How to Read Your Business’s Employment Contracts Like a Lawyer (Even if You Didn’t Go To Law School)

Many small business owners fail to understand the nuances of the contracts they utilize with employees. Some small businesses simply pull their contracts off the internet and hope that they will apply to their own circumstances or provide adequate legal protection. Other businesses have had their contracts drafted or reviewed by a lawyer, but have been using the same contract for years. Both of these approaches could have serious legal consequences.

Even if you haven’t gone to law school, some knowledge of the key terms that appear in most employment contracts can help give your small business an edge. This post examines some of those key terms and points out some common legal pitfalls for employers in these contracts.

The term of the contract.

The “term” of the contract refers to how long the agreement between the parties – in this case, your business and your employee – will last. This is a very important provision because it can affect your employees’ ability to bring claims against your company. As a general rule, employment is “at-will,” meaning that either party can terminate the employment relationship at any time, without notice, for any reason or for no reason. If there is a term specified in your contract, but the contract does not also specify that the worker’s employment is “at-will,” your business may find itself on the receiving end of a breach of contract lawsuit if you terminate the employee before the term has elapsed.

Bonus provisions.

Providing a bonus can be an excellent way to help attract and retain employees. However, promising the payment of a bonus in an employment agreement can lock your business in to paying that amount, regardless of the employee’s performance or the company’s success. If your contract specifies that the payment of a bonus is at the company’s sole discretion, this may help your business retain the flexibility to pay out the bonus based on employee performance and business conditions.

Severance provisions.

Many contracts contain severance provisions to help ease any transitions and avoid cumbersome negotiations at the conclusion of the employment relationship. The general purpose of severance is to provide something of value to the employee in exchange for the knowledge that he or she will not be able to sue your business. It is important that your contract specify that the employee is only entitled to a severance payment if he or she in fact waives those legal rights. Otherwise, your company will pay out the promised severance and still risk the possibility of a lawsuit.

Restrictive covenants.

Your business likely invests significant time and expense in the development and training of your workforce. Particularly if you have a unique or specialized business, it can be extremely damaging if one of your employees takes all of that specialized knowledge and then begins working for a competitor. Clauses called “restrictive covenants” can help protect your business from this scenario. They can include restrictions on the use of confidential company information, restrictions on the solicitation of other employees to leave the company, and restrictions on an employee’s ability to work for a competitor in a certain geographic area for a certain period of time. There are many specific legal requirements for these provisions, so it is best to consult with an attorney if you believe your business would benefit from the use of restrictive covenants.

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