It’s a rare business that needs an employment contract for every employee. But it can save you time, money and legal aggravation if you know which employees should be under contract and which shouldn’t.
And the best way to decide when to use a contract is to consider its advantages and disadvantages and how they apply to each employee in your organization.
- If you want control over the employee’s ability to leave your business. For example, if finding or training a replacement will be costly or time consuming for your company, you might want a written contract to lock the employee into a specific period. Or it can require the employee to give you enough notice to find and train a suitable replacement
- If the employee will be learning confidential and sensitive information about your business. You can insert confidentiality clauses that prevent the employee from disclosing the information or using it for personal gain. (Some companies insert noncompete clauses in the contract, too, but they’re tough to enforce.)
- If you want to entice a highly skilled individual to come work for your company. By promising the individual job security and beneficial terms in an employment contract, you can guarantee the promise and help seal the deal.
- If you want a greater level of control over the employee. For example, if the contract specifies standards for the employee’s performance and grounds for termination, you may have an easier time terminating an employee who doesn’t live up to your standards.
- Limited flexibility. Remember, the contract binds the employee and the employer. What if you later decide that you don’t like the contract terms and want to get out of them, or the needs of your business change? In those circumstances, if you want to change the contract terms, you’ll have to renegotiate the contract.
- Special legal requirements. Employment contracts bring with them a special legal obligation to deal fairly with the employee. In legal terms, this is called the “covenant of good faith and fair dealing.” If you end up treating the employee in a way that seems unfair, you may be legally responsible not only for violating the contract, but also for breaching your duty to act in good faith.