Employment contract pitfalls

Business owners must take care when signing an employment contract.

The most common condition of employment in the United States is “at will” employment. This means that both parties, employer and employee, are under no obligation to work together any longer than desired. If the employee wants to leave the business for any reason, he may do so without penalty. Likewise, if an employer wishes to fire an employee, she may do so. If you were to characterize this relationship as a contract, it is one without duration or consequences of breach. “At will” employment is in contrast with indentured servitude, where the employee must work for the same employer until his service is complete ((Fleischer, pg. 2)).

Although “at will” employment is most common, contractual employment is also prevalent. Under optimal conditions, an employment contract can be a superior option to “at will” employment. In fact, two jobs, direct in-home sales and real estate, are required by law to be contract-only ((Fleischer, pg. 6)). But there are certain dangers in contractual employment which, if a business owner does not consider, could cost the business owner a great deal of time and money.

The first danger of contractual employment is liability. An “at will” employee is lawfully responsible for damages caused on the job. This is probably because she is under no obligation to represent the employer. A contractor; however, who causes damage while under employ may pass the liability for damages to the employer. For this reason, many contracts include a liability clause that liberates the employer. Such a clause is not much different from the paper you’d sign to go white-water rafting, hang-gliding, or sky-diving.

The second danger of contractual employment is control. While an “at will” employee has put himself under the control of the employer - idea which hearkens back to the days of master-slave relationships - a contractor has only agreed to an outcome. The employer may hold the contractor accountable to the outcome promised, but she may not dictate the approach. The employer may choose to control the contractor by adding lists of stipulations to the contract, but there is always risk that the contract may not be fulfilled in the manner desired.

The third danger of contractual employment is duration. If a contractor demonstrates that he is making progress towards the agreed-upon outcome, the employer has no grounds to end the relationship without loss. This danger is possible even in circumstances where “at will” employment is intended. Like Fleischer’s example offer letter ((Fleischer, pg. 10)) that presumes the new sales manager will be leading the sales team for three years, an implicit contract duration may occur if an employer is not wary of his language.

Employers who know the dangers may choose to use employment contracts under the best circumstances. Work with clear boundaries, state or federal certifications, and mandated standards is an excellent source of contract work. No office-bound business need employ an electrician, plumber and construction worker because they occasionally require these services; let them contract the work as-needed. Unusual employment circumstances may also warrant the use of an employment contract. Before a business owner pays to relocate a family of six to corporate headquarters in another country, the wise owner may require a contractual agreement lest the employee decide to leave immediately afterward! Finally, positions which are extraordinarily difficult to fill may require the business owner to offer a contractual agreement as a way to persuade and retain talent.

In a foreign context where I may not know the local employment relationship, I will take special care to recommend business owners avoid contractual employment agreements. I will recommend that owners who have a specific job that might warrant a contract to consider common practice in their region. Is this work typically contracted, or do other businesses use another hiring means? A book similar to Fleischer’s work that gives legislative examples will also be an invaluable tool to play out the local pitfalls of contractual employment and how best to defend against them.

To explore more about this, consider the legal battle between Uber drivers and the company over their employment status.

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