Introduction

Hiring can be a tough task for managers. It's challenging enough to find the right hire for the job -- someone with the skills, attitude, personality, and other important qualities to be a success at your company. When you add legal concerns to the mix, hiring can seem like a truly daunting responsibility.

But you cannot ignore your legal obligations when hiring new employees. Federal and state employment laws reach beyond current employees; many also protect those who apply for jobs by, for example, prohibiting discriminatory job postings, putting limits on the information you can gather in a background check, or outlawing certain kinds of applicant screening tests. What's more, the things you say and do during the hiring process could come back to haunt you and your company later, particularly if an employee claims that you offered a job contract or promised job security.

The good news is that following sensible and careful hiring practices will keep your company out of immediate legal trouble, help you find the most qualified employees, and -- by screening out problem employees from the get-go -- help prevent management headaches and possible lawsuits down the road.

This chapter explains the legal ins and outs of hiring, including practical advice on how to find, interview, and seal the deal with your lucky new hire.

Advertisements

Although most "help wanted" ads contain only a handful of words, using the wrong sort of words can land your company in legal trouble. Any job requirement that discriminates against applicants based on a characteristic protected by law (for example, race or gender) violates federal law and the laws of many states. (To learn which characteristics are protected by federal and state law, see Chapter 3.)

Some off-limits topics are obvious -- most managers know that an ad can't state "only white males need apply." But companies can get into trouble by posting an ad that discriminates on a more subtle level -- and they may not even realize it until it's too late.

For example, let's say you want to hire a technician for your company's information systems department. Almost all of the technician's day would be spent at a computer. On occasion, however, technicians at your company have to install new equipment, which might require them to carry computers, monitors, printers, and so on. Should you write an ad saying that you are looking for someone who can lift at least 50 pounds? Well, that kind of requirement would screen out applicants with certain disabilities, as well as disproportionate numbers of women. Because the lifting is only occasional and could be accomplished by other means -- using machinery, for example -- including such a requirement in your ad could be discriminatory.

Similarly, watch for words or descriptions that imply you have a discriminatory preference. For example, let's say you are looking for someone to do odd jobs around your office, from answering phones to filing to typing. Your ad can say that you are looking for an "office worker," but if you say you are looking for a "girl Friday," it implies that you are only looking for women -- and therefore that you would discriminate against male applicants. The same precaution applies to terms like "handyman" or "waiter."

So what can you say? If you follow two basic rules, you should steer clear of trouble:

• Focus on the essential functions of the job. In other words, only ask for the skills or characteristics that the job absolutely requires. For example, if you are looking for someone to proofread magazine articles, you probably don't need someone with a college science degree -- unless, of course, your magazine is a professional scientific journal where someone might need such a specialized education. If there is an up-to-date job description for the position, you can use it to focus the ad appropriately.
• Pay attention to the literal meaning of the words you use. This is particularly important with the suffix "-man" -- as in "salesman," "repairman," and so on (try "salesperson" and "general repair person" instead), or gendered positions such as "waiter" (use "server" or "waitperson" instead). It is also important to be cautious when using words that refer to age. For example, if you want someone who is energetic with a lot of fresh ideas, you might want to say in your ad "looking for worker with a youthful attitude." But if you do, you are expressing an age preference -- which is discriminatory and illegal.

Interviews

The spontaneous and unpredictable nature of the job interview makes it rife with traps, even for managers with the best of intentions. Well-meaning, innocent comments could be construed by an applicant as prejudicial or used as the basis of a discrimination lawsuit.

For example, let's say an applicant grew up near your home town and attended the same high school as you and your siblings. You might naturally want to ask when the applicant graduated, as a way to find out whether you know people in common. The problem is, the answer will necessarily reveal the applicant's age -- and if the applicant is at least 40 years old, this could be part of a discrimination claim if you later offer the job to someone else.

On the other hand, you don't want to get so hung up on every word you say that you defeat the purpose of the interview: to learn about the applicant's skills and experience so you can choose the best-qualified candidate for the position.

