Employment contracts relies on the concept of authority, in which the employee agrees to accept the authority of the employer and in exchange, the employer agrees to pay the employee a stated wage (Simon, 1951).
Employee vs. Independent Contractor
An independent contractor is in business for him or herself providing services to other businesses and does not work for or under an outside authority. Independent contractors are contracted on a temporary basis and paid at the completion of a project upon which their contract will be terminated. An employee works for an organization and is covered by federal and state employment and labor laws, which entitles them to certain benefits such as social security, income tax withholdings, and workers compensation, among others per the United States government (U.S. Department of Health & Human Services, 2018).
Types of Employment
Employment contracts define the type of employment, which fall into two categories: at-will employment and for-cause employment.
For-Cause Employment
For-cause employees can only have their employment terminated for a just reason. The employer’s decision to terminate an employee also must be reviewed by an independent body to ensure the termination was indeed just and provide protection for employees from unfair or arbitrary termination (Pitchford, 2005). The three largest classes of just-cause employees are federal and state employees, as well as union members.
At-Will Employment
On the other hand, at-will employment does not require an employer to give any cause for termination. At-will employment is unique to the United States, as most countries require specific procedures for employment termination. At-will employment was considered common law in the United States prior to the nineteenth century as opposed to the standard employment law in England, which was annual hiring rule or seasonal hiring. In 1877, Horace Wood wrote his treatise on employment titled Master and Servant, which is considered by some to be the origin of at-will employment in the US. However, critics of Wood indicate that he incorrectly cited the cases to support his claim that employers can discharge workers for any reason. Shortly after, courts across the country upheld his claim (Pitchford, 2005).
There are several theories as to why at-will employment became a legal standard in the US. According to Jay Feinman in The Development of the Employment at Will Rule, as a result of the Industrial Revolution and increasing economic pressures, courts adopted the rule because it favored employers who were trying to avoid mounting employment lawsuits. Employers did not want employees to have a voice because if they knew they could be dismissed at any point, they would be less likely to protest working conditions, wages, etc. At-will employment doctrine also maximized employers’ ability to decrease their work force in times of economic contraction (Ballam, 1996).
A second theory, proposed by Sanford Jacoby, argues that trade unions were much weaker in the US than in England during this period, so the courts did not offer as much protection for the annual hiring rule. Additionally, white collar workers in England during the nineteenth century garnered much more protection from the English courts due to their higher status compared to white collar workers in the United States (Ballam, 1996).
More recently, Deborah Ballam argues in Exploding the Original Myth Regarding Employment-At-Will: The True Origins of the Doctrine that the employment-at-will rule was the norm throughout the history of the United States because the agriculturally based economy and labor market were not conducive to the English annual hiring rule. “Because of the extensive use of indentured servitude, slavery, and express contracts for specified terms, and because of the sever labor shortage, few laborers would have been in situations where the annual hiring rule could have applied,” (Ballam, 1996).
Types of Employment Contracts
The two most common types of employment contracts include fixed-term and open-ended contracts.
Fixed-Term Contract
Fixed-term contracts are used when an employer wishes to hire an employee for a specific amount of time that is agreed upon in advance [citation needed]. Also known as task contracts, a fixed-term contract can also be used for the completion of a specific task and the contract will be terminated automatically upon completion of the task. Either party may terminate the contract before the end of the specified term if appropriate notice is given by either side (University of Strathclyde, 2013).
Open-Ended Contract
Conversely, an open-ended employment contract does not have a specified end date. Open-ended employment contracts are also called permanent, indefinite, or continuing contracts as they are typically used for long-term employment situations (University of Strathclyde, 2013). This type of employment contract may be terminated if either party gives appropriate notice to the other party or in specific instances such as health concerns, resignation, or misconduct.
Common Clauses
Scope of employment
Each employment contract contains a job description including the range of activities that an employee is reasonably expected to perform. Scope of employment often identifies demotion, transfer to different responsibilities, and modification or increasing current responsibilities. Travel and relocation can also be discussed in this section.
Compensation and benefits
Compensation includes a negotiated base salary or earning potential for an employee, performance incentives, production bonuses, signing bonuses, equity, and stock options. Benefits include insurance (health, life, vision and dental), pension plans, paid time off, vacation time, sick and personal leave. This section will also include if or when an employee’s salary can be reduced for instances such as suspension or company financial distress.
