The Employment Contract: A Tool to Clarify and Incentivize

by Bryan Lane Berson, Esq.

The previous two columns focused on independent contractor agreements.  This month, we focus on employment contracts.  Usually, employment is “at will” – at any time, an employee can quit, or an employer can sever the employee.  Most employees do not have written contracts for a guaranteed time period.  While a good employee manual can provide many detailed policies, the manual should state that it is not a contract.

See: Worker Classifications: Independent Contractors and Employees
See: Independent Contractors: Structuring Relationships with Workers

Usually, companies reserve written contracts for executives and key employees.  They are personal service contracts for the employee’s labor.  Sometimes, an executive will have special talent or connections that give the person leverage when negotiating.  Negotiation should occur before the relationship begins.

Contracts are a form of private law between parties.  Durable contracts protect their parties’ interests.  Parties should consider their own and one another’s interests.  If a party does not perceive a benefit, there is an increased likelihood it will breach the contract.  That can be a prelude to costly disputes.

Agreements should articulate the parties’ respective rights and responsibilities in as much detail as practical.  Wherever possible, they should avoid ambiguity and vagueness.  Clear communication of expectations must begin early.  If a company tells an applicant something during an interview, but the employee later discovers that the job description, compensation, or benefits are different, or promises will not be fulfilled, it will cause resentment.  That will hurt morale and performance.  As obvious as it sounds, this happens often.

Sometimes, the company will hire the employee only if certain conditions are satisfied.  Conditions may include the company’s securing a large work order (e.g., a contract to manufacture a fleet of vehicles) or the employee’s obtaining a professional license (e.g., earning a black belt in Six Sigma).

A contract should include a detailed job description.  This enables the company and employee to clarify the employee’s responsibilities and company’s objectives.  Specifying the employee’s job title and identifying to whom or to what department the employee will report directly can avoid much confusion and frustration.

Employee compensation comes in many forms, including salary, incentives, bonuses, benefits (e.g., health and life insurance), paid time off (PTO), reimbursement of specified expenses, and perquisites (e.g., use of a company car, tuition for continuing education).

Companies hire employees to help earn or save money, either directly or indirectly.  Well-crafted performance bonuses can reward an individual and help the company.  Warren Buffett has long-favored bonuses over options, in part, because bonuses can be tailored to a worker’s specific performance rather than company-wide performance.  This is not the whole story though.

In Out of the Crisis, W.E. Deming noted that a worker’s performance is dependent upon a combination of forces – many of which are not within his control.  In Juran on Leadership for Quality, Joseph M. Juran cautioned against suboptimization – the urge for departments (or individuals) to subordinate a company’s goals to their own.  Companies and executives must think carefully about what to reward and how to measure it.  They may decide to revisit or renegotiate this issue later if the job or business environment changes or when they better understand the job dynamics and develop new ideas to earn and save money.

Relationships end.  Employees may resign, be fired, become disabled, or die. Contracts can define termination “for cause” and disability.  They can protect employees from having their responsibilities changed too drastically or against relocation to a distant outpost where they never expected to go.  They can address severance pay and compensation for accrued PTO.  They can create a mechanism to notify one another of immaterial breaches – giving the counterparty an opportunity to cure the breach through corrective action.

Disputes and grievances can be resolved cost-effectively and confidentially through the use of alternative dispute resolution (ADR) rather than litigation.  Mediation gives the parties the best chance to preserve their working relationship.  If that fails, an arbitration clause will enable the parties to resolve the dispute without it becoming a matter of public record parked in expensive, plodding, never-ending litigation.

Contracts vary depending on the parties’ needs, but a thoughtful negotiation process will try to anticipate problems to prevent them from occurring.  Thus, parties should treat employment contracts as effective tools to clarify and incentivize performance and achieve mutual gain.

About the Author:  Bryan L. Berson, Esq. is an attorney and mediator at The Berson Firm, P.C., a commercial and civil law firm that handles estate administration and planning, real estate, commercial transactions, mediation, and commercial litigation.  His e-mail is bberson@bersonfirm.com.  His phone number is (631) 517-1055.  Connect with The Berson Firm on Facebook and Bryan L. Berson on LinkedIn.  The firm’s website is www.bersonfirm.com.

Disclaimer:  Constructive Knowledge is published by The Berson Firm, P.C. (the “Firm”).  The information contained in this column is provided for informational purposes only.  It is not tax or legal advice on any subject matter.  No readers, clients or otherwise, should act or refrain from acting on the basis of any content without seeking appropriate legal or other professional advice with respect to one’s particular circumstances.  This column reflects a general discussion of the law in New York.  It may not accurately reflect the law of other states.  The content is general information and may not reflect current legal developments, verdicts, or settlements.  The Firm expressly disclaims all liability with respect to acts taken or not taken based on any or all content of this column.  This column is Attorney Advertising.  IRS Circular 230 Legend:  Nothing in this column is intended to be used and cannot be used to avoid U.S. federal, state, or local taxes.  It was not written to promote, market, or recommend any tax planning strategy or action.  Copyright:  All rights reserved.  No part of this publication may be reproduced without prior written consent.  Readers may share this column through, but not limited to, social networks.

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2 comments

  1. […] begin in several ways. For instance, parties can sign an agreement, such as a power of attorney or contract. Agency can be implied by the nature of the position (e.g., a salesman). Whether someone is an […]

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