BusinessLiabilityInsurance

Should I Require New Employees to Sign Contracts?

Making a contractual agreement with a new employee during the potential employee interview process is not common in most fields, but it makes good business sense to do so in some industries. A contract can include simple terms of the job like the hours the employee will work, compensation and workplace rules. The employee's signature indicates that she understands those terms so there is no question down the road. More commonly, a highly skilled field will require contracts of employees in order to protect their training investment.

Training a new hire is a costly endeavor. Time and resources go into acclimating the employee to his new duties, and the learning curve can temporarily slow production. Once an employee is well-trained, he is an asset to the company, and the company can begin to recoup the cost of training. If that employee suddenly leaves to work for a competitor, the company loses that time and money and is faced with having to start from scratch.

To prevent such a loss, a company may require employees to sign on for an agreed upon length of time. If he breaks the terms of the contract, the employee could be fined to repay the cost of training. A contract like this is practical for saving time and money on new hire training, and it can also help with retention of good talent. Generally, the contract stipulates the fine as a ratio of time spent training. For instance, an employee may be obligated to pay back $1,000 for every month spent on training.

Other contracts stipulate what an employee can do with trade secrets. Non-compete clauses bar employees from working for a competitor for a set length of time. This prevents new hires from being bought out by the competition. Non-compete clauses are controversial, and courts will look for them to be narrowly-tailored and defensible in order to protect the worker's right to make a living.

Another hot-button labor issue is having employees sign arbitration agreements. An arbitration agreement bars the employee from seeking a trial by jury on issues related to employment. Instead, complaints are heard by a panel of arbitrators. Contracts may also prohibit employees from joining class action suits against the company. The validity of these sorts of agreements vary by state.

Disadvantages of Employee Contracts

Having new employees sign contracts benefits companies in many ways. A business can protect its training investment, trade secrets and legal interests. But there are a few potential disadvantages that employers should consider before mandating contractual obligations. Remember, a contract does not only tie an employee to you, it binds you to the employee as well.

Simple contracts spelling out compensation and duration of employment can draw new talent in, as a contract signifies job security. To get the best applicants available, contracts may be written in a generous way. If the company decides to make changes to the terms of the contract, it must renegotiate with the employee. There is never a guarantee that the employee will concede to the changes, and altering the contract could render it void. In this way, contracts limit the company's flexibility.

Employers face a legal double-whammy when they break the terms of the new employee contract or act unfairly. Employers entering into a contractual agreement have a legal obligation called the "covenant of good faith and fair dealing." In addition to breech of contract, a judge could find the company in violation of its duty to act in good faith. New employee contracts have many benefits, but be sure to consult your attorney on all the pros and cons before entering into a legally-binding agreement.

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