What is an Addendum to an Employment Agreement?
An employment agreement addendum is an attachment to an original employment that contains modifications to the terms and conditions of the initial agreement between the employee and the employer. This document acts as a supplement, changing or augmenting the original agreement with additional stipulations, modifications and/or disclosures that update and enhance the original terms of employment. Addenda are generally used to uphold both parties’ interests in terms of job security despite any significant modifications to the employment contract.
Both employers and employees sometimes find it necessary to amend the terms of an employment contract; this may be because of changes to wage or salary structures, role and responsibilities within the company or changes in the law.
While employment contract addendums serve the same purpose as amending agreements, they differ in the fact that amending agreements concern a singular previously-agreed upon entitlement , whereas an addendum addresses the entirety of the legal relationship – with or without prior notice – and sets forth a new set of entitlements and obligations.
Employers tend to use employment contract addendums, particularly to amend employment conditions that will affect future compensation packages, such as layoffs and employment terminations. An addendum will not necessarily excise from the original contract any entitlements and obligations; if existing obligations are not included within the scope of the addendum, for the most part, they retain their force.
Addenda to employment contracts may specify one or more of the following: While no new consideration is necessary for the addition of these clauses, they cannot be used to take away existing entitlements from the employee. The basic relationship between the employee and employer, as indicated by the employment agreement, is not supposed to be transformed within the addendum; its purpose is not to give the employer or the employee any new advantages under the original employment contract.
Reasons to Utilise an Addendum
Employers may find themselves in need of an addendum because a new law is enacted that makes it necessary for the employer to changes the terms of the agreements, so it is easier to issue an addendum to an employment agreement addressing the new law where an existing agreement is in place. In addition, a common circumstance where an addendum is used is when an employer is merging or selling part of its business that had an existing employment agreement with someone so that the purchaser of the business can decide to either have the individual enter into a new agreement or attach an addendum to the existing employment agreement. Similarly, addenda are often used when there is a change in duties of an employee, such as when an employee is promoted with additional responsibilities and/or a compensation change where an employee is entitled to a raise or bonus, and these increases in wages are addressed in an addendum where a lot of rights have been in the original agreement that the employer will want to retain but will not be needed in the addendum.
Legal Considerations for Addendums
Addendums are potentially legally significant documents. As such, many legal issues should be considered when drafting and negotiating the language and terms to be used in an addendum to an agreement. For example, an addendum will often clarify or supersede some aspect of the initial agreement to which it is attached. If the change to the initial agreement is material, you may need mutual agreement in the form of a waiver or release of the initial agreement in exchange for the new terms or conditions. (For example, the use of a waiver to release the company from its obligations in the original agreement in exchange for increased compensation in the addendum.) To avoid future disputes, it is important to make sure that the addendum you are using appropriately addresses the terms and conditions at issue and complies with the legal requirements for creating a binding and enforceable agreement. Addendums should always be carefully reviewed and their provisions clearly understood prior to signing them. In order to ensure that rights and obligations under the new addendums are well understood, the original agreement and all of its relevant provisions should be read in conjunction with the new addendums. Where appropriate, consult with an attorney to establish and protect your legal rights.
How to Create a Strong Addendum
How to Draft an Effective Addendum to an Employment Agreement
When writing an Addendum, it is important to extract the relevant portions their employment contract and insert them into the Addendum to be modified. For example, if the change to a bonus structure is being inserted into the Addendum as Section 5, you need to be sure that that portion of the original employment contract is Section 5 to avoid any confusion or arguments later on.
Most Addendums include a Preamble section, naming the parties (insert names of parties, where they reside, and their roles) and referencing the employment contract (insert contract date and version) and when it became effective and has been amended or replaced, and also lay a general groundwork for the following sections.
