In all states except Montana an employee is considered to be "at-will," unless there is an employment agreement or contract. An at-will employee means that either the employee or the employer can terminate the employment agreement at any time for any reason. This is typically the desired employment arrangement most of the time. It allows for maximum flexibility in making employment decisions for both the employee and the employer.
However, there are times and circumstances where a different arrangement is desired. An employment contract allows the parties to negotiate terms and conditions of the employment arrangement to provide protections and clarification for both parties.
Compensation and Benefits
An employee may want an employment contract that provides for compensation and benefits. The employment contract can enumerate an expected salary and benefits along with bonuses or incentives, such compensation details may not be possible without a contract.
Hiring a Key Employee
An employer should give serious thought to an employment contract when hiring an executive or key employee. Such an individual may have unique or special skills that an employer would have difficulty replacing, should they choose to leave suddenly. An employer could contract certain conditions and offer incentives that are not possible without a contract.
Covenants Not to Compete
It may be desirable to an employer to have a covenant not to compete clause that limits competition from the employee, if they choose to leave the company. There may be employees that will learn the business of the employer, such that they could set up a competing business. An employer may want to try to control or limit this type of competition.
Protection of Trade Secrets or Proprietary Information
Sometimes, an employer wants to protect proprietary information or trade secrets. The best way to accomplish that goal is with an employment contract. The contract can dictate that certain material is not disclosed to outsiders or used outside of the company. The contract can also specify how information is used within the company. However, even more important is a contract that specifies what, if any, information the employee can take with them when they leave.
An employer may also want a contract that will ensure that any work or document created by the employee during his employment is and remains the property of the employer. A clause in an employee contract that all work created for the company, using the company resources is the property of the company as defined by the United States Copyright Act, may save the company litigation costs, should there be a future dispute.
If the employee is likely to develop an invention or patent using the company's resources, the employer may want an invention assignment clause. Such a clause would specify that the company owns all inventions that the employee develops or works on that use the company's equipment, supplies, or trade secrets, which resulted from the work that the employee did for the company.
Just as a written hiring agreement can provide for significant benefits and protections during employment, at the end of employment, a severance or separation agreement can have great advantages for the employee. A few of the advantages that an employee may secure with a properly drawn severance agreement are continued salary or settlement payments; bonus and commission eligibility; the extension of stock options or stock rights, the enhanced funding of retirement benefits or so-called "bridges" to early retirement, as well as continuing employee benefits, such as health, life, and disability insurance, outplacement services, a positive letter of reference, and other favorable provisions.
Be aware that even if an employment contract is not desired, there may still be an implied contract. Formal multi-page hiring agreements are not the only form of contracts upheld by the courts. An exchange of letters between the employer and employee may be enough to create an implied contract. Moreover, even with no individual written promises, general policy statements in employee handbooks or personnel manuals may create contracts, entitling employees to protections, such as the requirement of good cause or progressive discipline before employment termination. A formal employment contract is an excellent way to minimize or prevent inadvertent contracts and unintended promises from informal communications.
In most instances, there will be no need for a formal written employment contract. However, for key employees or special business circumstances it may provide both the employee and the employer certain protections.