Employment contracts: What are they good for?

If you have to go back to the contract and start telling the other person "The contract says you would do X", then the relationship is already screwed up and it is almost beyond repair.

In addition, there is always an "inventions and confidentiality" type of agreement that: (1) clarifies the employee's confidentiality obligations; and (2) makes clear that all IP generated by the employee belongs to the company.

In purely technical terms, under California law, you could actually skip both these documents because the default relationship is "at will" and normally can easily be terminated by either party if it does not work out and because the law automatically says that inventions conceived by employees in the course of performing their duties belong to the company and not to the employee.

Why not keep it simple, then?

Of course, any company can choose to do so.

But:

1. If compensation is not in writing, you can get claims of the "I took reduced pay because I was promised x percent of the company" variety.

2. If an employer does not take prudent steps to show that it is keeping its trade-secret information confidential, the law can find that it is not really protectable trade-secret information after all, thereby potentially jeopardizing the company's right to protect it from theft by any employee.

3. Usually the employee is given an option grant and any promise relating to equity should always be hedged by statements like "this is subject to approval of our Board of Directors" and "terms of the grant will be governed by our option plan and standard option agreement" - and followed up by a signing of the formal stock option agreement (among other things, if you don't have such documentation, your ISO classification of incentive options is jeopardized and the employee will miss out on whatever tax benefits such a classification provides).

4. People do make things up when disagreements arise and it is very prudent to have at least a basic document that specifies exactly what the relationship was in order to avoid problems (perhaps this could be solved by the globally posted employment policies that the articles alludes to).

5. Finally, some forms of compensation are incentive-based, e.g., commissions, and it is a serious mistake to agree to such arrangements verbally without clarifying such basic issues as "to what does the commission apply," "is there a tail on it if employment terminates," etc.

The above are basically random thoughts but they do suggest that you do not want to scrap routine employment documents unless there is a pretty compelling reason to do so, and I don't think the issue of wanting to avoid an atmosphere of mistrust is by itself necessarily compelling. Indeed, most employees that I know routinely accept the idea that basic documentation and "legalese" is in order and do not interpret this as some sign of mistrust.

I don't think this is an issue of letting lawyers run a company's life. It is just basic prudence and common sense.