Employment Contract Red Flags (From an Employment Lawyer)
Warning signs that could cost you thousands or restrict your career for years
After 15 years of employment law practice, I've seen careers derailed and businesses crippled by problematic employment contracts. Here are the red flags you must watch for—whether you're hiring or being hired.
From the Lawyer's Desk
"I've represented both employees and employers in contract disputes. The cases that end up in litigation almost always involve contracts with at least one of these red flags."
— Employment Attorney, 15+ years
Who This Guide Is For
For Employees
Learn what clauses could trap you in a bad situation, restrict your future opportunities, or leave you unprotected. Know what to negotiate before signing.
For Employers
Understand which contract provisions could expose you to lawsuits, make your contracts unenforceable, or create toxic relationships with employees.
Critical Red Flags in Employment Contracts
Overly Broad Non-Compete Clauses
What to Watch For: Non-competes that are too wide in scope, geography, or duration.
Problematic Examples:
- "Employee cannot work in the technology industry for 5 years nationwide"
- "Employee cannot work for any competing company or similar business"
- "Employee cannot solicit any client the company has ever served"
- No geographic limitation in a local service business
Why It's Dangerous:
For Employees: Could prevent you from working in your field for years, destroying your career progression.
For Employers: Overly broad non-competes are often unenforceable and signal aggressive tactics that deter top talent.
Reasonable Alternative:
"Employee shall not, for 12 months following termination, work for direct competitors (Company A, Company B, Company C) within a 50-mile radius of Company offices, in a similar role."
State Law Note:
California generally prohibits non-competes (with few exceptions). Other states vary widely. Check your state's laws—some ban them for low-wage workers or have strict enforceability requirements.
Unlimited Unpaid Overtime or "Exempt" Misclassification
What to Watch For: Clauses that require unlimited hours with no additional compensation or incorrectly classify non-exempt employees as exempt.
Problematic Language:
- "Employee agrees to work as many hours as necessary to complete assigned tasks"
- "Position is exempt from overtime pay" (when duties don't qualify for exemption)
- "Salary covers all hours worked, including evenings and weekends"
- No mention of overtime eligibility when employee should be non-exempt
Why It's Dangerous:
For Employees: You could work 60-80 hour weeks with no additional pay. Misclassification means you're owed back overtime wages.
For Employers: Misclassifying employees as exempt can lead to massive liability—years of back wages plus penalties and attorney fees.
Exempt Employee Test (Federal FLSA):
To be exempt from overtime, ALL three must be true:
- Paid on a salary basis (not hourly)
- Earn at least $684/week ($35,568/year) as of 2024
- Perform exempt duties (executive, professional, administrative)
Note: Simply calling someone "manager" or "exempt" doesn't make them exempt. Duties matter.
Vague or One-Sided Termination Provisions
What to Watch For: Termination clauses that heavily favor the employer with no employee protections.
Problematic Examples:
- "Company may terminate employment at any time for any reason with no notice"
- "Employee must give 90 days notice but company can terminate immediately"
- "Employee forfeits all bonuses and benefits if terminated for any reason"
- "For Cause" defined so broadly it includes minor infractions
- No severance provision for executives or senior employees
Why It's Dangerous:
For Employees: You could be fired without cause or notice, losing earned bonuses and unvested equity with no recourse.
For Employers: Overly harsh terms can damage morale and make it hard to recruit. They may also be unenforceable as unconscionable.
Balanced Approach:
- Define "Cause" narrowly (fraud, felony, gross misconduct)
- Provide reasonable notice periods for both parties
- Include severance for termination without cause
- Protect earned bonuses and vested equity
- Allow cure period for minor issues
Overly Broad IP Assignment Clauses
What to Watch For: Intellectual property clauses that claim ownership of everything you create, even outside of work.
Problematic Language:
- "All inventions, ideas, and creations belong to Company, regardless of when or where created"
- "Employee assigns all intellectual property rights in perpetuity"
- "Any work product created during employment term belongs to Company"
- No exclusion for prior inventions or side projects
- Claims ownership of work done on personal time with personal resources
Why It's Dangerous:
For Employees: The side project you build at home on weekends could belong to your employer. Your personal app, book, or invention isn't yours.
