Employment Agreements 101
An employment agreement is a document that provides the terms and conditions for the relationship between an employee and employer. An employment agreement often provides the compensation, duties, term of employment, benefits, non-competition obligations, non-solicitation obligations, confidentiality, protections for the employer, protections for the employee, termination procedures, and numerous other aspects of the employment relationship. For example, it is common to have a clause which requires the employee to pay the employer’s attorney fees if a dispute arises under the employment agreement. There are many other important clauses that may be included in an employment agreement.
For an employee, the most critical aspects are often benefits , compensation, vacation and time off, termination of employment and restrictive covenants. Often there are performance bonuses for achievement of goals or objectives and vacation limits. For executives and higher level employees, there may be equity incentive plans and long-term and short-term bonuses. It is critically important to understand all aspects of the deal you are receiving.
An employment agreement is an important legal document that either shores up your protections and interests if you have a short-term employment relationship or significantly protects your employer if you have a longer term employment relationship. Employing attorneys who can review and negotiate your employment agreement is essential in order to protect you.
Critical Elements to Review
The key clauses in an employment agreement that must be closely examined are the non-compete, non-solicitation and confidentiality clauses. If an employer has invested in training, built a customer base or provided any sensitive information that could be used to compete with the employer’s business, the employer will want these clauses to be enforceable against the employee. Conversely, the employee will want to limit his or her restrictions to protect future job opportunities, while the employer will want them to be as broad as possible.
The termination clause is also very important to the employer. Many employers only use termination provisions that are highly beneficial to the company and negate some of the rights and entitlements of the employee. The employee will want a termination clause that protects his or her employment on a reasonable basis. The focus should be on how much notice or termination pay is payable, and whether it is based on cause.
Other clauses to consider are the relocation clause, which allows the employer to change the place of work; the intellectual property clause, which deals with who owns any works of authorship created by the employee; the dispute resolution clause, which governs how any disputes will be handled; and the vacation clause, which provides for the number of vacation days the employee will receive.
Common Review Mistakes
One of the most common mistakes employees make when asked to sign a new employment agreement is to view it as a simple formality. Instead of recognizing that the new agreement is an opportunity to either replace an existing agreement or expand upon what they already have, employees oftentimes don’t even read the document (or read it only superficially) before signing. When an employee asks us to review a proposed agreement after it’s become effective, it’s typically too late to make meaningful changes.
When presented with a new employment agreement from your employer (or a new employer), review it carefully. Pay particular attention to any term that is inconsistent with your existing agreement, obliterates your existing agreement or is outright new. Here are some of the terms that often catch employees off guard: Don’t be surprised: Employees frequently sign an agreement believing that it is simply an update or that nothing will change if they sign it. However, if it contains broad and different terms than what you currently have, it will likely take precedence. That means that the new terms will govern should there be a dispute over any of the covered issues. The best way to avoid being on the wrong end of an unfavorable change to your employment contract is to contact an employment lawyer before you put pen to paper.
Role of Legal Counsel
When it comes to employment agreements, seeking the expertise of a legal professional can make all the difference. These legal experts can provide guidance not only on what the terms of your agreement mean but also on what they should mean. Legal professionals are well versed in the most current labor laws and can spell out how these laws could affect you as an employee. This is especially important considering that your employer may try to take advantage of your lack of knowledge about your rights. With legal advice on your employment agreement, you can rest assured that you understand every facet of it and can trust that it complies with the law.
Having an employment agreement reviewed by a legal professional can avoid the high cost of litigation down the road and help you build a strong working relationship with your employer from the start.
Comprehensive Review Process
Prior to digging into the review process, it is helpful to schedule a time to review the agreement without distractions. It is increasingly common for professionals to multi-task by doing something else while reading the document. Often, multi-tasking leads to oversights and difficulties comprehending the document. Set aside a specific period of time away from other screens and notifications. Being able to approach the review with complete attention will lead to the best outcome.
Carefully read through the entire agreement. Then read through the agreement again – this time, looking specifically for certain types of provisions. A useful approach is to break down the review process into four "layers," and to review for different types of issues at each layer.
This first layer is the most important, and also the easiest. The issue is simple: make sure the agreement accurately describes your current circumstances. This is especially true if you have been at the company for any substantial amount of time. It is not uncommon for the company to provide a "form" agreement that is used as a template for many employees. But your company’s attorney may not be aware of earlier provisions contained in prior contracts. Ask yourself, which law applies? Where will litigation happen if the time comes? What is the timing for asserting claims? Is there an arbitration?