Here are some tips that will help you stay out of legal trouble while also getting the information you need to make the right choice:

• Don't ask about any characteristic that the law prohibits you from considering in making your decision. (To learn about these protected characteristics, see Chapter 3.) For example, you can't base your hiring decisions on an applicant's religious beliefs or national origin, so you shouldn't be asking about those things in your interviews. In "Preemployment Inquiries," at the end of this chapter, we give you some ideas on how to get information while staying within the bounds of the federal law.
• Respect the applicant's privacy. Although federal law does not require you to do so, many state laws and rules of etiquette do. For example, asking applicants in California about their sexual fantasies (yes -- that actually happened in a real life case) violates their state-protected right to privacy. (For more information on privacy in the workplace, see Chapter 6.)
• If an applicant raises a delicate subject, it's usually best to skirt the issue. Unless the topic is directly related to the position -- for example, the applicant reveals that he or she has a disability and will need an accommodation to perform the job -- politely steer the conversation in another direction. Although it might seem a bit awkward, you'll be better off in the long run if you don't take the applicant's comments as an invitation to start a long conversation about, for example, relationship troubles or political beliefs.
• Ask open-ended questions to get the candidate talking. There's a big difference between a closed question -- such as "How many supervisory positions have you held?" -- and an open one -- such as "Tell me about your most recent experience supervising others." The more open your questions, the more you invite the candidate to talk. This will not only give you the factual information you need to make a decision, but will also let you see how well applicants carry themselves, think on their feet, and so on.
• Ask behavioral questions, if possible. It can be tough to find out whether applicants have important, yet somewhat intangible qualifications, such as problem-solving skills or the ability to work well as part of a team. If you just come out and ask, all but the most dim-witted applicants are going to know the correct answer. ("Are you good at solving problems?" "You bet!") On the other hand, if you ask about specific instances in which the applicant had to use that skill, you're more likely to get a helpful response. To find out about a candidate's problem-solving skills, for example, you could say, "Tell me about a problem you recently faced in your current position and how you handled it."
• Focus on what the job really requires. Use the job description for the position (if you have one) to script some interview questions that will help you find out if the applicant has the necessary skills and experience. If you don't have a job description, create a list of the essential tasks the employee you hire will have to perform, then craft questions that will help you figure out whether the applicant can meet these requirements. Remember, the law absolutely allows you to ask questions that directly relate to the job you are trying to fill.
• Cover similar ground with each applicant. You can't ask exactly the same questions of each applicant, nor should you. After all, you don't want to miss the opportunity an interview offers to ask follow-up questions spontaneously or delve more deeply into particular topics. On the other hand, you should try to cover the same basic topics and general questions with each applicant. This will help you compare candidates when it's time to choose your hire; it will also help you avoid claims of discrimination by applicants who don't get the job.

Making Promises

A common mistake managers make during hiring is to exaggerate about the prospects of the business ("We're expanding like wild fire -- those stock options will be worth millions in no time!") or about the security of the job ("We never fire anybody; if you do good work, you'll have a job for life!"). Lots of companies and managers embellish when they're trying to sell an especially desirable applicant on a job. No harm in that, right?

Wrong. If you tell a prospective employee something about a job, you'd better be able to back it up. If the employee takes the job in part because of what you said, then that employee can turn around and sue if your promises or statements later prove false. Courts sometimes decide that a promise or statement you make to a prospective employee turns into a contract if the employee accepts the job offer because of what you said. If the position doesn't live up to your statements, your company has broken the contract -- and might have to pay damages to the employee.

It's easy to avoid making inflated promises if you follow one simple rule: Tell the truth. After all, job applicants are trying to figure out whether the job will fit with their career goals, skills, and lives outside the workplace. They deserve to know the truth so they can make the right decision.

This strategy will not only keep you out of legal trouble, but also increase your chances of finding an employee who is right for the job and for your business. No one wants a disgruntled employee on the payroll. If you've told the applicant the truth and he or she still wants the job, then you've probably found a good fit.

