Understanding Employment Agreements

An employment agreement is a formal agreement that specifies the conditions of the relationship between an employee and an employer including compensation and expectations. Also referred to as employment contracts, they are often executed for a specified period, typically one year. 

Not all states require employers to enter into employment agreements.  Many states, like the state of Texas for example, are “right to work” or “employment at will” states.  An “at will” employee can end his or her employment for any reason at any time. Likewise, an employer can terminate an “at will” employee’s employment agreement at any time for any reason, so long as the reason is not an illegal reason, such as racial or gender discrimination.

Although an employer may not be required by law to have a contract of employment when hiring its employees, many employers use employment agreements.  At first glance, employment agreements may seem intimidating because they contain legalese and can be lengthy. Prospective employees may also be afraid to ask questions about the provisions of their employment agreement, fearing any inquiry might jeopardize their potential employment. Nevertheless, many of the provisions in an employment agreement provide benefits and protections to both employers and employees. 

Below is a list of provisions often found in employment agreements and a brief summary of the benefits:  

• Job Description and Duties.  This provision defines the scope of the job and gives the employee an understanding of what the employer will and will not expect of them.  This provision helps avoid misunderstandings surrounding the employee’s job responsibilities and may also provide guidance on how the employer will measure the employee’s performance.  This provision can protect an employee because it limits an employer’s ability to arbitrarily change or expand an employee’s duties once the employment has begun.

• Compensation and Benefits.  This provision defines the employee’s pay and benefits, which often include whether an employee is paid by salary or on an hourly basis, whether overtime will be paid, whether vacation and/or sick leave shall be accrued, whether insurance is available, and what, if any, bonus the employee may be entitled to. 

• Drug Testing Program.  Many employers require their employees to abstain from the use of illegal drugs and may require employees to undergo random drug testing. The employment agreement should state whether such a program exists, and if so, define how the program is run. 

• Length or Term of Employment.  Some employment agreements specify a period of time, or term, that the employment is to last.  Once that period of time has passed, the employment generally ends unless both the employee and the employer mutually agree to renew or extend the agreement.

• Termination of Employment. This provision defines circumstances in which an employee could be terminated “for cause” and/or “without cause.”   This provision also typically requires the employee return certain property to the employer, including a company vehicle, computers, cell phones, uniforms, and identification cards.

• Confidentiality Agreement.  A confidentiality agreement is a provision that imposes a duty onto the employee to protect the employer’s confidential information and trade secrets, both during the course of employment and after the employment has concluded.  A confidentiality agreement can impose a variety of civil penalties on an employee if the confidentiality is breached, including the financial loss incurred by the employer.

• Covenant Not to Compete/Non-Competition Clauses.  This is a provision in which an employee agrees not to compete against an employer in a particular profession or trade once employment has ended. Employers and employees should recognize that non-compete agreements have legal limits.  Employers who want to include a non-competition agreement in an employment agreement should consult an attorney to ensure that they have the appropriate terms to create an enforceable agreement. Likewise, employees should seek legal advice before signing a non-compete agreement, as it may significantly limit the employee’s ability to seek future employment.

• Non-Solicitation Clauses.  Typically, this provision prohibits an employee from soliciting or recruiting clients and/or coworkers away from the employer.  Such solicitation typically arises in instances where an employee leaves a job for new employment.

The Diefenbach Group understands the benefits and pitfalls employers and employees may encounter when it comes to employment agreements.  Whether you are a hiring business or an individual seeking employment, our team is here to assist you with your employment agreement needs.