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6 Costly Employment Contract Mistakes To Avoid


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Many startups make the mistake of not establishing a proper legal structure right off the bat. However, getting off on the right foot means that you need to dot your i’s and cross your t’s in every aspect of the business — including contracts — to prevent potentially costly problems down the road.

One of the key areas in which you need to focus is on employment contracts. When you hire others to work for you, employment contracts are vital to outlining what is expected of employees, the terms of their employment, company policies, ownership of intellectual property, and certain financial agreements. Without these contracts, should the relationship between you and an employee be severed, you could find yourself facing a lawsuit — and significant losses when you have to pay damages to a former employee.

Despite the importance of employee contracts, many startups make certain common mistakes with them. As you develop your contracting processes and procedures, keep these mistakes in mind so you don’t make them and land in hot water later.

1. Not Creating Employment Contracts at All.

Some businesses assume that drafting a written offer letter is enough, that it covers the entire agreement between the employer and the employee. However, most offer letters don’t cover everything that should be included in an employment contract, nor do they represent a binding agreement between both parties. Therefore, you must develop a specific employment contract that addresses all of the important factors in the employment agreement as well as any negotiated clauses that can be signed by both parties. Contract management software can speed this process, allowing you to use templates and negotiation tools to quickly draw up these typical documents.

2. Using the Same Contract for All Employees.

Most companies have a variety of different employee types, including full-time, part-time, temporary, and contract workers. Because the laws and regulations governing each of these employee types is different, and because each employee type is likely to have different contract terms, you cannot use the same employment contract for each. Should questions arise in the future, using the wrong terminology on a contract (calling someone a consultant when they are actually an employee, for example) could nullify the agreement and lead a court to award damages to an employee. If you have different classes of employees, you need different contracts for each of them.

3. Not Differentiating Between Employment Contracts and Employment Policies.

Some employment contracts do include clauses that could be considered employment policy issues, such as outlining the hours to be worked or dress codes. However, a contract is primarily designed to outline the rights and responsibilities of both the employer and the employee, not cover every single rule and regulation governing day-to-day operations. More to the point, the provisions of a contract are legally enforceable and binding, and cannot be changed without both parties agreeing in writing. Therefore, employers need to maintain separate employee policies, which offer more flexibility while still outlining how the business will be run. For example, while a contract might specify that an employee will have access to a company mobile device for work purposes, a policy will outline how the device can be used. Making that a policy ensures that the company can make chances that are in line with current industry standards.

4. Non-Disclosure and Non-Compete Clauses That Are Too Broad.

One of the most common problems with employment contracts is that these clauses do not specifically outline what constitutes confidential information or disclosure, or includes language that could potentially prevent an employee from earning a living. While you have a right to protect your business, you cannot do so in a way that is harmful to an individual. In other words, you can prohibit employees from going to work for a direct competitor, but you cannot ban them from working within the industry as a whole.

5. Ignoring Current Laws and Regulations.

Employment law is constantly changing, making it imperative for employers to continually revise employment contracts to ensure compliance with the most up-to-date laws and regulations. Contract terms that are not in compliance with the law can and will be nullified in court, so stay abreast of current regulations.

6. Not Updating Employment Contracts.

Finally, employment contracts are not static documents that should be filed away and forgotten. Contracts should be reviewed annually and revised to reflect current laws, policies, and changes in employment status or responsibilities. Failing to do so could create costly loopholes should there be a lawsuit.

Contracting is complex, and should always involve legal counsel to ensure it is correct. Use the tools you have available to you and avoid these mistakes and you will have one less thing to worry about as your launch your startup.