Here are a few rules that will help you avoid common promise pitfalls:

• Don't make predictions about your company's financial future. Even if you honestly believe that your company is headed for the Fortune 500, keep your optimism to yourself. If the applicant asks about the company's prospects, stick to the facts -- and if you make any statements about what the future might bring, clearly identify them as hopes, not predictions. For example, you might say, "Our business has doubled in each of the last three years, and we're hoping that growth trend will continue," but you shouldn't say, "We'll be the industry leader by this time next year."
• Don't estimate the future value of stock options. Let's face it: You simply can't know what your company's stock options will be worth in the future. It's fine to explain the stock option program to applicants and to tell them that you hope the options will be valuable, but don't say things like, "When these options vest, we'll all be millionaires!"
• Don't say anything that might limit your right to make personnel decisions in the future. If you tell an applicant that your company fires workers only for poor performance, this will limit your ability to terminate that person for any other reason -- such as personality conflicts or economic downturns -- if he or she accepts the job. Similarly, if you promise pay increases at regular intervals, the employee could hold you to that promise, even if your company's financials or the employee's performance don't warrant a raise.
• If layoffs are likely, say so. If your company is considering staff reductions and there is even a remote chance that the applicant you are interviewing might lose that new job as a result, disclose this before the applicant accepts the job. Otherwise, you may find your company slapped with a lawsuit -- especially if the employee left a secure job elsewhere to come work for your company. Of course, this strategy might make it difficult to find new employees, but it really isn't fair (or legal) to hire people on false pretenses.
• Be accurate in describing the position. Don't exaggerate to land an applicant -- and don't play bait and switch by offering an applicant one job, then placing him or her in another. It may not matter much to you who does what, but it will matter a lot to the employee. An employee who accepts the position based on statements that turn out to be false will have grounds for a lawsuit.

Applicants With Disabilities

Of all the antidiscrimination laws, none confuses managers more than the Americans with Disabilities Act (ADA), 42 U.S.C. §§ 12101-12213, especially when it comes to hiring. Managers want to find out if the person they hire can actually perform the job but often aren't sure how to explore this issue without running afoul of the law. (For information on how the ADA applies to employees, see "Disability" in Chapter 3.)

If you remember one simple rule, you'll be in good shape: You can ask candidates about their abilities, but not about their disabilities. This means that you can ask how an applicant plans to perform each function of the job, but you cannot ask whether the applicant has any disabilities that will prevent him or her from performing each function of the job.

One way to ensure that you stay within the rules is to attach a detailed job description to the application or describe the job duties to the applicant during the job interview. Then ask how the applicant plans to perform the job. This approach gives applicants an opportunity to talk about their qualifications and strengths. It also gives them a chance to let you know whether they might need reasonable accommodations to do the job.

Generally, you may not ask an applicant questions, on an application or during a job interview, that are likely to require the applicant to reveal a disability. The Equal Employment Opportunity Commission (EEOC), the federal agency that interprets and enforces the ADA, gives the following examples of questions you should not ask:

• Do you have a disability that would interfere with your ability to do the job?
• How many days were you sick last year?
• Have you ever filed for workers' compensation? Have you ever been injured on the job?
• Have you ever been treated for mental health problems?
• What prescription drugs are you currently taking?

You may ask questions like these:

• Can you perform all of the functions of this job?
• How would you perform each of the job functions?
• What certifications and licenses do you hold?
• Tell me about your education and work history.
• Can you meet the attendance requirements of this job?

If you have no reason to believe that the applicant has a disability, you may not ask whether the applicant will need an accommodation to perform the job. If, however, you know that the applicant has a disability -- because it is obvious, for example, or the applicant has told you about it -- you may ask about accommodations.

Testing Applicants

Many companies like to use preemployment tests as a way to screen out applicants who are not suitable for a job. These tests include skills tests, aptitude tests, psychological tests, personality tests, honesty tests, medical tests, and drug tests.

