You do need contracts

Yesterday, Jason Fried from 37signals posted on their company blog asking why they need employment contracts.

The contract is about five pages. It outlines some basic responsibilities we have to the employee and the employee has to the company. Starting salary, an overview of benefits, vacation time, confidentiality, and general expectations on both sides. But that’s really only a paragraph or two. Everything else is legal-cover-your-ass-speak. Like most contracts, it’s basically a big “I don’t trust you and you don’t trust me” document. What a terrible way to welcome someone to the team.

All the points made make sense from a personal point of view. We take a similar approach – deal with your employees how you’d like to be dealt with. However, it is important to remember why contracts exist in the first place – to confirm what has already been agreed and provide options in the event of a dispute.

I always approach contract drafting as if everything has gone wrong and we’re relying on the terms to obtain a remedy of some sorts. I have been involved with a lot of different contractual arrangements over the years and the only instance where there was no contract was the one time that it would’ve helped because a dispute arose. In that case I was able to rely on an implied contract by performance but it was a bad position to be in.

Jason is correct when he says:

How often are these things actually enforced in a business like ours? And if people aren’t really enforcing them, why are we writing/signing them?

But it’s not correct to say

“Just in case” feels like a pretty weak argument to go through all the cost, trouble, and rigamarole.

“Just in case” is the right argument because there may come a time when you do need to rely on the provisions. The same could be said for the reasons why you build redundancy into a server infrastructure or make backups for your computer – events where they are needed happen very rarely but when they do, the consequences can be major, especially in the case of employees.

The law in the US is probably different from the UK where I have all my experience. Having studied Law at university for 3 years, I have read many cases where contracts have saved a lot of money. In the UK, an employment contract will exist whether you have a written document or not, and if you don’t then the employee is the one taking the risk because by starting employment, they accept all the implied terms even if they haven’t read them. Contrary to popular belief, oral contracts are binding – the issue is proving the terms.

A solid employment contract is something any potential acquirers or VCs will look for (I know 37s are against both of those options, but many companies are not) and you can still include all the nice terms within the contract. It’s something everyone is used to and expects. The startup legal paradox applies here in relation to costs, but having a proper contract drawn up protects the company and the employee for a one time cost. It might be a small inconvenience right at the beginning but you’ll wish you had the written terms in place when you need to rely on them.