Not long ago, key personnel could be hired with a handshake; the underwritten compact between employer and employee included mutual expectations of loyalty, trust and long-term commitment.
Now as companies find they must depend on increasingly transient executives, mangers, and technical employees, all parties are asking for protection in the business equivalent of the “pre-nuptial” — the employment agreement.
Employment agreements take many forms — from “sign and return” offer letters to fully comprehensive contracts. What these agreements should accomplish — to one extent or another — is to allow the parties to begin and end the employment with a clear understanding of their rights and responsibilities. Below are three types of terms employment agreements might include: those setting forth the expectations of the parties regarding the employment, such as job duties and compensation; those intended to protect the company’s interests; and those dealing with terminations, with and without cause.
Getting it right at the outset
An employment agreement should reflect accurately the understanding of the parties
upon which the employment relationship is based. Clarification of open or uncertain
issues in the early stages, while good feelings prevail is much easier than sorting
out vagueness during a difficult exit. Note that the offer letter is often only
a shorthand statement of the terms. Additional thinking, and writing, is often
required to produce a satisfactory definitive agreement. Key areas to consider
include:
Title and Responsibility
The agreement should indicate the employee’s title, responsibilities, and line of report. If these could change, the agreement should say how this would be implemented, and what the outer limits are: “or such other work suitable for a senior executive as the board of directors may request.” Understandings regarding Board of Directors participation should also be spelled out.
Relocation
If the employment requires relocation, the agreement should include terms regarding the payment of, e.g., pre-move long distance commuting and temporary housing costs, moving costs and the cost of selling one home and purchasing another. As an alternative, the employer may offer a lump sum amount or cap.
Travel
If the company expects the employment to require extensive travel, it is worth putting that in writing so as to avoid complaints in the future. Some companies provide weekend “return home” travel expenses for employees whose schedules keep them away from home two or more consecutive weekends.
Term and Extension
A term of service is often found in employment agreements. If the term is renewable conditions and timing of a notice for extension or nonrenewable should be explicit.
Compensation and Incentives
Accurately stating the initial compensation package is not enough. When and how is the base salary adjustable? If the employee is eligible for one or more bonuses, how are these calculated? What are the criteria for performance and who conducts the evaluation? Is the employee eligible for equity incentives, such as incentive stock options or no-qualified stock options, or, less commonly, stock appreciation rights or phantom stock? Needless to say, the tax implications of such incentives should be reviewed very carefully.
Benefits and Fringes
Many agreements do little more than state the amount of annual vacations, and assure provisions of health, disability, life insurance coverage in an employer-sponsored program, as well as participation in its retirement benefits. However, particularly for the senior executive, more detail is required. Executive benefits may includes enhanced life and disability insurance coverage, defense and identification coverage, participation in non-qualified retirement plans, change of control protection and so forth.
Protecting the company’s interest
The following are often found in employment agreements used by companies relying on employees with specialized knowledge or abilities.
Protection of Confidential Information
Key employees are often required to protect and not disclose, or use detrimentally, the employer’s confidential information. The protection always runs during and generally after employment.
The definition of confidential information may vary but it generally includes trade secrets and items that confer competitive advantage, such as customer lists, pricing information, know-how, technical information, and business plans. Trade secrets are protectible even if the underlying information would not meet standards of copyright or patent protection. Once public, the information, is of course, no longer confidential, and so the employee should not be bound to protect information that becomes public through no fault of the employee. Agreements may contain “carve-outs” addressing ways confidential information may become public and thus releasing an employee from the obligation to protect that information.
Assignments of Inventions
It’s no secret that the competitive advantage of many companies depends on the work or their technical employees, such as engineers, scientists, analysts, and designers, who “add value” to the employer’s enterprise by means of the intellectual property (IP) they create while employed. Under patent and copyright law, the employees owner their IP unless they assign the “inventions” to the employer or agree that original works of authorship were done for the employer’s benefit. An employment agreement will usually contain elaborate provisions for assuring that the IP becomes the exclusive property of, or is licensed to, the employer and that the employee assist the employer in perfecting the IP protection.
A carve-out of “prior inventions” and those unrelated to the employer’s business should be considered. The savvy technical employee is likely to demand such a change. Conversely, and assignment of inventions may include a “trailer” post-employment whereby relevant inventions occurring during, say, the first year after presumption. This should be carefully analyzed by an employee contemplating starting or joining a company in an arguably related technical business.
Covenants not to Compete
Key employees are often asked to provide covenants not to compete. During employment, the covenant is consistent with an employee’s duty of loyalty to an employer, and breach may serve as grounds for termination for cause. More controversial are the post-employment covenants, as these may in effect restrict an employee’s access to a new job. However, an employer may impose reasonable limitations such that its trade secrets and confidential information not be used competitively against it.
Both the employer and employee benefit from analyzing realistically the scope of a post-employment covenant. If the employer insists on, or carelessly permits, protection so broad so as to prevent the employee from earning a living, the covenant may not be enforceable. Courts tend to side with employees unless the employer can show that the employee has specialized talent or knowledge that arguably could be used to its competitive detriment. Furthermore, covenants are more likely to be enforced if narrowly drafted, e.g., to prevent an employee from soliciting certain customers or clients, from working for a direct competitor, and/or from working within a specific geographical territory for a limited period of time.
Unless the post-employment covenant is part of the bargain when starting employment, it should be supported by payment (sometimes referred to as “consideration”) such as severance pay, if agreed to on exiting employment.
Finding employment
In addition to the post-employment effect of non-competes and assignment of inventions discussed above, employment agreements often address the triggering event for termination.
Termination for Convenience
Either side may wish to be able to “walk away” from the relationship merely by giving notice, a so-called termination “without cause.” This tends to benefit employers who can terminate on short notice without stating a reason, perhaps because of change in a company’s strategy, or because the employee’s performance was marginal. Employees often negotiate for a period of notice and severance pay. If the employee exits during the employment term, the severance is typically forfeited, although some agreements provide that a significant reduction is effectively a termination and grounds for the employee to leave with forfeiting severance.
Termination for Cause
Provisions permitting termination for cause based on an employee’s egregious misconduct (embezzlement, fraud), substance abuse or criminal convictions are not typically controversial. But where the grounds are poor performance (personal or corporate), disclosure or misuses of confidential information, failure to execute directives, or engagement in competitive activity, the employee may request written notice, opportunity to cure and perhaps, if the employee is in senior management, the opportunity to be heard in person by the board of directors.
Dispute resolutions
Employers may include a waiver of the right to a jury trial in the event of a dispute, preferring arbitration because this is considered less risky then being exposed to jurors who may empathize with the employee, or out of a concern that litigation is slow and expensive. If arbitration is the chosen method, the parties should consider, e.g., how it is started, where it occurs, how the arbitrator is chosen, and who pays the expense.
Employment agreements, like pre-nuptial agreements, must be negotiated gingerly. Attorney involvement is sometimes more effective when indirect , i.e., coaching a client rather than directly negotiating with opposing counsel. Overt displays of mistrust and over-reaching may undermine the relationship before the “marriage” has even begun. However, as employers, and employees, have learned, a failure to come to terms beforehand can lead to time-wasting controversy during the employment and, all too often, litigation after it has ended.
(Guest, Shilepsky and Silveira are attorneys with the firm of Tillinghast, Licht, Perkins, Smith & Cohen, LLP of Providence.)
