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Should Your Employees Sign a Contract?

business.com editorial staff
business.com editorial staff

A Supreme Court ruling might change the way employees view contractual agreements.

  • Employee contracts may soon be necessary for businesses of all kinds.
  • Some experts assert that these contracts will make it harder for employees to assert their rights as employees.
  • Some of the most common types of employment contracts are at-will employment contracts, written contracts, oral contracts and implied oral contracts.

Business owners want to surround themselves with talented employees. In addition to a thorough vetting process to find the best candidates, employers need to look at employment agreements to close the deal.

Adding employees under employment-at-will agreements or signing them to contracts can cause your business to be viewed differently by potential employees, and potentially lead to legal ramifications down the road.

The Supreme Court ruling in Epic Systems Corp. v. Lewis adds another consideration for employers signing employees to contracts. Regarded by some as a win for employers, the ruling allows contracts to stipulate that all employment claims go through individual arbitration rather than class-action court arbitration with fellow employees.

We spoke with experts to better understand the potential effects of the Supreme Court's decision and to share a few tips for employers signing employees to contracts.

Interpreting Epic Systems Corp. v. Lewis

While the Supreme Court ruling gives employers the ability to avoid potential lawsuits by instead opting for individual arbitration, employment attorney Michael Harman isn't expecting a major impact on employees.     

"Even though employers can include these waivers in their employment agreements, it doesn't mean they actually will," Harman said. "There's still a number of reasons why an employer would choose not to include a class action waiver – mainly that requiring employees to arbitrate claims individually could end up being [costlier] for the employer if instead of defending one class action claim, they are now required to defend dozens of individual claims." 

Other legal experts, like workplace discrimination attorney Alex Umansky, believe employees will feel the effect of the new legislation.

"This will make it much more difficult for individual employees to exercise their rights under the law, as the time, cost and effort needed to bring an individual arbitration could be more than the employee can afford," Umansky said.

Only time will tell whether employees suffer from the court's ruling. Employers obtained an avenue to avoid class-action lawsuits; whether they take it at the expense of employees remains to be seen. For businesses looking to gain the trust of potential employees, offering contracts that don't force employees into individual arbitration if they file an employment claim could separate you from competitors. 

Benefits of contracts

Contracts can prove valuable when hiring top talent. Employees like the job security of a contract, while employers enjoy knowing they have one of their top employees committed to the team. 

"Employers may use such a contract to secure a highly positioned or highly qualified employee," said Linda F. Williams, a certified executive coach and management consultant. "This protects the company for the stated period of time, and it protects the employee from arbitrary separation."

Employees relocating may also like the added job security, according to Umansky. At-will employees are at risk of being let go at any moment, including having their job offers rescinded. Contracts alleviate that stressor, which may help your business set itself apart from other companies. Job security can prove quite valuable in the recruiting process.

An additional benefit is the increased protection of company secrets through nondisclosure and noncompete agreements. If you're a company with specific knowledge you need kept in-house, contracts serve as a reliable way to protect that knowledge.  

Drawbacks of contracts

Just as employees can face consequences for breaching a contract, employers can as well. It's important that employers act truthfully and create fair contracts. Employees don't want to work for companies that try to trick employees with complicated and unfair contractual agreements.

For employees, it's a good idea to enlist the help of a legal expert when reviewing contracts. Understanding the contract's language is crucial before accepting a position and signing the contract. It's especially important to review an employer's protocol for letting employees go.

"An employee would be highly disadvantaged if [they enter] into an agreement that gives the employer the right to freely terminate the agreement and then restricts the ability of the employee to acquire subsequent employment due to restrictive convents contained within the agreement," Harman said. For example, "an employee may leave a good job to take a position with a new company, just to be terminated two months later and unable to take a similar position with a competing company for several months."

Transparency is critical for employers asking employees to enter into contracts.  

Are contractual agreements right for your business?

When it comes to contracts, employers should keep an eye on the aftermath of the Epic Systems Corp. v. Lewis ruling. Employers can limit the number of times they face class action lawsuits, but it's important not to abuse the power to limit employee rights. If companies do begin to consistently take advantage of employees, new entrants to the job market will notice and shy away from entering into contractual agreements.

Types of employment contracts

According to Gonzalo Law, some of the most common types of employment contracts are:

  • At-will employment contracts: This is the most common employment contract, and it says employees can quit or be fired at any time.

  • Written employment contracts: A written contract is a bit more complex and sets specific obligations for both employers and workers.

  • Oral employment contracts: These contracts are legally binding but are much more difficult to prove.

  • Implied oral contracts: Although these products are not formally documented, they can be a combination of written and verbal contracts.

When deciding whether to form at-will or contractual agreements with employees, it depends on what both you and the employee want. If the worker possesses tremendous value and wants long-term job security, a contract could be best. If they're an entry-level employee fresh out of college, an at-will agreement leaves more flexibility in case the hire doesn't work out. The decision rests on employer and employee needs. To best determine the option that suits your scenario, consult a legal expert.

Image Credit: fizkes / Getty Images
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