THE BLOG
01/06/2015 03:13 pm ET Updated Mar 08, 2015

When Should Your Small Business Use an Employment Contract?

Employment contracts are binding agreements between an employer and employee. They spell out every detail, including how long the contract period will last, what the compensation will be, and other employment issues. While you may think that employment contracts are only for large companies, you may want to think again. They can benefit even the smallest business, especially if you have valuable trade secrets you need to protect.

Why Should You Use an Employment Contract?
  • They protect trade secrets: Many small businesses have trade secrets. Whether it's a recipe for your signature bagels or a production method, it must be protected. An employment contract can have a non-disclosure agreement, which prohibits employees from sharing trade secret information during and after their contract period is over.
  • Non-compete: Don't want your employee to work for a competitor or start his own business just down the street? You can include non-compete agreements within your contracts to prevent current and past employees from doing just that. (In California, where non-competes are unenforceable for the most part, employers can use non-solicitation agreements and nondisclosure agreements to protect their trade secrets, client lists, and employees when an employee leaves.)
  • Ensures steady employment: With an employment contract, you have a promise from an employee that you will have access to their skills as long as you provide work for a specified period. While the at-will employee can quit whenever he or she wishes, employees with contracts are less likely to resign because of the benefits and guaranteed work and risk of breaching the contract.
  • Better talent acquisition: An employment contract may attract better talent to your company. A good employee will value the benefits of a contract, and if you can offer them a worthwhile opportunity, you may lock in the best talent long-term.
When Should You Use an Employment Contract? If you are not sure when to use an employment contract, these are a few situations that call for them:
  • You have extensively trained an employee and you want him or her to work for you for a specified amount of time before being allowed to resign. That way you don't waste resources and time training them.
  • You will be exposing that employee to trade secrets that could easily help a competitor if they were shared.
  • You can commit to a timeframe and supply enough work to that employee so that you don't breach the contract.
What to Include in an Employment Contract: Employment contracts don't just benefit your small business -- they benefit the employee, too. Certain things that you should include:
  • The term (how long the employee will work with you)
  • Benefits provided to the employee during the contract period
  • Reasons you could terminate the employee before the contract ends
  • Vacation and/or sick days that are allowed
  • Covenants
  • Nondisclosure agreements. - California employers can use non-solicitation agreements and nondisclosure agreements to protect their trade secrets, client lists, and employees when an employee leaves.

It can be difficult to identify when employment contracts should be used and when they shouldn't. Because contracts are binding, you could be contractually obligated to an employee for a year that you will not need six months from now. Therefore, contracts must be used with caution.

Using employment contracts are very effective ways to reduce employee turnover, but only if they're used properly. As a small business owner, there may come a time when you need to protect your investment or reduce turnover, and an employment contract can do just that.

Get expert advice on creating an employment contract by contacting a human resources consultant at MJMS.net or call 480.924.6101.