Although you are allowed to do some testing of applicants, both state and federal law impose numerous restrictions on what you can do. These restrictions are often vague and open to contradictory interpretations. As a result, you should use only tests that are absolutely necessary and you should consider consulting with a lawyer before administering the test to make sure that it will pass legal muster in your state.

Avoiding Disability Discrimination

For all tests -- including those described below -- you must take care to avoid discriminating against applicants who are protected by the Americans with Disabilities Act (ADA). (For information on the ADA, see Chapter 3.) To ensure that a test does not unfairly screen out people with disabilities, it must accurately measure people's skills, not their disabilities. For example:

• Avoid testing mental, sensory, manual, or speaking skills unless they are job-related. For example, even though a typing test is a manual test that will screen out people who have particular impairments, it is acceptable if you are filling a job for a typist.
• Accommodate people with disabilities by giving them a test that is "disability neutral" whenever possible. For example, if you are giving a written test to applicants for a sales position to test their knowledge of sales techniques, you can offer to read the test to a blind applicant. This is a reasonable accommodation because sight is not required for the job, but it is required to take the test.

Skills Tests

Skills tests range from something as simple as a typing test to something as complicated as an architectural drafting test. Generally speaking, these tests are legal as long as they genuinely test a skill necessary to perform the job, don't violate the ADA (see above), and don't unfairly exclude anyone based on a protected characteristic.

Aptitude, Psychological, and Personality Tests

Some companies use written tests -- often in a multiple choice format -- to learn about an applicant's general abilities, personality, and/or work style. However, using these tests leaves you vulnerable to various types of lawsuits. For example:

• A multiple choice aptitude test may discriminate against minority applicants or female applicants because it really reflects test-taking ability rather than actual job skills. (Studies have shown that some aptitude tests are biased against women and minority test takers.)
• A personality test can be even riskier. Such a test may invade a person's privacy by inquiring into topics that are personal in nature, such as sexual preferences or religious beliefs. (Many states specifically protect a person's right to privacy -- even from inquiries by employers.) In addition, these tests can lead to a discrimination lawsuit. For example, if you decide not to hire someone based on his or her answers to questions dealing with religious issues, the applicant could argue that you discriminated based on his or her religion. (For more about discrimination, see Chapter 3.)
• Psychological and personality tests are treated like medical tests (see below) when they ask for answers that would indicate whether the applicant has a mental disorder or impairment. If they do, they will be governed by the Americans with Disabilities Act (ADA) and all of its restrictions. (For more on hiring and the ADA, see "Applicants With Disabilities," above.)

If you decide to use one of these types of tests, proceed with extreme caution. Make sure that the test has been screened scientifically for validity and that it genuinely correlates to necessary job skills. Review the test carefully for any questions that may intrude into an applicant's privacy. And, depending on the complexity and purpose of the test you use, your company may need to hire an expert to interpret the results.

Lie Detector and Honesty Tests

The federal Employee Polygraph Protection Act, 29 U.S.C. §§ 2001 and following, generally prohibits employers from requiring applicants to take a lie detector test or from asking applicants about the results of previous lie detector tests. The law contains a few narrowly defined exceptions for certain types of employers, including those that provide armored car, alarm, or guard services, and those that manufacture, distribute, or dispense pharmaceuticals.

Even though no federal law specifically outlaws written honesty tests, these tests sometimes violate federal and state laws that protect against discrimination and violations of privacy. Plus, the tests can be unreliable.

Some states have adopted their own rules about polygraph tests -- and some of these rules are even stricter than the federal law. To find out what your state requires, see "Employee Polygraph Examination Laws," at the end of this chapter.

Medical Tests

Medical testing is tricky. To avoid violating the Americans with Disabilities Act, you shouldn't ask for an applicant's medical history or conduct any medical exam before you make a job offer.

However, once you decide to offer the applicant a job, you can make the offer conditional on the applicant passing a medical exam. You must require the exam for all entering employees doing the same job. If you only require people whom you believe or know to have disabilities to take the exam, you will be violating the Americans with Disabilities Act. If the exam screens out disproportionately large numbers of disabled applicants, you may administer it only if it is job-related and correlates to necessary job skills.

