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Do I Really Need My Employees to Sign Contracts?

"I trust my employees."

"I want to keep things casual."

"We don't need policies and rules."

In the many discussions I've had with small business owners about the importance of having their employees sign employment agreements, these are common objections. Sometimes, the business owner will grudgingly admit the possible usefulness of such an agreement, but then: "can you just give me a general template? I'll fill in the blanks." The hesitation on the part of employers about having proper written employment agreements is understandable, especially for smaller businesses. Good employees are a valuable resource, after all. You don't want to risk scaring off employees with thick tome of archaic legal language - maintaining a certain workplace culture is critical to the success of a business.

Some parts of the employee-employer relationship, however, are too important to leave unwritten. An ideal employment agreement balances the employer's desire to maintain the business's workplace culture with the necessity of defining the relationship and protecting the business from liability. If you are an employer currently operating without employment agreements, you should strongly consider defining your employees' relationships in writing.

Employment Agreements Provide a Framework for the Employment Relationship

The typical employer-employee relationship is complicated. Even for the most casual of positions, many terms of employment come into play, such as:

  • compensation;
  • duties;
  • probation;
  • benefits;
  • termination/notice;
  • policies and procedures;
  • non-competition and confidentiality; and
  • ownership of intellectual property.

This is not an exhaustive list, but it gives an idea of the high-level concerns that an employment agreement addresses. Employers and employees are usually on the same page about things such as compensation and benefits, but misunderstandings and false assumptions can occur in many areas. The more explicit an employee's rights and responsibilities are from the beginning of the employment, the less there may be to fight on down the road if the relationship turns sour.

For example: unless you are dealing with high-level, executive-type positions, your employees do not owe your business a duty not to compete after the employment relationship ends. This means that, without having employees agree not to compete post-employment in writing, they can solicit business from your customers or attempt to induce away your remaining employees to another position. A written employment agreement with a clear non-competition clause allows you to protect against this situation (note that non-competition clauses must be carefully drafted to be enforceable).

Employment Agreements Provide Certainty on How the Relationship Will End

Both you and your employees should be clear on the ways in which the employment relationship can end, and the subsequent ramifications. The ideal employment agreement outlines not only how an employee can be terminated with cause ("fired" for doing something wrong), but also how you can let an employee go without cause, including severance entitlement and notice periods. Without a written mechanism in place for termination without cause, an employee's severance and notice is governed by the Employment Standards Act and the common law. In some cases, employees who have been terminated without cause (and without a written employment agreement) have found to be entitled to severance equal to more than 20 months of salary, which could have potentially been avoided by having an agreement with a clear and fair termination and severance section.

Yes - Employment Agreements Can be Simple!

An employment agreement does not need to be a long, dense, or overly "lawyerly" contract. In fact, for all but the top levels of executives, simpler employment agreements are often better - if they cover all the key points discussed above (and any other points that are important to your business).

Whether your business is more suited to formal employment contracts a dozen pages long, or simple two-page over letters, defining the framework of the employer-employee relationship is critical to avoiding misunderstandings and potentially costly litigation down the road. Having your employees sign agreements allows both parties a clear snapshot of rights, roles, and responsibilities. This clear snapshot, in turn, gives a degree of transparency to all aspects of the employee-employer relationship, notably the eventual termination of the contract.

If you'd like to discuss using employment agreements in your business, get in touch with us today to book a free consultation.