The definition of "cause" for termination of employment is sometimes limited to situations where the employee engaged in theft, embezzlement or was convicted of a crime involving dishonesty. Sometimes, the definition is broader. In either case, the trigger for termination might be evaluated in any number of circumstances including: repeated failure to follow directions; dishonesty; or violation of the law – including company policies. For these reasons , it is important to have a discussion about the events that need to occur before your employer can terminate your employment.
Be conscious of the possibility that your employer may have a culture of only ending employment in extreme situations such as those listed above. Many companies with this culture will create a "remedial period" at the time of a termination for what would otherwise be considered a "cause" termination. In those circumstances, even if the employee engaged in an act justifying termination, the company will provide a notice of the termination instead of ending employment immediately. The notice includes details about the events that must occur prior to terminating employment. The last part is the most important – while there are circumstances in which a third-party evaluator can be used, the evaluation is typically administered by the senior human resources executive or company attorney.
Carefully read through at the entire agreement once more. Review for any "catch-all" provisions. These are sometimes found at the end of section 8, but not always. Often, they include some version of a general non-solicitation of employees and clients, but may be more restrictive in terms of which current employees (even if there are new employees) can be contacted post-employment. Most openings lead to workforce changes; so employees should feel comfortable reaching out to former colleagues about potential opportunities. Reviewing the general non-solicitation provision for these rare circumstances is important.
In addition, many agreements contain a "non-disparagement" provision. For example, a provision may state that neither party can disparage the other. The practical result of the non-disparagement provision is that you are either unable to publicly comment on events leading up to your last day of employment or that your statement must be limited to only positive statements.
Tips for Effective Negotiation
When proceeding on an employment agreement – either from the perspective of a prospective employee, or an employer – there are critical considerations for every party that drive the discussions. For the prospective employee, in negotiating these terms, it is suggested that the projected start date be included in the discussions. Along with this, any non-working day/holiday provisions should be addressed. While these may seem small, to the employee, they have significant importance. In instances where the employment is being transferred from one employer to another (i.e. a purchase of business), these considerations are very important to the employee. As time is money, maximizing the start date so that an employee can commence work as soon as possible permits the employee to start gaining income, and for the employer to avoid the employee being on unpaid leave to start his or her employment. Ensuring that the job description – especially in terms of duties assigned – is clearly documented is equally important in streamlining the process. For the employer, being able to assert clear documentation will assist the employer’s ability to limit the liability exposure in the event the employee is sued personally for legal violations that take place after the start of the employment relationship. Further, clearly addressing the appropriate lawful classification of the employee is also critical. Addressing whether the employee will be paid on an hourly basis, a flat fee monthly, or on some other basis is important in these discussions. Further, contemplating how any commissions will be calculated (including tax considerations) can streamline the discussion and make it easier for the parties to determine what works most cleanly and simply. In all negotiations, communication is suggested to be clear, fully acknowledged and documented so that there are no misunderstandings. Those negotiating the more substantive provisions of the employment agreement are well-advised to have a list of topics to consider which may include: These are merely some of the key provisions to address when negotiating the terms of the employment agreement.
Online Tools for Employment Agreement Review
In today’s digital age, numerous resources are available to help review employment agreements. Familiarity with these can give you a competitive edge when negotiating or recommending an employment contract to your client. The following are categories of programs and online tools worth knowing about:
Document comparison tools
There are many software programs available that allow you to load two versions of a document and compare them for changes. This is particularly useful for contracts drafted by multiple professionals who have edited the agreement at various stages of negotiation. In this context, high-definition tools highlight any changes in blue while low-definition systems provide a redline of changes. Conversely, many word processing systems offer comparison features as part of their basic functionality .
Collaboration and task management programs
There are many cloud-based management and collaboration programs with comprehensive task management components. Project management programs allow for input from multiple people, helping to ensure that all necessary contract clauses are considered and included in the contract.
Checklist programs
Other contract drafting tools are standalone checklists, which allow you to answer questions to determine the type of contract you should be drafting. Some include sample clauses you can insert into your draft so you can create a first draft that is good enough to start contract negotiations.
Legal research programs
Computer-assisted legal research programs offer insights into how judicarements have treated certain contractual clauses in the past. It allows you to determine whether your clauses are unusual and view decisions based on similar contracts.