Drug Tests

The laws on drug testing vary widely from state to state. Some states allow these tests only for jobs involving public safety; some states allow them only for drivers; some states allow them for any occupation; some states don't allow them at all. Consult "State Drug and Alcohol Testing Laws," at the end of this chapter, for information on your state's rules.

Background Checks

When you are making hiring decisions, you might need a bit more information than applicants provide. After all, some folks -- surveys estimate between 30% and 40% of applicants -- give false or incomplete information in employment applications. And workers probably don't want you to know certain facts about their past that might disqualify them from getting a job. Generally, it's good policy to do a little checking before making a job offer.

However, you do not have an unfettered right to dig into applicants' personal affairs. Workers have a right to privacy in certain personal matters, a right they can enforce by suing your company if you pry too deeply. How can you avoid crossing this line? Here are a few tips to keep in mind:

• Make sure your inquiries are related to the job. If you decide to do a background check, stick to information that is relevant to the job for which you are considering the worker. For example, if you are hiring a security guard who will carry a weapon and be responsible for large amounts of cash, you might reasonably check for past criminal convictions.
• Ask for consent. You are on safest legal ground if you ask the applicant, in writing, to consent to a background check. Explain clearly what you plan to check and how you will gather information. This gives applicants a chance to take themselves out of the running if there are things they don't want you to know. It also prevents applicants from later claiming invasion of privacy. If an applicant refuses to consent to a reasonable request for information, you may legally decide not to hire the worker on that basis.
• Be reasonable. Managers can get their employers into legal trouble if they engage in background check overkill. You will not need to perform an extensive background check on every applicant. Even if you decide to check, you probably won't need to get into excessive detail for every position. If you find yourself questioning neighbors, ordering credit checks, and performing exhaustive searches of public records every time you hire a clerk or counterperson, you need to scale your efforts back.

In addition to these general considerations, specific rules apply to certain types of information:

• School records. Under federal law and the law of some states, educational records -- including transcripts, recommendations, and financial information -- are confidential. Because of these laws, most schools will not release records without the consent of the student. And some schools will only release records directly to the student.
• Credit reports. Under the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681, employers must get written consent to check an applicant's credit report. Many companies routinely include a request for such consent in their employment applications. If you decide not to hire or promote someone based on information in the credit report, you must provide a copy of the report and let the applicant know how to challenge the report under the FCRA. Some states have more stringent rules limiting the use of credit reports.
• Bankruptcies. Federal law prohibits discriminating against applicants because they have filed for bankruptcy. This means that you cannot decide not to hire someone simply because he or she has declared bankruptcy in the past.
• Criminal records. The law varies from state to state on whether, and to what extent, a private employer may consider an applicant's criminal history in making hiring decisions. Some states don't allow you to ask about arrests (as opposed to convictions), convictions that occurred well in the past, juvenile crimes, or sealed records. Some states allow you to consider convictions only if the crimes are relevant to the job. And some states allow you to consider criminal history only for certain positions: nurses, child care workers, private detectives, and other jobs requiring licenses, for example. Because of this variation among the states, you should consult with a lawyer or do further legal research on the law of your state before digging into an applicant's criminal past.
• Workers' compensation records. You may consider information contained in the public record from a workers' compensation appeal in making a job decision only if the applicant's injury might interfere with his or her ability to perform required duties.
• Other medical records. Under the Americans with Disabilities Act, you may inquire about an applicant's ability to perform specific job duties only; you may not request medical records. Companies cannot make job decisions (on hiring or promotion, for example) based on an applicant's disability, as long as the employee can do the job, with or without a reasonable accommodation. Some states also have laws protecting the confidentiality of medical records.
• Records of military service. Members and former members of the armed forces have a right to privacy in their service records. These records may be released only under limited circumstances, and consent is generally required. However, the military may disclose name, rank, salary, duty assignments, awards, and duty status without the member's consent.
• Driving records. You should check the driving record of any employee whose job will require large amounts of driving (delivery persons or bus drivers, for example). These records are available, sometimes for a small fee, from the state's motor vehicles department.

