Contract law FAQs

When an agreement is deemed a contract?

A contract may be formed when an employer promises certain compensation in exchange for a specific type of labor. Employment contracts may be in writing or verbal, or some combination of the two. E-mails may, for example, form part of employment agreements.

Employment contracts may also be implied through the conduct of the parties. To limit their liability for such agreements, employers will frequently include clauses in “offer letters” that say that any prior terms are superseded by the written agreement, and/or that employment is “at-will.”

The offer letters or other agreements will often state that the terms of the agreement can be modified only in writing. If you are given such a letter to sign, you should contact an attorney immediately. Though you may regard it as a simple formality (with the real intent being your months of prior conversations and e-mails), a disreputable employer may seek to use such agreements to renege on promises made.

How do I negotiate an employment contract?

Written employment contracts typically set forth the terms and obligations of the employer’s relationship with the employee. Typically, only high level executives or managers are given such agreements for negotiation.

These written employment contracts are negotiable prior to acceptance of a position. After signing the employment contract, the employee and employer are both bound under the terms of the contract, with future revisions often required to be only in writing.

The employment contract often gives the employer control over how and when they can terminate an executive. On the flip side, an employment contract can provide the employee with a sense of job security, if it includes a “for cause” provision, or other provisions on severance and separation.

Even if a written contract does not include a “for cause” provision for termination, if it covers in detail when and how commissions or bonuses are paid, then it may be very helpful to the executive or manager who signs it.

What items should be featured in an employment contract?

Basic terms in a written contract will often include the following, though each contract is different and key terms will vary depending upon the industry, position and individual involved:

  • Job title, responsibilities and duties
  • Salary or compensation
  • Standards for evaluation
  • Health/Medical benefits
  • Other benefits (stocks, options, etc.)
  • Length of employment
  • Grounds for termination
  • Severance terms upon termination or voluntary resignation

What are some common clauses featured in employment contracts?

  • Arbitration Clause – This clause provides that if the employer and employee have a dispute, they must go through arbitration rather than the court system. Arbitration is much like a trial before a judge — employers like it because there is no jury, and the process is confidential. The arbitrators are often part of private dispute resolution companies, and have been selected because they are retired judges or attorneys with years of experience in the particular field. In many cases, arbitration is binding on the parties, and neither party can seek judicial review of the arbitrator’s decision. In California, there are some strict guidelines as to when an arbitration clause is legal, and frequently the clauses are subject to challenge, so that the right to jury trial is preserved. Even if the arbitration clause is valid, the employer is required to pay the costs of arbitration.
  • Non-Compete Clause – The employee is restricted from working for the employer’s competitors for a period of time after leaving the employer. This clause may also place restrictions on types of industries or geographic locations where the employee may seek future employment. As we spell out in the non-compete clause section below, these clauses are often over-broad and unenforceable by the employer because they are illegal. Nonetheless, they are used by the employer to intimidate the employee.
  • Confidentiality and Trade Secrets– This will specify what business information the employee cannot use or discuss once they leave the job. In some circumstances, the employee’s work or products created while employed may also be defined as confidential or proprietary to the company. When the company seeks to define confidentiality and trade secrets in ways that are over-broad, it may be simply another means of establishing an illegal and unenforceable non-compete clause.
  • Choice of Law Clause – This may indicate what state law courts will use to interpret the contract terms and settle contract disputes.
  • Severance – This states what the employee will receive if the employment relationship must come to an end. This clause may also specify the difference in benefits the employee will receive if she is fired, resigns or is laid off.
  • Termination Clause – Often this clause will describe the procedure for termination. It may provide whether and when employment is renewable. It may also provide that the employee or employer must give advance notice before ending employment. Some managers and executives are able to negotiate “for cause” termination only, among other benefits.
  • Covenant of good faith and fair dealing – Even if not explicitly stated, both parties are required to treat the other party fairly. A failure to pay commissions, bonuses or other benefits may constitute a breach of the implied covenant of good faith and fair dealing.

Do I need an attorney for my employment contract matter?

You should consult an attorney before signing or drafting an employment contract to ensure that you know what to expect under the contract. An attorney can also help negotiate terms that will benefit you and to re-negotiate the contract if either party wishes to change the employment relationship.

Receive the answers to other contract law questions by contacting our firm. We are available by e-mail or by calling 310.385.0777.