Most employees don't have employment contracts and they don't need them. They work under an implied employment contract, meaning that the general terms of employment are determined by state and federal laws as well previous court cases, a legal concept called common law.
You probably don't need a contract if you're hiring an administrative assistant, a shipping clerk, or an IT person, but it can be a very good idea when you're filling some other positions. You'll probably want to prepare an employment contract and have a new employee sign it when you're hiring professionals or top management individuals.
Some other criteria can make it a good idea as well.
When the Employee Would be Difficult to Replace
A professional with very specific skills or an employee who has knowledge of your market and your competition would be one example of someone you might have a hard time replacing if she should suddenly leave your employ. You'll want to consider it if it might be difficult to find and train a replacement in a specific field or area.
In these cases, you would use the contract to limit the employee's ability to leave without giving you ample notice.
When the Employee Has Knowledge of Confidential Information
This might include trade secrets or knowledge of other sensitive materials. In this case, you would want to include a confidentiality clause in the contract to prevent the employee from divulging this information during and after the end of the contract.
When You Want to Avoid Competition
An employment contract can be a good idea when you don't want the employee leaving and competing against you for business. You would want the employee to sign a non-compete agreement as part of the employment contract, limiting his ability to compete with you within a certain time period and within a defined geographic area in a specific type of business.
What Else Should You Include in an Employment Contract?
The language of an employment contract should include a general description of the duties you expect the employee to perform, as well as restrictive covenants like the non-compete agreement mentioned above. It should include specifics about what happens if a contract employee leaves.
An employment contract should be in writing. This isn't the time for a handshake deal because there are too many complex issues involved. You don't want to take a chance on a misunderstanding. You'll want everything spelled out.
Consider the Disadvantages, Too
Remember that legal contracts bind both parties. You'll have obligations and responsibilities under the terms of an employment contract as well. The contract might set an employment term. If the employee isn't really working out, you'd be stuck with her regardless—or you'd have to go back to the drawing board and negotiate a new contract with her to cover the early termination.
And some courts might hold you to a higher standard in the event of a dispute and a lawsuit. This is a threshold you might not quite have to reach if you didn't enter into an employment contract. You can be held to a standard commonly referred to as a "covenant of good faith." Your every action and decision could be placed under a microscope.
When in Doubt...
Check with an employment attorney to discuss the need for a contract with a specific employee if you're unsure. A legal professional can also make sure that contract language you include is correct and sufficient. If you try to bind an employee to a term that's not supported by law, your entire contract can be invalidated if there's eventually a dispute.
In most cases, you probably don't need contracts with hourly employees or lower-level salaried employees, but if you hire an office manager or administrative assistant who deals with highly confidential information, you might want to sign him to a contract. And contracts can protect you against some serious problems with professionals and top management as well.