For Employers: Overly broad clauses may be unenforceable and create resentment. They can also deter entrepreneurial talent.
Reasonable Scope:
"Employee assigns IP rights to inventions created: (1) within the scope of employment, (2) using Company resources, (3) related to Company's business, or (4) during working hours. Personal projects created on own time with own resources, unrelated to Company business, remain Employee's property."
Action Item:
Attach a "Prior Inventions" schedule listing any IP you created before employment. This protects your existing work and side projects.
Unilateral Contract Modification Rights
What to Watch For: Clauses allowing the employer to change contract terms without employee consent.
Problematic Language:
- "Company reserves the right to modify this agreement at any time"
- "Terms may be changed with 30 days notice"
- "Employee handbook may change compensation and benefits at Company's discretion"
- "Company can reassign job duties or location without consent"
Why It's Dangerous:
For Employees: Your salary, benefits, job duties, or location could change at the employer's whim. You agreed to one job and could end up with something completely different.
For Employers: While flexibility is valuable, unilateral modification clauses can be challenged as illusory contracts lacking consideration.
Better Approach:
"Material changes to compensation, job duties, or work location require mutual written agreement. Handbook policies may change but won't reduce guaranteed compensation or benefits."
One-Sided Arbitration and Class Action Waivers
What to Watch For: Arbitration clauses that heavily favor the employer or prevent collective action.
Problematic Features:
- Company chooses the arbitrator or arbitration service
- Employee pays all arbitration fees (can be $10,000+)
- Class action waiver prevents joining with other employees
- Limits discovery or evidence gathering
- Confidentiality prevents discussing the case publicly
- Company can go to court but employee cannot
Why It's Dangerous:
For Employees: You may be unable to afford to pursue valid claims. Class action waivers prevent banding together to challenge systemic issues like wage theft.
For Employers: One-sided arbitration clauses can be struck down as unconscionable. They also signal distrust and can harm employee relations.
Fair Arbitration Features:
- Both parties share arbitration costs equally
- Neutral arbitrator selection process
- Allows sufficient discovery
- Employee can opt out within 30 days
- Preserves rights to statutory claims (discrimination, wage claims)
Clawback Provisions Without Reasonable Limits
What to Watch For: Clauses allowing the company to reclaim paid compensation under broad circumstances.
Problematic Language:
- "Company may reclaim any bonuses if employee leaves within 2 years"
- "Signing bonus must be repaid if terminated for any reason"
- "All equity vests only upon sale of company"
- "Training costs ($50,000) must be repaid if employee leaves before 3 years"
Why It's Dangerous:
For Employees: You could owe tens of thousands if you leave or are fired, trapping you in a bad situation. Performance bonuses should be earned and kept.
For Employers: Unreasonable clawbacks can be challenged and may violate wage laws in some states.
Reasonable Clawback:
"Signing bonus repayment required only if Employee voluntarily resigns within 12 months, on a pro-rated basis. No repayment if terminated by Company. Performance bonuses, once earned and paid, are not subject to clawback."
No Equity Acceleration Upon Change of Control
What to Watch For: Stock option or equity grants with no protection if the company is sold.
The Problem:
Company grants you stock options vesting over 4 years. Company sells in Year 2. You're terminated by the acquiring company. You lose 50% of your equity despite helping build the company that was acquired.
Why It's Dangerous:
For Employees: You helped make the company valuable enough to acquire but get fired before equity vests. Founders and investors get rich; you get nothing.
For Employers: Without acceleration provisions, you'll have trouble recruiting senior talent who understand equity structures.
