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New requirements for employment contracts from 1 July 2024 – what must/should the employment contract contain?

All individuals set to be employed are required to have a written employment contract, as mandated by the Working Environment Act, Section 14-5. This requirement applies regardless of whether the employment is for a permanent or temporary position.
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Minimum Requirements for Employment Contracts
All individuals set to be employed are required to have a written employment contract, as mandated by the Working Environment Act, Section 14-5. This requirement applies regardless of whether the employment is for a permanent or temporary position.

As of July 1, 2024, new content requirements for employment contracts will be introduced for new employment relationships. These requirements are in addition to the existing minimum requirements. In summary, this includes an expansion of the list of details employers must provide as outlined in Section 14-6. The timeframe for incorporating changes into the employment contract will be reduced, and the obligation to provide additional information to employees assigned overseas will be broadened. Furthermore, there will be new regulations concerning probation periods.

Additionally, two new presumption rules are introduced to address situations with insufficient information: (i) if the employment contract does not state that the employment is of a temporary nature, it will be considered as permanent employment unless the employer can demonstrate that the contrary is more probable, and (ii) if the employer fails to specify the job’s percentage in the employment contract, the employee’s assertion regarding the job scope will be accepted unless proven otherwise.

These requirements will apply to all new employment contracts entered into after July 1, 2024. For existing employment relationships, the written employment contract must be supplemented in accordance with the changes in the Working Environment Act, Sections 14-6 first paragraph and 14-7 first and second paragraphs, upon the employee’s request. Such requests should be accommodated as soon as possible, and at the latest, two months after receipt.

From July 1, 2024, onwards, the written employment contract must be provided as soon as possible and within seven days from the start of the employment. For employment lasting less than one month, or in the case of labor leasing, a written employment contract should be concluded immediately. Any changes in employment conditions as per the Working Environment Act, Sections 14-6 and 14-7, must be documented in the employment contract no later than the day such changes become effective. However, this does not apply if changes in employment conditions result from amendments to laws, regulations, or collective agreements.

It is crucial to note that these legal amendments are not intended to restrict the employer’s management prerogative. However, overly detailed and specific regulations within the contracts could impose limitations. Thus, we advise a thorough review of contract templates to ensure compliance with the legal changes and to maintain operational flexibility and authority.

When examining the templates, it’s also wise to evaluate other commercial aspects. While specific content requirements for these sections might not be mandated, including certain elements could fortify and safeguard the company`s business in the long term. For instance, some clauses might be beneficial to include, even if not explicitly required. Additionally, some arrangements might be better addressed in the contract through a general reference but regulated separately from the main employment contract to avoid complications.

Special Regulations
Parties are at liberty to include additional terms. For individuals assuming a pivotal role in the company, certain aspects should be specifically regulated.

  • Leading or Particularly Independent Positions

Employees in leading or particularly independent positions can be exempted from several working time regulations under the Working Environment Act, including overtime pay requirements. Such designations should be clearly indicated in the employment contract.

  • CEO and Waiver of Position Protection

When employing a CEO, consider whether they should waive their right to position protection against severance pay. Such waivers must be explicitly stated in writing, typically by stating this in the employment contract. Without this waiver, a CEO enjoys the same protections as regular employees regarding dismissal etc. Additionally, CEOs may waive rights to enforce non-compete and non-solicitation clauses in exchange for severance pay.

  • Non-Compete Regulations

Non-compete, non-solicitation, and recruitment clauses are utilized to protect a business’s competitive interests. These clauses are common in employment contracts, especially for key personnel.

  • IP Clause

An intellectual property (IP) clause clarifies ownership of IP created before, during, or as a result of the employment. A well-crafted IP clause can prevent future disputes and ensure the protection of both parties’ interests.

Separate Regulations
There are some schemes that should be considered separately, i.e. the arrangements are not regulated in detail in the employment contract itself, to maintain the company’s flexibility and authority.

  • Bonus schemes

When it comes to employees participating in bonus schemes, our general advice is not to delineate these schemes in exhaustive detail within the employment contract. A more prudent approach would be to incorporate a broad statement indicating that the employee is eligible to participate in the prevailing bonus scheme, or words to that effect.

The rationale for not specifying the particulars of the bonus scheme within the actual contract stems from the potential for employees to assert a legal entitlement to the scheme. It is advisable to manage any bonus scheme as a separate entity, thereby ensuring the company is not obligated to perpetually offer the scheme. Essentially, the structure of the bonus scheme should be such that it preserves the company’s managerial discretion, allowing for the modification or discontinuation of the scheme as necessary.

  • Stock Option agreements

If the employee is to be given an option to purchase shares, separate agreements should be entered into. An option agreement gives the employee the right, at a future date or within a specified period of time, to acquire shares in the company at a predetermined exercise price, so-called “strike price”. The purpose behind option agreements is often to incentivise employees to contribute to a positive development in the value of the company’s shares, by giving the employees a financial self-interest in the increase in value. Based on the option strike price, the employee will take part in any increase in value from the exercise price, which may typically be based on the value at the time of grant. Option agreements can also help bind key employees to the company over longer periods, as it is market practice to include provisions stating that granted options cannot be exercised until a certain period of time, so-called “vesting period”. By adopting a vesting period as a condition for exercise, it will also be possible to regulate that if the employee resigns from his position before the accrual period has been reached, options that have not yet been earned or exercised lapse, without any form of compensation to the employee.

Our Assistance
With our comprehensive experience in customizing employment contracts, we are prepared to assist throughout this process. Our multidisciplinary approach ensures legal compliance, while preserving the company`s managerial discretion and addressing commercial and tax considerations.

For a review of current company employment contracts or to discuss our services further, please do not hesitate to contact us.