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How can an Employment Contract protect my business after an employee has left?

An Employment Contract is an important document to help protect your business after an employee leaves. It usually spells out all the important terms of employment, rights, responsibilities, and benefits to help employees understand what to expect.

Employment Contracts usually contain:

  • Details about pay and benefits.
  • Agreements from the company and worker to be fair to each other.
  • Confidentiality or Non-Disclosure Agreements to prevent employees from sharing private company details, both during and after employment.
  • Rules about doing competing or the same kind of work outside the company.
  • Rules for receiving pay after being fired or laid off.

Many Employment Contracts are the same for every worker. But others may contain more specific details, such as:

How detailed do my employee records need to be?

The more detail that you can provide in your employee records, the better. Keeping accurate payroll records and tax information can be critical if state or federal regulators, or your employees, claim you made a mistake. Depending on your industry, or if you have more than a few employees, you may be required to keep more records about employee demographics, injuries, incidents, and more. It can be helpful to ask a lawyer if you are unsure about what information you are legally required to maintain. Detailed performance histories or reviews can be helpful if a former employee files a lawsuit against you.

Federal, state, and local laws typically decide what paperwork you are required to keep for your employees. Federal law usually requires you to make sure your employees can legally work in the U.S. The most common new hire paperwork includes:

  • Tax forms such as a W-4 or W-9, depending on whether the employee is a contractor.
  • The I-9 form to verify employee identity and ability to work in the U.S.
  • Any state tax forms.
  • A direct deposit form for payment.

Using the E-Verify system can help you find out whether an employee can legally work in the U.S. Further, the law typically requires a business owner to inform employees of their rights. 

An Employee Handbook that contains this information is useful to help avoid legal trouble down the road, and it also keeps employees informed about workplace behavior, employer policies, and more. Local labor laws can tell you if you need any other paperwork to hire your employee within the law.

What can happen if I do not get signed agreements from employees or independent contractors?

Employees and independent contractors without a written and signed agreement may have an implied agreement. This means the worker's job terms are based on their prior work for you, or set prices, as well as the federal, state, and local labor laws. A written agreement usually offers the employer protections beyond what the law provides. 

If you decide to hire a new worker without an Employment Contract, or having them sign other agreements to protect your business, after their employment ends, you may have very little control over what they say or do. For example, depending on state law, a Noncompete Agreement in an Employment Contract may prevent an employee from quitting and going to work directly for a competitor in your area. In some states, such as California, employers may not be able to sue to enforce certain Noncompete Agreements. 

Additionally, if your employee has access to private information about your business, such as trade secrets like customer lists or processes, you likely do not want them to share it with anyone. An Employment Contract with a rule about sharing confidential information may help prevent them from disclosing your information, or using your business's trade secrets after their employment ends.

When it comes to independent contractors, they often require their own Independent Contractor Agreement to outline the scope, payment schedule, and deadlines. You may, however, ask them to sign additional agreements to protect your business. If you hire a freelancer for creative work, for example, you may want them to sign a Work for Hire Agreement or a Copyright Assignment, so they cannot sell the same work to another business, or claim they own it later on. 

How does a Severance Agreement affect Employment Contract terms after an employee leaves?

A Severance Agreement typically includes a payment that an employee gets after being fired or laid off, in exchange for agreeing to certain conditions. It can be tailored to stop departing employees from suing for wrongful termination, or for other reasons. It can also stop them from joining class action lawsuits, sharing confidential information, and, among other things, from disparaging their former employer. Severance packages may also include an arbitration clause to resolve disputes confidentially and outside the court system. 

But severance packages may not prevent departing employees from suing in all instances. For example, if an employee claims they are eligible for workers' compensation, unemployment, or unpaid wages or overtime — they may still be able to sue their former employer.

What are my rights if an employee breaks the contract after they leave?

If an employee breaks their contract after leaving your company, you may take legal action to protect your business. Employment Contracts may explain how to deal with a former employee breaching or breaking the terms of their contract. 

Most contracts specify the state's law that applies to it (for example, New York or Florida law). You can typically only sue under the specified state's laws, and every state is a little different. If the agreement requires arbitration, or mediation, or providing notice and an opportunity to correct the issue, you may be required to follow your own agreement.

If you have more questions about your Employment Contracts or how to protect your business when an employee leaves or breaks their contract, reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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