10 Common Questions about Employment Contracts

Sep 24 2018

Our previous blog posts, “10 Common Questions about Severance Agreements” and “10 (More) Common Questions about Severance Agreements,” have helped a number of people who are trying to negotiate their way out of a company.  But those posts don’t tell employees anything about what to watch for on their way in the door.  So if you are starting work at a new company — and, especially, if you are in the process of negotiating an employment agreement — this edition of the Employee Rights Blog is for you.

1. What information should the contract contain?

As with most advice about employment law, there is no one-size-fits-all answer.  An employment contract can include whatever terms the employer and employee want and agree upon.  In general, though, employment contracts should and often do include some variation of the following:

  • Compensation and benefits: The contract should state how much the employee will be paid, on what terms (e.g., fixed salary, salary plus commission), and how frequently (e.g., weekly, monthly). It should also state what benefits are included.  Employees would do well not to start working for a company until they have a definite, written agreement on how much they will be paid and when that pay will start.  Otherwise, the employee risks working for free while the final details are being negotiated.  And if the parties ultimately cannot agree on those details, the employee risks negotiating a departure from the employment relationship before it has even begun.
  • Signing bonus/relocation assistance: Along the lines of compensation, the contract should state (if applicable) whether the employee will receive a signing bonus (also called a sign-on bonus) or relocation assistance. The employer may want to include the terms under which either payment must be repaid to the company.  (For example, many contracts provide for repayment if the employee’s tenure does not exceed a predetermined amount of time, although this repayment obligation may be renegotiated upon separation.)
  • Bonus potential/equity potential: The contract should state whether the employee will be paid a bonus (also called incentive compensation), including equity, and on what basis. Some contracts state that bonus potential is “up to” a certain amount of money.  Others state a target bonus (generally as a percentage of salary).  The contract should state how the bonus will be determined (e.g., based solely on the employee’s individual performance or based on company metrics as a whole).  The contract should also state who will determine the bonus.  Many contracts reserve the bonus determination to the absolute discretion of the company.  Employees facing that language should understand that, in all likelihood, there is no guarantee that they will receive any bonus at all.  With respect to equity, the contract should state what type of equity could be paid (e.g., stock options, stock grants, restricted stock units (RSUs), phantom stock).
  • Job title/description/ duties/reporting structure: The contract should state what the employee will be doing and for whom. How else will you know what is expected of you and whether you’re actually getting the job you thought you agreed to?
  • Termination: This is the topic no one wants to discuss, but every employment relationship comes to an end eventually (whether by termination, voluntary separation, or retirement), and it is prudent to discuss how that will work at the outset. In fact, it’s so important that it deserves its own question.

2. When can my new employer terminate me, and what happens then?

You are smart to ask this question at the outset of your employment relationship, especially if you are giving up an existing job or another job opportunity to accept this offer.  After all, if this new job doesn’t work out, your old job or your other opportunity might not be available to you anymore.

In general, termination clauses fall into a few categories:

  • At-will: Many employment contracts state expressly that the employment relationship is “at-will.” “At-will” employment means that either the employee or the employer can end the employment relationship at any time, without notice, and for any reason or no reason at all, so long as the reason is not an unlawful one (such as discrimination or retaliation).  Many at-will contracts are open-ended, meaning the employment relationship continues into the future until one of the parties decides to end it.
  • Good cause / just cause: Some contracts state that the employment relationship can be terminated only for “good cause” or “just cause.” Many agreements then define these terms (which can include willful misconduct, criminal activity, or a breach of company ethics).  Other agreements explicitly or implicitly incorporate the vast labor law jurisprudence about the meaning of these terms.  If the contract provides for termination only for good or just cause, and the employer terminates without cause, then the employee could have a claim for breach of contract and could be entitled to be paid a predetermined severance package or the remainder of her compensation under the contract.
  • Term contract: Some contracts state that they last only for a certain amount of time (e.g., one year, three years, until the completion of a certain project). These fixed-duration contracts also tend to state whether the contract automatically renews unless otherwise terminated by either party.  Under Connecticut law, unless the contract says otherwise, a term contract can be terminated only for “good cause” or “just cause.”
  • Notice: Many term contracts provide for termination prior to the end of the contract under certain circumstances. The contract might say, for example, that the employer can terminate “without cause” — that is, for any reason or no reason at all — by providing a certain amount of notice (e.g., 30 days, 90 days).  If that is the case — and this is critical — then the contract is actually a term contract for the notice period only.  After all, if you have a five-year contract that can be terminated with 30-days’ notice, then in reality you only have a 30-day contract.  Do not be fooled.
  • Good reason: Other term contracts include a “good reason” clause, which provides that the employee can resign the job and still obtain the predetermined severance package so long as she resigns with a “good reason.” “Good reason” is generally defined in the contract, but it might include a material change in duties or a requirement to move to a new location.
  • Silence: Some contracts don’t say anything about who can terminate the contract or on what grounds. The default in Connecticut — as in 48 other states — is that the employment relationship is at-will, so silence tends to mean that.  However, the default can be overcome by the statements, conduct, or intent of the parties.  For example, if your employer made you a promise (even if it is not in writing), you may have the basis for a breach of contract claim, and that could be a good reason to speak with an experienced employment lawyer.

3. The contract says my employer “plans” or “intends” to give me something. Is that a problem?

Potentially.  A statement that an employer “plans” or “intends” to do something — such as provide a raise or bonus or include you in its equity grant program — is not the same as a promise to do so.  And although a statement of present intent might be sufficiently definite to constitute a contractual promise or otherwise give rise to a legal claim, it also might not.  Whenever possible, the employee should try to obtain a definite written promise of the contractual terms that she wants and expects.