Standard Protection:
Single-Trigger: All equity vests upon acquisition (rare, usually only for founders)
Double-Trigger: Equity vests if (1) acquisition occurs AND (2) you're terminated without cause within 12 months (more common, fair balance)
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What to Do When You Spot Red Flags
For Employees
- Don't sign immediately—request time to review (3-5 days)
- Consult an employment lawyer ($300-1,000 well spent)
- Negotiate problematic clauses before signing
- Get modifications in writing, signed by both parties
- If they won't budge, consider if the job is worth the risk
- Document everything if you do sign
For Employers
- Have an employment lawyer draft or review your templates
- Balance protection with fairness—attract top talent
- Ensure compliance with state-specific employment laws
- Update contracts regularly as laws change
- Be willing to negotiate with senior hires
- Document legitimate business reasons for restrictive clauses
Negotiation Scripts
Negotiating a Non-Compete
What to Say:
"I'm excited about this role, but I'm concerned about the non-compete. A 3-year nationwide restriction would prevent me from working in my field if things don't work out. Could we narrow this to 12 months and limit it to direct competitors in our region? I'm happy to sign a strong non-solicitation for clients and employees."
Negotiating IP Assignment
What to Say:
"I want to protect the company's IP, but I also have side projects unrelated to this role. Can we add language clarifying that personal projects created on my own time, with my own resources, and unrelated to the company's business remain my property? I'll list my existing projects as prior inventions."
Negotiating Equity Acceleration
What to Say:
"I'm committed to building this company long-term. However, if there's an acquisition and I'm let go, I'd like double-trigger acceleration for my unvested equity. This is standard for senior roles and aligns my interests with a successful exit."
FAQ: Employment Contract Questions
What are the biggest red flags in employment contracts?
The biggest red flags include: overly broad non-compete clauses (restricting your entire career), unlimited unpaid overtime requirements, vague termination provisions with no employee protections, IP assignment covering all personal projects, unilateral contract modification clauses, one-sided arbitration agreements, unreasonable clawback provisions, and equity structures with no change-of-control protection.
Can I negotiate my employment contract?
Yes! Employment contracts are negotiable, especially for professional and senior roles. Common negotiation points include: salary and bonuses, equity amount and vesting, non-compete scope and duration, severance terms, IP assignment limitations, work location and hours, and vacation time. It's easiest to negotiate before signing—changes afterward require consideration (something of value in exchange).
Should I have a lawyer review my employment contract?
For executive positions, contracts with equity, or any contract with non-competes or significant restrictions, yes. An employment lawyer can identify problematic clauses, suggest modifications, and negotiate on your behalf. The cost ($300-1,000 typically) is minimal compared to potential losses from signing a bad contract that could cost you tens of thousands or restrict your career for years.
Are non-compete agreements enforceable?
It depends on your state. California generally prohibits non-competes (with narrow exceptions). Other states enforce them if they're "reasonable" in scope, duration, and geography. Courts look at whether the restriction is necessary to protect legitimate business interests without unduly restricting the employee's ability to earn a living. Overly broad non-competes are often struck down.
What if I already signed a contract with red flags?
You're not necessarily stuck. Options include: (1) Negotiating an amendment (offer something in return), (2) Consulting a lawyer to determine if problematic clauses are enforceable, (3) Documenting violations of the contract by the employer, (4) In extreme cases, the contract may be unconscionable or violate public policy. Don't violate the contract without legal advice, but know that not every clause is enforceable.
Do I need an employment contract for every employee?
Not always required, but highly recommended for: executives and senior management, employees with access to trade secrets or confidential information, employees receiving equity or significant bonuses, roles requiring non-competes or IP assignment, and any role where clear terms benefit both parties. For at-will hourly employees, an offer letter may suffice.
Final Thoughts
Employment contracts set the foundation for the employer-employee relationship. Red flags in these contracts aren't just legal technicalities—they're warnings of potential problems that could derail careers or expose businesses to significant liability.
Whether you're an employee reviewing an offer or an employer drafting contracts, take the time to get it right. Fair contracts protect both parties and foster trust. Unfair contracts create resentment, litigation, and turnover.
Remember:
The best employment relationships are built on mutual respect and fair terms. If a potential employer won't negotiate reasonable terms or address legitimate concerns, that tells you something about how they'll treat you as an employee.