Understanding Employment Contract Provisions

Employment contracts take many different forms. All employees at a company may be asked to sign the same form contract, or each employee may have a contract with the employer that is applicable just to his or her employment agreement. An employer and an employee may simply have an oral agreement regarding the kind of work the employee will do, for how long, and at what rate of pay. Sometimes there is no written or oral agreement but the behavior of the employer and the employee can be viewed as an implied employment contract.

Most employment contracts have common elements such as the employee’s start date, salary, and benefits. Other provisions that often appear in employment contracts are listed here. You can think about what kind of employment contract is agreeable to you before you sign your next employment agreement. Your attorney can advise you about the pros and cons of agreeing to the various provisions or suggest other terms to include.

1. Confidentiality Agreement. An employee confidentiality agreement is a contract or part of a contract in which the employee promises never to share any information about the details of how the employer’s business is conducted, or the employer’s secret processes, plans, formulas, data, or machinery used, such as the price the company has charged for its products. Usually a confidentiality agreement lasts even after the employee no longer works for the employer.
2. Non-competition Agreement. In the non-competition clause the employee agrees that for a certain amount of time after he or she stops working for the employer, the employee will not become employed by a rival company or any company engaged in a similar type of business, and the employee will not set up a company that will compete with the employer’s business or solicit the employer’s customers. Usually the non-competition clause is limited to a particular geographic area.
3. Ownership of Inventions. This provision applies to employees who invent things as part of their jobs. In this part of the contract the employee agrees that anything he or she invents at work, or during a set period of time after termination, becomes the employer’s invention, not the employee’s own invention. Additionally, employees usually agree to assign their inventions to the employer, cooperate with the employer in getting inventions patented, and keep information about the invention confidential like any other trade secret. In return, sometimes the employer agrees to share with employee-inventors a percentage of the royalties paid for inventions.
4. Best Efforts. Although it is often just assumed that the employee will work hard for the employer, sometimes employers add a best-efforts provision to the employment contract. It states that the employee promises to work to the best of his or her ability and to be loyal to the employer. Sometimes it also states that the employee specifically agrees to make suggestions and recommendations to the employer that will be of benefit to the company.
5. Exclusive Employment. In this provision, the employee promises that as long as he or she works for the company the employee will not work for anyone else in the same or similar type of business. It may also extend to a promise not to be a shareholder or director in a similar business, or even to provide services voluntarily to a similar or competitor business.
6. No Additional Compensation. The no additional compensation clause states that if the employee becomes an elected director or officer of the company or serves on a company managing committee, the employee will not be entitled to additional compensation for doing that work.
7. No Authority to Contract. Sometimes this part of the contract is called the agency provision. It makes clear that the employer and employee have an employment relationship only, not an agency relationship; the employee has no right to enter into a contract or otherwise obligate the employer, unless the employer gives the employee express written consent to do so.
8. Termination. A standard part of any employment contract is the termination clause. It states that either party may terminate the employment contract for any reason by giving a certain amount of notice, such as two weeks’ notice. It may also give the employer the right to terminate the contract without notice if the employee violates the contract in any way. Another aspect of the termination clause is a statement that the employer has the right to terminate the contract if the employee becomes permanently disabled because of ill health or physical or mental disability such that the employee can no longer do the job.
9. Arbitration. Arbitration clauses are found in many types of contracts, including employment contracts. In this provision, the parties agree at the onset of the relationship that if they ever have a dispute about any aspect of the employment relationship, they will submit the dispute to arbitration rather than seek resolution by a court of law. It may include details about the arbitration, such as whether the arbitration decision will be binding and how the parties will find an arbitrator when the time comes.
10. Choice of Law. Employment laws vary from state to state. Some states have laws that are generally viewed as more favorable or beneficial to employers than employees are or vice versa. This part of the contract is an agreement that if the parties ever have a dispute that results in a lawsuit, the laws of a particular state will govern the lawsuit, no matter where it is filed.

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