The Trap: Why Employment Contracts Backfire

Most business owners assume they should have employees sign an employment contract. They’re wrong—and here’s why. When you put employment terms in a contract, both parties must agree to any changes. Six months in, when you need to update policies or shift responsibilities, you’ll have to negotiate amendments with every employee who signed. That’s an uncomfortable, unnecessary conversation.

Use Policies Instead of Contracts

The better approach: use employment policies, not contracts. Policies can be updated unilaterally—you communicate the change, have employees acknowledge receipt in writing, and move on. No renegotiation required. An employee handbook with clear policies gives you the flexibility contracts take away.

Contracts require mutual agreement to modify. Policies do not. That single distinction makes policies far more practical for managing an evolving workforce.

When a Contract Actually Makes Sense

There are narrow exceptions. A highly paid executive you want locked in for several years, or a key hire where you need a non-solicitation or non-compete agreement (where permitted by your state’s law)—those situations may justify an actual contract. But for the vast majority of employees, over 99% of the time, a contract creates more problems than it solves.

Confidentiality Without the Contract Trap

You can still protect confidential information without an employment contract. Include a confidentiality clause in your policies or use a standalone confidentiality agreement—separate from the employment terms. That way, you keep the protection you need without locking yourself into rigid contractual obligations for every aspect of the employment relationship.

Video Transcript

The Common Question

Should you have your employees sign an employment contract when they start?

Now, I am not talking about a non-competition agreement or a non-solicitation agreement, but you might think about what about other aspects of the relationship, maybe a confidentiality agreement, maybe some other requirements of the job. Should you have your employees sign an employment contract?

The Common Misconception

A lot of business owners think they should, but they are dead wrong, and I will explain why. Now the thought process goes like this. If I want to expect something from my employees, and they are expecting something from me, that is essentially a contract. We are both giving something. And if you don’t give something to me, or I don’t give something to you, then you can leave.

Now, the vast majority of the time, well over 99%, you should not have an employment contract. What are the exceptions? Well, maybe for a highly paid executive or a person you want to commit to a certain number of years of employment. Or a non-solicitation agreement or non-compete agreement if those are allowed in your jurisdiction.

Why Contracts Can Create Problems

So why is it that you should never have an employment contract signed, or virtually never? Well, here is the problem. Typically what you are agreeing to is pay the employee the wages. And the employee then is being asked by you to do certain things. Let’s say it is a list of things that are expected, maybe to show up on time, and you can have these breaks at these times, etc. Well, the problem is, in order to amend a contract, both parties have to agree to it.

So do you want to have to go to your employees six months in or a year in and say, “Hey, we are going to change some policies here. We are going to change an approach. Would you agree to amend your employment contract?” That is a difficult situation. It is an uncomfortable conversation, and it can entirely be avoided.

Use Policies Instead

And here is how: You can have policies, not a contract, with all the rules that your employees need to follow. And then you can update those policies from time to time without your employees having to agree and enter a new contract.

Contracts need both parties to agree to the change. Policies do not. Employers can simply modify their employment policies over time. They need to communicate those policies to the employees. The typical best practice is have the employees acknowledge in writing that they received them. But the employee doesn’t have to agree to them. They are bound to the new policy and procedure.

Why Policies Are More Practical

So if you as a business owner want to avoid having to negotiate amending a contract as you change your policies and procedures and approaches over time, don’t use a contract for that relationship. Use policies and procedures. That might be in the form of an employee handbook. It may have a confidentiality clause.

Now there is something to keep in mind. If you want some consequence for an employee after they depart, it is not enough usually to have an employee handbook or a policy or procedure. Because the consequence of violating a policy or procedure is they get fired. But if you want a consequence after they have already left, obviously firing isn’t enough.

So there you may want the option to sue for breach of contract. But for most employment relationships, the company isn’t concerned about having to sue an employee afterwards. Let’s face it, most employees can file bankruptcy and get rid of any lawsuit judgment that they have against them anyway for breach of contract at least. So it is usually not worth the money to sue employees for breaches of contract after they depart.

The Takeaway

So the takeaway here is for the vast number of employees, the best practice is not to have a contract when they start, but rather to use policies and procedures, which you can update over time, and you deliver those to the employee, and they acknowledge receipt in writing.

Want to Know More?

Now you might be wondering, “What are best practices related to employment policies and procedures? What do the best companies do? What are common mistakes made by companies?” If that is a topic that interests you, you have a few options. You can like this video so that YouTube delivers more videos like it to you. You can subscribe, and that way you will receive a notice when I produce other videos on this topic. And you can go to AaronHall.com/free, and when you sign up there, you will get free tips, videos, and resources on how to implement best practices in your company.

My hope is to help people like me when I was struggling to grow a new business years ago with best practices, insights from experts, and techniques that will help you build a great company that treats other people fairly, allows you to do good in the world, and live the best version of yourself.

I am Aaron Hall. I am an attorney for business owners and entrepreneurial companies.