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Benefits of Employment Contracts

Updated: March 28, 2023
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The benefits of employment contracts should be deeply understood by employers to make sure they’re running their businesses effectively. Employment can be a very contentious and litigious area of the law, so getting everything well documented alongside an expert is always the best course of action.

An employment contract employment contract is an agreement between an employer and employee regarding the employee's term of employment. These agreements can be written, agreed to orally, or even implied. Let’s explore some of their benefits.

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Clearly Defined Duties and Benefits

If you run a business or have worked for a business, you understand the importance of employees having clearly defined roles, compensation structures, incentives, and benefits. Without these, you run the risk of creating an ineffective employment relationship and also not having a leg to stand on if you want to terminate an employee.

Employment contracts define responsibilities for new hires and outline how they will be compensated. When used effectively, you can increase the productivity of your employees or create defensibility if you ever need to terminate an employee.

Protection of Both Employers and Employees

The employment contract outlines and protects the rights of both parties. The employer can include terms that are favorable to the company, which may include things like noncompete clauses or nondisclosure clauses to prevent an employee working for a competitor and giving them all of your valuable proprietary information. Employment contracts can also outline responsibilities which an employer can use to show non-compliance to justify a termination.

For the employee, they can make sure to negotiate terms that are most important and favorable to them. This may include things like compensation or benefit packages. It can also include protection against termination without cause.

Overall, protecting both parties in a transaction is always the best course of action which is another benefit of an employment contract.

Retain and Attract Top Employees

For businesses, labor turnover is very costly and can be disruptive to the day-to-day business. A big benefit of an employment contract is that it can define terms of the employment and limit reasons why the employee can leave early.

An employer can never stop an employee from leaving, but they may be able to set up incentive structures to keep top talent to stick around. A good example of this is vesting schedules with stock options.

Recruiting top talent can also be hyper-competitive. Most quality candidates do not stay on the market long and will have multiple offers. Setting up an employment contract with favorable terms is one way you may be able to stand out.

Legally Binding

Creating a legally binding contract means there are real life repercussions if someone breaches their side of the bargain. While this may be obvious, creating a legally binding agreement through a written or oral employment contract will create better incentives to make sure the relationship is successful.

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Reduce the Risk of Up-Front Investment

Training new employees is one of the most important things an organization can do and also comes with a large price tag. Putting an employment contract in place that incentivizes employees to stay can make sure that investment is realized to its maximum capacity.

If you do have benefits to join, like signing bonuses, and plan on spending money on training, it is wise to structure your employment contracts in a way that will keep employees at your organization.

Protecting Proprietary Information and Trade Secrets

Proprietary information, like customer lists, pricing models, etc, is one of the highest value items at any company and you want to make sure it does not get in the hands of the wrong party. A good way to do this is to include terms that protect this information in your employment contract.

If you don’t take the steps to protect this information, it could potentially fall in the hands of your competitors and you can be out of business quickly.

Invention Assignment

If an employee working on your product, using company resources to do so, develops technology that is so good it can get a patent , then you want to make sure the company holds that intellectual property. You can do this by addressing this in your employment contract.

Noncompete

Noncompete clauses are used by employers to limit where employees can work if they end up leaving the organization. This can be especially important if a competitor tries to recruit away a top employee or if an employee’s tries to start a competing business and coax your customers to change providers.

These employees may know your business inside and out, and it is in the company’s best interest to legally limit where they can work. may want to limit or control such competition.

If you need to create an employment contract for your team, ContractsCounsel can help. We have a team of lawyers who have been vetted and work in over 30 different industries. Contact us today to find out how we can help.

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