Backdating contracts is not usually advisable. However, it may be permissible if acting to enforce an earlier arrangement not yet subject to a written contract. This also applies to contracts for employment where employees have begun working for an employer without a written agreement. This article discusses what employers should be aware of when looking to backdate employment contracts, and where it is not permissible to do so.
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Legitimate Reasons for Backdating Contracts
A contract can only be backdated if there is a legitimate reason for doing so. The most legitimate reason is to enforce through writing the effects of an agreement already operational between two parties. The following example details a situation where backdating may be permissible:
A restaurant owner contacts a vegetable wholesaler to obtain fresh vegetables. The wholesaler verbally offers to sell at a special price if they agree to purchase the vegetables for 12 months. The owner agrees, and the arrangement commences. 3 months later, in the interests of clarity, the wholesaler creates a written contract. The contract backdates the commencement to when the agreement became operational between the parties. The term is 12 months from that date. The written contract sets out information about the existing verbal agreement and is signed by both parties.
Backdating may be legal here because the contract relates to the legitimate operation of an agreement, existing prior to it being put into writing.
Backdating Employment Contracts
The above principle also applies to employment contracts in the United States. The existence of an employment contract between employer/employee is not legally required. In the absence of a written contract, the Fair Labor Standards Act (FLSA) provides minimum wage and overtime protections. Regardless, it is beneficial to have a written contract between employer/employee to provide clarity. This contract should detail the terms of employment.
It is possible for employees to begin work on the basis of an oral or non-written agreement. In the future, it is possible to solidify this agreement through an employment contract. The start date on this contract may be backdated, provided:
- the backdating is not fraudulent – it does not inflate tenure or terms initially agreed upon;
- backdating does not allow the employer/employee to unduly claim benefit or avoid detriment; and
- the backdating is in compliance with employment laws and regulations.
The Risks
As a practice, backdating carries a significant risk of parties committing fraud. Often, parties may look to backdate transactions or contracts to avoid detriment or obtain benefit. This is fraudulent activity and is illegal. For example, it would be fraudulent to backdate a contract to favor company stocks, affecting the stock price, or to avoid tax obligations. This activity would certainly draw the attention of authorities if discovered.
Key Takeaways
- Backdating contracts is only permissible if codifying a legitimate non-written agreement previously in existence
- There are significant risks of committing fraud or breaching the law when backdating.
- Always seek professional legal advice before backdating employment contracts.
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