction for specific advice.  Ms. Lindeman is admitted to practice law in NY and NJ and may be contacted at DL@greenwaldllp.com.  She is under no obligation to respond to reader inquiries personally, but may answer general employment law questions through this column.

© 2011 Greenwald Doherty.  May not be reprinted without permission.