Probationary period
Some companies begin employment with new employees on a probationary basis. An employee is hired for a trial period that gives the company an opportunity to evaluate an employee’s job performance and conduct. The duration of the trial period, training guidelines and assessment standards should be outlined in this section. If an employee's performance is found to be unsatisfactory, the employer can terminate the employee at the end or before the completion of the probationary period. This section should also detail how the employer will inform the employee if they wish to continue the employment at the end of the probationary period. A probationary period can only be extended if agreed by both parties or if the employment contract allow it.
Non-competition
A non-competition clause prevents an employee from taking a position with a competitor of their employer following the termination of employment. The employer must have a legitimate interest in restricting the employee from future employment and the clause must be reasonable in time, activities, and geographic area.
Non-solicitation
A non-solicitation clause prevents an employee from soliciting the employer’s clients, customers, or employees for his or her own benefit. The employee also cannot solicit the employer’s clients, customers, or employees for a period of time after the termination of the agreement. This section protects the employer’s information and tries to ensure company loyalty.
Non-disclosure
Under a non-disclosure or confidentiality clause, the employee agrees to not disclose information that the employer deems confidential or sensitive to the business and to take reasonable steps to prevent disclosure. Non-disclosures are commonly used to protect trade secrets, client information and other valuable information. A non-disclosure agreement can continue indefinitely or can include a duration clause that stipulates an end date of the agreement.
Moonlighting & best efforts
A moonlighting clause details the employer’s expectation that an employee with treat their employment with the business as their primary job and other jobs will not interfere with their job performance. In some cases, a moonlighting clause will go as far as to specify that an employee cannot hold any other form of employment other than with their employer. The employer can also require an employee to report any outside work.
Intellectual property
An employer can assign all work products and intellectual property created by an employee during their term of employment is an exclusive right of the employer. This clause pertains to inventions that relate to the company’s past, present or reasonably foreseeable future business or research endeavors. Employers can claim the rights to inventions that were created using company resources, including confidential information, regardless of if they were developed during normal work hours.
Arbitration
This clause specifies that the employer and employee will resolve disputes outside of court and with an arbitrator. In arbitration, the disputing parties each present their side of an issue to an arbitrator who will act like a judge and decide the matter without a jury. The court will then enforce the arbitrator’s binding decision on the dispute.
Termination
The term of the contract should be included in this section, detailing a specific time after which the contract will be terminated or no longer be enforceable. Renewals can be included as automatic with options not to renew or can be elective by both parties mutually [citation needed].
Legal Implications
With at-will employment, employers must be weary of legal issues that could potentially arise from wrongful termination.
Civil Rights Act of 1964
Employees in the United States are protected under Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on race, color, religion, sex or national origin (Prenkert et. al., 2019). Title VII covers all employers with 15 or more employees and who are engaging in an industry affecting interstate commerce. Employers include individuals, partnerships, colleges and universities, labor unions and employment agencies, as well as state and local governments. Title VII prohibits two theories of employment discrimination: disparate treatment and disparate impact. Disparate treatment occurs when an employer treats an employee differently because of the employee’s protected status. Disparate impact occurs when an employer’s policies or practices are seemingly neutral regarding protected statuses have a disproportionate negative impact on members of one of those groups (Prenkert et. al., 2019).
American with Disabilities Act
Wrongful termination lawsuits can also arise from violating the Americans with Disabilities Act of 1990, which protects both individuals who can perform the essential functions of their job despite their disability and those who need reasonable accommodation to perform their duties (Prenkert et. al., 2019). Reasonable accommodation includes making existing facilities readily accessible and usable, acquiring new equipment, restricting job, modifying work schedules, and reassigning workers to vacant positions [citation needed]. However, employers do not need to make accommodations that would create a undue hardships. An act requiring significant difficulty or expense (Prenkert et. al., 2019).
Fair Labor Standards Act
The Fair Labor Standards Act also affects employers and employment contracts in that it establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments [citation needed]. The FLSA applies only to employers whose annual sales total $500,000 or more or who are engaged in interstate commerce (U.S. Department of Labor, n.d.).
Respondeat Superior
Lawsuits can arise as well from Respondeat Superior Liability or vicarious liability. Respondeat Superior is the legal doctrine that in Latin means “let the master answer” [citation needed]. Respondeat Superior holds an employer legally responsible for the wrongful acts of an employee or agent if such acts occur within the scope of the employment or agency. A court will apply the doctrine regardless of how closely the employer was monitoring the employee. Respondeat Superior applies to employees, but not to independent contractors.
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