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The Hidden Pitfalls of Termination Clauses

Risk & Compliance

An employment contract may be the most important document that employees will sign while working for your company. Thoroughly defining the terms of employment with a written document isn’t just a good idea—it’s a best practice and a crucial step in order to protect your business from expensive litigation.

Why Termination Clauses Matter

Depending on the specific situation, your employment contracts might include provisions such as:

  • Non-disclosure agreements

  • Non-compete clauses

  • Rights to inventions created by the employee while at work

  • Exclusivity of employment clauses

One clause that deserves particular attention, however, is the termination clause: the section of the contract that outlines the ways in which the employer-employee relationship can be terminated.

Termination clauses vary in terms of their content and conditions. They may require the employee to alert the employer ahead of time, such as providing two weeks’ notice before resignation, in order to remain in good standing with the terms of the contract. They may also give the employer the right to terminate the relationship immediately upon discovering illegal conduct by the employee.

Before including a boilerplate termination clause in your next employment contract, however, it’s important to review the advantages and challenges of using termination clauses, and the potential ramifications of doing so.

The Benefits and Challenges of Termination Clauses

Including a termination clause in your employment contracts helps you stand out to attract top performers, protect your business interests, and mitigate your risk as a company. Nevertheless, you should consider the factors below carefully before drafting your next employment contract.

Fixed-Term Contracts

Your employees may have either an ongoing employment contract or a fixed-term contract that lasts for a definite period of time. While fixed-term contracts make it easier and more predictable to sever relations with an employee, they also give you less flexibility.

For example, if you hire an employee to work on a specific project on a fixed-term contract, you may find yourself in a tricky situation if the project is unexpectedly shut down.

Unless the premature end of the project has been listed as acceptable grounds for termination within the contract, you can’t simply cut ties with the employee right away. Instead, you’ll have to renegotiate with the employee or reach a settlement, both of which will be more costly than you anticipated.

By including a clause that allows for early termination in the contract, you can give your company some protection from these risks. Such clauses often stipulate that the employee may work at the employer “up to” the final end-date.

Probationary Periods

U.S. labor law often permits businesses to use “at-will employment,” which allows them to terminate an employee at any time for any reason (except for discrimination based on protected classes).

If your company is located in a jurisdiction that has exceptions to at-will employment, however, you may be risking pricey and drawn-out lawsuits from disgruntled employees alleging that they were unfairly terminated.

To avoid these issues, many legal departments insert language into the employment contract that creates a “probationary period” at the beginning of the relationship during which the conditions of the termination clause do not apply. This allows the business to dismiss the employee in the event of a poor fit or a change in company trends.

Final Thoughts

With these and other considerations to take into account, managing your legal department’s employment contracts can be complicated at the best of times. Implementing a contract management strategy, as well as using contract lifecycle management software, can help you get a better handle on your obligations as a business and avoid unnecessary exposure or liability.

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