Employment Contracts: Why They Are Important for Both Parties

The reason why employment contracts are important for both parties is the fact that the first day on the job is literally the first day towards your departure.  It is an unfortunate fact of life but the most important element of a business relationship, incorporated into a contact is its termination.  Like any military engagement, no skirmish should be initiated until an exit strategy is determined.

When you are hired and when all around the table are excited and optimistic about the potential for success, this is the time for the two parties to engage in an employment contract.  Most legal counsels will advise that terms should be put down in writing so that you can alleviate any future discord.

An employment contract is a  relatively recent vehicle in business in the same sense that the handshake agreement has vanished with the 3 martini lunch.  For those who managed associations back in the 70’s and 80’s, a contract was looked upon as an unnecessary discussion.  Back then the only people who had contracts were unions and we certainly didn’t want to be placed in the same arena as the Teamsters.

I remember being told in my first association job that a contract was not necessary and that I should not worry – that “we will take care of you.”  By the way, those people who made those commitments were long gone by the time I departed from that position.  This paternalistic approach to business has changed over the years and it is quite accepted policy for association executives to now have an employment contract or in the very least a Letter of Understanding.

American Society of Association Executives (ASAE) recommends that legal counsel be advised during the contractual process.  Obviously both sides are looking for preferential terms in negotiations but what is quite obvious is that the most important element of any contract is termination.

According to numerous legal practitioners, the length of the contract is inconsequential, though it probably behooves the Exec to not have a fixed-term contract since it may automatically stimulate Board discussion about your future with the association upon every renewal date.  Afterall, discussion may prompt an urgency to change leaders one of these days.  You never know when the personality of the Board will change just because of one or two protagonists.

ASAE recommends that all Board Members should be involved in approval of employment contracts, renewals and the ultimate parting of the parties.  Participation of the full board eliminates individual actions while also giving full disclosure to the membership.

The latest trend is for an “evergreen” or 3 year term contract with an automatic annual rollover.  Of course any attorney will tell you that the length is only as long as you are wanted by the Board of Directors.  Most contracts will have certain language about termination with or without cause.  If you are being terminated with cause you certainly need an attorney because the long arm of the law may not be far behind; the severance terms come into play when a contract is terminated without cause.

It is common for termination packages to include one month of compensation for every year of employment with a cap of one year.  Only very unique tenures will result in lengthier severance packages.

Though termination is the most important element of any employment contract it is not the sole vital paragraph.  A fair contract for both parties should always include such elements as:  compensation and benefits, periodic performance evaluations, board and management parameters, financial boundaries, voluntary departure and program and budgetary expectations tied to the strategic plan. 

A contract of any kind is a two party agreement and an employment contract is no different.  The employer benefits from a stable environment when the Exec is comfortable and confident that he/she has a future with the organization.  Nothing is more detrimental to an association than an ever-changing management.  Continuity is important and an employment contract is instrumental in making that happen.

A fair and balanced employment contract will also set guidelines for voluntary departures.  People do find new jobs and new locations and those situations need to be addressed in a contract so that the employer is not” left in the learch” when an Exec ups and leaves for a new situation.

Two weeks notice for a secondary or support staff level individual may be appropriate for departure but an association or company (especially smaller entities) can find themselves in dire straights if an Exec leaves on very short notice.  Standard contract terms would include 60 or 90 days as an appropriate amount of time for the Exec to give notice prior to a firm departure.

Parties never want to contemplate departures in an employment agreement but it is the most important action you can accomplish during negotiations.  Due dilligence is vital for both parties and discussions should never become adversarial.  Many will tell you that once talks become “nasty” that it is difficult to move forward.  Good negotiators know when to “hold” and when to “fold” but many relationships have been ruined by those who cannot find a middle ground.  Compromise makes a better working environment for many years to come.

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