Young Workers

Many jobs around an office and in a business are perfect for younger workers. For example, if you need someone to photocopy documents for an hour or two a day, a high school student who comes in after school might be just what you are looking for. The student gets experience and extra pocket money, and your company gets someone who is willing to work just a few hours a week on the cheap.

The history of child labor in this country isn't quite so benign, however. Children once worked long hours in hazardous jobs -- such as manufacturing and mining -- for very little money. They didn't attend school, and they often suffered serious -- even fatal -- health problems.

To protect child workers, the federal and state governments passed laws regulating the type of work children can do, the number of hours they can work, and the types of businesses that can employ them.

Before you hire any worker younger than 18, you should check both federal and state law. We describe the federal law here. To find out about your state child labor law, contact your state department of labor.

The Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 2201 and following, is the federal law that governs child labor. Virtually all employees and businesses must follow the FLSA, although a handful of businesses, including small farms, are not required to. To find out about exceptions to FLSA requirements, refer to the website of the U.S. Department of Labor -- the federal agency that enforces the FLSA -- at www.dol.gov.

Hazardous Jobs

According to the U.S. Department of Labor, workers younger than 18 may never perform the following types of hazardous jobs (some exceptions are made for apprentices and students):

• manufacturing or storing explosives
• driving a motor vehicle and being an outside helper on a motor vehicle
• coal or other mining
• logging and sawmilling
• anything involving power-driven, wood-working machines
• anything involving exposure to radioactive substances and ionizing radiations
• anything involving power-driven hoisting equipment
• anything involving power-driven metal-forming, punching, and shearing machines
• meat packing or processing (including anything involving power-driven meat slicing machines)
• anything involving power-driven bakery machines
• anything involving power-driven paper products machines
• manufacturing brick, tile, and related products
• anything involving power-driven circular saws, band saws, and guillotine shears
• wrecking, demolition, and ship-breaking operations
• roofing and work performed on or near roofs, including installing or working on antennas and rooftop appliances, and
• excavation operations.

Agricultural Jobs

If you own or operate a farm or other type of agricultural business, the following child labor rules apply to you:

• You may hire a worker who is 16 years or older for any work, whether hazardous or not, for unlimited hours.
• You may hire a worker who is 14 or 15 years old for any nonhazardous work outside of school hours.
• You may hire a worker who is 12 or 13 years old for any nonhazardous work outside of school hours if the child's parents work on the same farm or if you have their written consent.
• You may hire a worker who is ten or 11 years old if you've been granted a waiver by the U.S. Department of Labor to employ the youngster as a hand harvest laborer for no more than eight weeks in any calendar year.
• If you own or operate the farm, you can hire your own children to do any kind of work on the farm, regardless of their ages.

Nonagricultural Jobs

If you seek to hire a youngster for work that is nonagricultural, the following rules apply:

• You may hire a worker who is 18 years or older for any job, hazardous or not, for unlimited hours.
• A worker who will do job-related driving on public roads must be at least 17 years old, must have a valid driver's license, and must not have any moving violations.
• You may hire a worker who is 16 or 17 years old for any nonhazardous job, for unlimited hours.
• You may hire a worker who is 14 or 15 years old outside school hours in various nonmanufacturing, nonmining, and nonhazardous jobs, but some restrictions apply. The teen cannot work more than three hours on a school day, 18 hours in a school week, eight hours on a nonschool day, or 40 hours in a nonschool week. Also, the work cannot begin before 7 a.m. or end after 7 p.m., except from June 1 through Labor Day, when evening hours are extended to 9 p.m.

Offer Letters

When it comes to offer letters, keep them short and sweet. The same rules that apply to job interviews apply to offer letters: Stick to the facts and don't make promises you can't keep. Applicants might some day try to turn an offer letter into a contract that sets the terms and conditions of the job or limits your company's right to fire or discipline them.

