Contracts can describe or change your relationship with employees or independent contractors. They can protect your important business information or restrict your employees’ ability to compete with you after they leave.
Here are some of the most common types of agreements that employers make with their employees or independent contractors.
Contracts that Define the Employment Relationship
In most states, employees are “at-will,” meaning that they can leave or be terminated at any time, for any legal, nondiscriminatory reason. An employment agreement can change that. The employee agrees to work for a company for a specified period of time, and the company cannot terminate the employee except for good cause.
An employment agreement can help guarantee that key employees won’t leave in the middle of an important project, but employment agreements also limit your ability to lay those employees off if you need to.
Independent Contractor Agreements
An independent contractor agreement describes your relationship with people who perform work for your business but who are not your employees. An independent contractor agreement will typically specify the type of work the contractor is performing for you, the start and (if applicable) end date, and the rate of pay. The agreement will also clarify that the person is an independent contractor and not an employee, and is thus not entitled to tax withholding, company benefits, vacation or sick pay.
The Internal Revenue Service has strict rules about who can be classified as an independent contractor and who must be paid as an employee. Make sure your independent contractors fall within those guidelines.
Other types of Employment-Related Contracts
Employment contracts can do more than just define the terms of the employment relationship. Contracts can also be used to protect confidential information or to limit employees’ ability to work for a competitor. These sorts of employment agreements might be stand-alone contracts, or they might be included in another contract.
Nondisclosure agreements or “confidentiality agreements” protect your confidential business information from falling into the hands of competitors and other unauthorized parties. You may require nondisclosure agreements for employees, independent contractors and anyone else who has access to information that you don’t want to make public.
Confidential information might include business plans, information about a new product you’re developing, financial information, customer lists, pricing information, marketing strategies, or client or customer’s confidential information.
A nondisclosure agreement usually defines confidential information, describes the acceptable uses of that information, and describes when it can and cannot be disclosed. It may require the person signing the agreement to return or destroy confidential information at the end of a project or employment.
Contracts can also be used to limit your competition. A non-compete agreement may limit someone’s ability to work for a competitor, start a competing business, or attempt to lure your employees away to work for a competitor.
To be enforceable, a non-compete agreement can’t overly restrict a former employee’s ability to get another job. Non-compete agreements are most likely to hold up in court if they limit an employee for working for a direct competitor in a restricted geographic area for a limited period of time.