The next section will answer the question of why the parties are entering into the Addendum. Here you will identify the section(s) of the employment contract that are being amended, and what the changes are. Then, in the following section(s), you will insert the relevant changes, using verbiage such as "effective January 1, 2017, the following sections of the Employment Agreement shall be replaced with the following" to alert the reader that is replacing the old verbiage with the new verbiage.
If any definitions were used in the original employment agreement, be sure to copy and add those into the Addendum as well.
Examples of Employment Addendums
The first employment addendum I would like to discuss actually is a modification of the employer’s standard at-will language. For example:
NOTE: "Employment at Will" is defined as at any time, with or without any reason or notice, and with or without cause, either the employer or the employee may terminate the employment relationship.
The next employment addendum is probably the most straight forward and common in content, but it simply serves to modify or update the position of the employee. For example:
Immediately upon execution of this Agreement, the employee will be a _______________________.
It is important to point out that in many instances the position being filled is not clearly defined. In my experience, as the senior executive to a company, I often found myself having to make a decision as to whether or not to create a new position or to appoint an employee to an existing position. The decision should be made based upon the current needs of the company as well as the skill sets of potential candidates. As long as the employee is aware that the position is new, then it is fine to use the term "new" instead of "open."
Another common employment addendum is a salary change. Often times the salary will be amended to reflect a higher amount as the employee will be taking on more responsibility. In this instance, it is important to list the starting (old) salary and then the new (amended) salary. For example:
The monthly salary of _______________ shall be paid to the employee until amended by mutual agreement of the parties…. Effective ______ the employee shall earn a base salary of ______ per month.
Another employment addendum is a list of responsibilities. Often times , an employer wants to ensure that an employee understands his/her responsibilities as well as the chain of command. In this instance, I recommend setting up an organizational chart and writing a brief description of each person and their responsibilities. I have included some examples below:
________________ ________________ is responsible for _______________________________. It is also the responsibility of ____________ ________________ to _________.
________________ ______________ is also responsible for ________________. This is the responsibility of this position on an annual basis, but can change from year to year as plans are finalized.
The last type of employment addendum is a confidentiality agreement, which is extremely important. The following is a common example of a confidentiality agreement:
In consideration for employment by the Company, the employee agrees to keep strictly confidential from any third parties all information of a proprietary or confidential nature pertaining directly or indirectly to the business or affairs of the Company, its parents, subsidiaries, or affiliates, including without limitation the identity, location, and status of any persons listed on the Company’s customer list. The employee also agrees to maintain all such information in a manner so as to prevent inadvertent disclosure via electronic or other means, and to return or destroy all such information upon termination of the employment relationship.
Common Errors to Avoid
One of the common mistakes made when adding addendums to employment agreements is using ambiguous language in the agreement itself. It is important to ensure that the amendments are clear and concise in meaning so that they will not be subject to varying interpretations. This also becomes cumbersome when you are later attempting to enforce the agreement as it then requires lawyers to spend hours deciphering the agreement to determine whether the terms of the agreement were complied with.
Just as important is communicating those amendments to the employee. Often managers simply fail to inform the employee that there has been a change to the agreement. While failure to communicate may be costly, it is easy to avoid by having strong lines of communication with employees and setting aside time at regular intervals to review the terms of agreements to understand what has changed and why. The other common mistake is failing to update all copies of the employment agreement. It is important that all parties have the same copy of the agreement to ensure that it is followed accordingly. In a situation where there is a question about the terms, it is then difficult to argue what the true terms of the agreement are.
Why You Need Legal Experts
Consulting with legal advisors is particularly important when considering the addition of additional terms to the existing employment relationship. An experienced employment lawyer can provide valuable guidance on how to ensure that the addendum is compliant with employment standards law, and if it is compliant, whether it is legally and realistically enforceable. In particular , legal advisors will be able to ensure that the interests of all parties are protected. Without expressing a personal opinion, legal advisors are able to offer their professional advice without emotion or ego detracting from the negotiation process, thus ensuring that the agreement between the parties is sound and will not lead to future employment-related disputes.