Employment Contract Red Flags: What Attorneys Should Check
Employment agreements are among the most personally consequential contracts any individual will sign. They govern compensation, ownership of work, post-employment restrictions, and dispute resolution. For attorneys reviewing employment contracts on behalf of clients — whether employers or employees — missing a red flag can have serious consequences.
Why Employment Contracts Are Different
Unlike commercial contracts where both parties are sophisticated entities, employment contracts often involve a power imbalance. The employee may have little leverage to negotiate. This makes the attorney's review especially important — you're often the only protection your client has against unfavorable terms.
The 12 Red Flags to Check
1. Overly Broad Non-Compete Clauses
What to look for: Restrictions that are broad in geography (nationwide, worldwide), long in duration (exceeding 1-2 years), or broad in scope (prohibiting work for any competitor).
Why it matters: Many states have significantly restricted or banned non-competes. California, North Dakota, and Oklahoma largely prohibit them. Colorado and others have strict limitations. Even where enforceable, courts often narrow overbroad restrictions, but the litigation cost to challenge them is significant.
What to do: Check the governing law first — if it's a non-compete-friendly state, push for narrower scope. Limit to direct competitors, reduce duration to 6-12 months, restrict geography to where the employee actually worked.
2. One-Sided IP Assignment
What to look for: "All inventions, discoveries, and works of authorship created during employment shall belong to the Employer." Watch for language that captures work done on personal time, using personal resources, or unrelated to the job.
Why it matters: An employee's side projects, open source contributions, or independent innovations could be claimed by the employer. Some agreements even retroactively capture prior work if it's "related to" the employer's business.
What to do: Ensure IP assignment is limited to work created "within the scope of employment" or "using employer resources." Include a carve-out for prior inventions (listed in an exhibit). In states like California (Labor Code 2870-2872), employees have statutory protection for off-duty inventions — make sure the contract acknowledges this.
3. Mandatory Arbitration with Class Action Waiver
What to look for: "All disputes shall be resolved through binding arbitration. Employee waives the right to participate in any class or collective action."
Why it matters: This combination prevents employees from joining collective claims and makes small-value disputes impractical to pursue. While generally enforceable under the Federal Arbitration Act (per Epic Systems v. Lewis), some states (California, New York) have limitations through the PAGA mechanism or other procedural protections.
What to do: If representing the employee, push for a carve-out for wage/hour or discrimination claims, or request a mutual forum selection clause. At minimum, ensure the employer pays arbitration fees so the employee isn't priced out.
4. Evergreen/Infinite At-Will Provisions
What to look for: The contract states employment is at-will but includes terms that continue indefinitely — perpetual non-competes, indefinite confidentiality, perpetual IP assignment.
Why it matters: Even after termination, certain obligations continue. An employee may find themselves restricted years after leaving. Perpetual non-solicitation or non-compete provisions are particularly dangerous.
What to do: Ensure post-termination obligations have clear, reasonable end dates. Confidentiality should survive for a defined period (2-5 years), not indefinitely (except for trade secrets).
5. Forfeiture-on-Termination Clauses
What to look for: "Upon termination for any reason, all unvested equity, bonuses, and commissions shall be forfeited." Or clawback provisions that require returning compensation already paid.
Why it matters: Employees may lose significant compensation if terminated, even without cause. Clawback provisions can require returning earned compensation, which can be financially devastating.
What to do: Distinguish between termination for cause and without cause. Ensure vesting continues or accelerates upon termination without cause. Review clawback triggers carefully.
6. Unilateral Amendment Rights
What to look for: "Employer may amend this agreement at any time with notice to Employee."
Why it matters: The employer can change compensation, duties, restrictions, or any other term unilaterally. Even with notice, the employee may have no meaningful ability to object.
What to do: Require mutual written consent for material amendments. At minimum, require advance notice and an opportunity to terminate if the employee doesn't accept the changes.
7. Broad Confidentiality That Sweeps in Everything
What to look for: "All information relating to the Employer, its business, clients, or operations is confidential." No carve-outs for publicly known information, skills, or general industry knowledge.
Why it matters: An overly broad confidentiality clause can prevent an employee from using general industry knowledge, skills, and experience in future roles — effectively functioning as an invisible non-compete.
What to do: Ensure standard carve-outs: publicly available information, information rightfully received from third parties, independently developed knowledge, and general skills/experience (the "general skills" doctrine).
8. Liquidated Damages Penalties
What to look for: Specific monetary penalties for early termination, breach of non-compete, or other violations. "Employee shall pay $50,000 for each violation of the non-compete provision."
Why it matters: Liquidated damages that exceed actual harm are unenforceable as penalties in most states. But they still have a chilling effect and may require litigation to challenge.
What to do: Challenge penalty clauses that don't reasonably estimate actual damages. In many jurisdictions, liquidated damages for employment contracts are viewed skeptically.
9. Inadequate Termination Provisions
What to look for: The contract allows termination "for any reason or no reason" with minimal notice, but only provides severance in limited circumstances.
Why it matters: The employee has no job security, limited severance, and may be subject to immediate termination. This is especially problematic for executives who relocate for positions.
What to do: Negotiate severance packages for termination without cause — typically 2-4 weeks per year of service. Include outplacement services, continued health coverage, and vesting acceleration.
10. Expense Shifting in Disputes
What to look for: "The prevailing party in any dispute shall recover all attorneys' fees and costs." Combined with mandatory arbitration, this can be a significant deterrent to legitimate claims.
Why it matters: Employees may be discouraged from pursuing valid claims if they face the risk of paying the employer's legal fees. This is particularly concerning for wage/hour or discrimination claims.
What to do: Push for mutual fee-shifting (both sides risk paying) or remove the clause entirely. In some jurisdictions, one-way fee-shifting in employment contracts is disfavored.
11. Restrictive Post-Employment Solicitation
What to look for: "Employee shall not solicit any client, customer, or employee of Employer for 24 months after termination." Broad enough to cover any person the employee ever interacted with.
Why it matters: Non-solicitation clauses that are too broad can effectively prevent an employee from working in their industry. They're often more enforceable than non-competes, making them a "backdoor" non-compete.
What to do: Limit to clients the employee personally serviced. Reduce duration to 6-12 months. Distinguish between active solicitation and responding to inbound inquiries.
12. Missing Governing Law / Jurisdiction
What to look for: The contract doesn't specify which state's laws apply, or specifies a state where the employee doesn't work and has no connection.
Why it matters: Forum selection can dramatically affect enforceability. Non-competes enforceable in Texas may be void in California. Choice of law may also affect implied contract terms, default rules, and available remedies.
What to do: If representing the employee, push for the state where the employee works. If representing the employer, ensure the chosen state has favorable law for the key provisions (especially non-competes).
How AI Helps with Employment Contract Review
Checking all 12 red flags on every employment contract is difficult to do consistently — especially when reviewing contracts under time pressure. AI tools like ContractPeer can analyze employment agreements in seconds, flagging these red flags automatically.
The AI checks for:
- Non-compete scope and duration
- IP assignment breadth and carve-outs
- Arbitration and class action waiver combinations
- Confidentiality scope and duration
- Amendment rights
- Termination and severance provisions
- Fee-shifting and liquidated damages
- Non-solicitation scope
- Governing law selection
Check Your Employment Contracts for Red Flags
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This article is for informational purposes only and does not constitute legal advice. Employment law varies significantly by jurisdiction. Always have a qualified attorney review employment contracts.