4. The contract doesn’t include everything I was promised. Is that a problem?

Be very careful here.  Many employment contracts contain a provision that states, in substance, that you are not relying on any other representations that have been made to you outside this written agreement and that you understand that the entire agreement is expressed in writing in this document.  This provision has several names, including “merger clause,” “integration clause,” and “total agreement clause.”  Regardless of the name, the result is that any other promise or representation that your employer made to you — but which is not included in the written agreement — becomes effectively null and void.  So if your employer promised you certain internal opportunities (such as a plum assignment) before you joined and then fails to deliver on that promise, you may be out of luck.  That is why it is so important to make sure that your employment contract includes everything you are relying upon in your decision to accept this job — and one of the many reasons it is so useful to speak with an experienced employment lawyer before you sign on the dotted line.

5. The contract includes a non-compete provision. Should I be worried?

Probably.  Covenants not to compete — or simply non-competes — are complicated and controversial.  (That is why some states — most notably California — prohibit them altogether.) Whether you should worry about this non-compete clause likely depends on its geographical, temporal, and subject-matter scopes, as well as the severance package you will receive when your employment ends.  If you are terminated from this job and cannot practically work for a period of months (or even years), is that a problem for you?  Or is that a gamble you are willing to take because of how much you want this job?  Only you can answer that question.

Note, as well, that the contract may ask you to represent that you do not have any existing non-competes and/or that there is no legal reason why you cannot accept this position.  Your prospective employer may also ask for a copy of any non-compete or other restrictive covenant by which you are still bound.

One last warning:  A non-compete may reside in a stock agreement, benefit plan, or another document other than your individual employment contract.  Be aware of every document you sign at your employer’s request, even if a representative of the employer tells you that it is all “standard.”

6. I’ve been asked to sign another agreement about “Confidential Information,” “Proprietary Rights,” and “Intellectual Property.” What’s that?

This form of secondary agreement is becoming increasingly common in certain industries, especially the financial, technological, and pharmaceutical sectors.  These agreements vary, but in general, they require the employee to keep all confidential information about the employer confidential.  They might also state that all inventions (or “intellectual property”) that you invent during your employment with the company belong to the company, not you.  Notably, these agreements generally survive the termination of your employment with the company.  In other words, these are promises that will last forever.  So you should be very sure you understand what they say and that you are comfortable complying with them before you agree.

7. The contract says it “incorporates” a handbook or another policy document. What does that mean, and is it OK?

To “incorporate” a document into a contract means to make it a part of that contract.  So if an employer incorporates its handbook into your contract, that generally means that you are agreeing to follow the handbook.  Whether it is OK depends on what the handbook says, and that is why it is important that you read and understand any documents that are included in your employment contract.  Do not be afraid to ask for a copy of the handbook before you sign the contract, and do not assume that the handbook is reasonable just because it applies to every other employee.

8. There’s a contract provision I don’t understand. Does that matter?

Emphatically, yes.  (In fact, many contracts explicitly state that you — the signatory — have read the entire agreement, understood the entire agreement, and had an opportunity to ask questions about anything you did not understand.)  It is essential that you understand every part of your employment contract, for at least two reasons.  First, how do you know that you want to agree to the terms in this contract unless you know what they say?  And second, how are you going to comply with the contract — which is your obligation — unless you know what it means and requires?  Do not be afraid to ask questions—either of your prospective employer or of a knowledgeable advisor, such as an employment lawyer.

9. What is all this legalese?

You may notice that the end of your contract includes a number of provisions that only a lawyer would understand — clauses like a choice of law clause (which says which state’s law will govern the interpretation of your contract); or a forum selection clause (which says where any litigation about your contract will occur); or a severability clause (which generally says that the contract will continue to be enforceable even if a court concludes that any one provision of the contract is not).

The contract also probably says that it can be modified only in a writing signed by both parties.  This is important because it could mean that any promises you receive from your employer after you sign the agreement are not binding unless they are written down.

Finally — and of particular import — the contract might include an arbitration clause, which means that you are agreeing to resolve your disputes with your employer through arbitration.  As we have explained, arbitration is an alternative dispute resolution process where the parties present their dispute to a private arbitrator, rather than to a court or a jury.  Many critics believe that the arbitration system is institutionally and inherently biased in favor of large companies and against employees or other individuals.  At a minimum, you should not sign an arbitration clause without understanding what you are doing and to what you are committing.

10. Do I need a lawyer?

As the nine previous questions (hopefully) make clear, employment agreements are complicated, with nearly unlimited combinations and permutations of terms and nearly as many potential pitfalls for the unwary employee.  And just because everything is great now doesn’t mean you should skip talking to a lawyer.  (After all, if the employment relationship weren’t good at the beginning, you probably wouldn’t be accepting this job.)

An experienced employment lawyer may be able to help you negotiate a better deal, either by talking directly with the employer’s lawyer or by counseling you behind the scenes.  At a minimum, though, before you sign a document as important as your employment contract, you should understand what it means.  And although this blog post is a good start, it cannot replace the individualized advice and guidance of an employment law specialist.

 

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Employment Contracts

About the Author

Joshua R. Goodbaum

Joshua R. Goodbaum

A graduate of Harvard and Yale, Joshua Goodbaum represents individuals in litigation and negotiation, with particular emphases in employment, civil rights, and appeals. He has represented clients in every level of our justice system, from local trial courts to the Supreme Court of the United States, in matters ranging from constitutional law to contract disputes. Learn More

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