Avoid using language that makes promises or assurances about the employment relationship. For example, if you tell the applicant "We look forward to a long and happy relationship with you" or "We think you have a bright future at this company," the applicant might assume that you're offering more than the normal "at-will" employment -- and that you can't end the employment relationship without a good reason. If you want to fire the employee in the future, these words might come back to haunt you.

Similarly, don't specify job duties, benefits, pay schedules, vacation/sick leave, or any other benefit you might want to change in the future. The employee might argue that your letter created a contract and try to hold the company to it.

So what can you say? You might want to:

• congratulate the applicant
• confirm the job title
• name the applicant's supervisor
• state the starting salary, and
• establish a start date.

In addition, if you haven't or won't offer the applicant a written contract for employment (the vast majority of employees don't have written employment contracts), confirm in writing that employment is at will -- meaning that there is no employment contract and you can fire the employee at any time for any reason that isn't illegal.

For more about written employment contracts, see "Written Employment Contracts," below. For more about at-will employment, see "At-Will Employment" in Chapter 4.

Written Employment Contracts

A written employment contract is a document that an employer and an employee sign, setting forth the terms of their relationship with each other. In addition to clearly describing what the employee is going to do for the employer (the job) and what the employer is going to do for the employee (the salary), the contract can address many other issues, including:

• the duration of the job (for example, one year, two years, or indefinitely)
• the specifics of the employee's responsibilities
• the employee's benefits (for example, health insurance, vacation leave, or disability leave)
• grounds for termination
• limitations on the employee's ability to compete with your company once the employee leaves
• protection of company trade secrets and client lists
• who will own the employee's work product (for example, if the employee writes books or invents gadgets for your company), and
• a method for resolving any disputes between the employee and the company.

Written employment contracts have distinct advantages and disadvantages that you should consider carefully before committing your company to the terms of such a contract.

Advantages

Employment contracts can make sense if you want or need to control the employee's ability to quit. For example, if the employee is a high-level manager or executive, or if the employee is especially valuable to the company (such as the secretary who is the organizational backbone of the office), then a contract can protect the company against the sudden, unexpected loss of the employee. It can lock the employee into a specific term (for example, two years), or it can require the employee to provide enough notice to allow your company to find and train a suitable replacement.

Employment contracts can also protect your company if the employee will learn or have access to confidential and sensitive business information. You can insert confidentiality clauses into the contract that prevent the employee from disclosing this information or using it for personal gain. (For more on this topic, see "Nondisclosure Agreements" in Chapter 10.)

Similarly, a contract can prevent employees from competing against your company after they move on to other pursuits. (For more on this topic, see "Noncompete Agreements" in Chapter 10.)

Sometimes, you can use an employment contract as a way to entice a highly skilled individual to accept a job offer. Job security and beneficial terms often sweeten the deal enough for a highly desirable applicant who is on the fence to join your team.

Finally, an employment contract can give the company greater control over the employee. If you specify the standards for the employee's performance and grounds for termination, you may have an easier time terminating an employee who doesn't live up to those standards.

Disadvantages

An employment contract is a two-way street: Just as the contract requires the worker to stay for a certain period of time, it limits your company's right to fire the worker for the same period. Your company won't have the ability to alter the terms of the employment as its business needs change. To alter the terms, you'll have to renegotiate the contract and offer the employee some new benefit in exchange for the alteration to make the new agreement binding. And, no matter what you offer, the employee is free to reject any proposed new terms. These factors can make the renegotiation process time-consuming and complicated.

For example, let's say you sign a two-year contract with a new employee. If, six months later, you decide you don't need the employee after all, you can't terminate the relationship. If you do, you will set your company up for a breach of contract lawsuit. Similarly, if you promised benefits in the contract, the company can't stop paying for them before the term is up without breaching the contract and risking a lawsuit.

Another disadvantage of employment contracts is that they always contain an unwritten obligation, imposed by law, to deal fairly with the employee. In legal terms, this is called the "covenant of good faith and fair dealing." If you treat an employee with whom you have signed a contract in a way that seems unfair, your company may end up in court.

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