The Importance Of Employment Agreements
Employment agreements can be an effective way to outline the expectations between employers and employees. While not typically required by law, these documents are beneficial in ensuring both parties understand their roles within the working relationship - providing a clear path for collaboration and success!
Whether it is called an offer letter, terms of employment, an employee contract, or an employment agreement, the idea is generally the same: an agreement between an employee and employer that outlines the parties' working relationship.
Today we're discussing the importance of employment agreements.
Advantages of Having an Employment Agreement
From an employer perspective, an employment agreement may be important for many reasons, including:
Clarity (Defined Benefits, Defined Duties) - An employment agreement may be valuable when it provides clear and detailed information about the terms of employment, including the duties and responsibilities of the employee (as well as the employer), the duration of the employment, and any benefits or perks that may be provided. If a legal dispute arises, the disputing parties may look to the terms of the contract to help resolve future misunderstandings.
Legal protection - An employment agreement can provide legal protection for the employer in the event of an employee breach or to support termination (or other legal action). For example, an employment agreement may include terms that protect an employer's confidential business information. If an employee breaches those terms, the employer may have the ability to proceed with a claim for breach of contract (in addition to other claims). Similarly, clear terms of an employment agreement may support an employer's defense for termination, if challenged by the employee. Take, for example, a situation where an employer terminates an employee because they learned they were working for another employer during the same time of their current employment. If the contract contained a provision requiring a duty of loyalty during employment, such provision may provide a defense in response to a potential claim for wrongful termination.
Attracting top talent - A well-crafted employment agreement is a powerful tool for any employer seeking to recruit and retain top talent. These agreements can provide job security assurances with terms like guaranteeing an executive's length of service (while also providing a severance provision in the event they are terminated without cause prior to their end date).
An employee may find an employment agreement valuable for similar reasons, including clarity, legal protection, and job security.
Terms to Consider Including in an Employment Agreement
Most employment agreements should contain the following terms:
Employee's Job Title (and potentially a basic description of duties or expectations)
Outlining an employee's duties or expectations provides clarity for both the employee and the employer, especially when those job duties are reduced to writing. If there is a challenge as to the employee's responsibilities or expectations, the parties can turn to the terms of the agreement to resolve.
On the other hand, many jobs require fulfillment of duties that may not be easy to define or may change over time. While it is always advisable for an employer to outline the job duties and expectations for any employee, an employer may decide to provide those details in a document separate from the employment agreement, to avoid the need to amend the employment each time the job duties or expectations change.Compensation
An agreement should outline an employee's salary or hourly wage or provide an addendum (that can be amended over time) with those terms of employment. If the employee is entitled to a bonus (discretionary or fixed), those details should be noted in the agreement. The agreement should also note whether the employee is entitled to benefits (though some employers may opt to provide more generalized language on benefits and instead include those details in a Company Handbook or similar document. In such case, the employment agreement may simply state "employee shall be entitled to benefits pursuant to Company policies, which may change from time to time at the Company's sole discretion).Term of Employment
The employment agreement should specify whether the employer is for a fixed term (such as one year or two years or an indefinite period (usually termed "at will"). If the agreement is for a fixed term, it should also provide guidance on how the agreement may be renewed or nonrenewed, such as requiring that the employer (or employee) give notice of non-renewal within a certain time period prior to the end of the term.
If the intention is that the employment is "at will" (meaning can be terminated at any time, with or without notice, by employer or employee, for any or no reason), then the agreement should specifically state (and reinforce) this. While some states, like California, have statutes that provide a presumption in favor of at-will employment in the absence of a specified term, (see California Labor Code Section 2922), courts in some cases have ruled that an employer's policies or actions (by managers) have created a presumption that the employment could only be terminated for "good cause" (rather than at-will).Governing Law
The employment agreement should contain a provision that specifies which state's laws will govern the agreement. While parties have the power to contract their own terms, keep in mind that some states (such as California), have laws prohibiting subjecting employees who primally reside and work in their state to (i) adjudicate the case outline of their state, (ii) deprive the employee of the substantive protections provided by their state.
Other Helpful Employment Agreement Terms To Consider
Confidentiality: The agreement may specify any confidential information that the employee will have access to and prohibit the employee from disclosing that information to third parties. It is advisable to define the meaning of "confidential information" specific to the business, too. For example, for a business in the entertainment industry (such as film or television), then the definition of "confidential information" may include "concepts, proposals, pitches, coverage, treatments, etc. In some states, additional restrictive covenants may be permissible and included (such as non-compete and non-solicit). Some employers may consider confidentiality to be so important to their business and want to further define its parameters that they elect to include a separate Confidentiality Agreement as an addendum to the employment agreement.
Dispute Resolution: The agreement should specify how any disputes between the employer and employee will be resolved, such as through mediation or arbitration (and if through arbitration, identifying which arbitration company and/or rules should be applied).
Statement of No Conflicting Obligations: The agreement may contain a warranty by the employee that they are not under any other obligations or commitments that would be inconsistent with their obligations under the agreement. This is especially important as an added protection for employers in the event that they later learn that the employee was subject to restrictions (such as a non-compete, non-solicit, or other restrictive covenant) that were not disclosed and the employer either needs to terminate the employee or is forced to defend a lawsuit for third-party violations of the employee's other agreement.
Note that these terms are in addition to standard terms you may typically find in any sort of legal agreement, such as (i) a Merger Clause (term stating that this is the entire agreement between the parties), (ii) a Notice provision (dictating where notices or communication between parties are to be provided), (iii) an Amendments and Waivers Clause (stating that the agreement cannot be modified or amended unless in writing and signed by both parties), (iv) a Severability provision (stating that if any of the provisions of the agreement are unenforceable, the remaining provisions shall continue to be enforceable), (v) an Assignment provision (stating whether the agreement is assignable to others and/or inures to successors and assigns), (vii) a Counterparts provision (stating that the Agreement can be executed in counterparts), and (viii) a provision on Electronic Delivery and/or electronic signature being binding.
Conclusion
Looking to craft an employment agreement or address terms of enforceability? Wagner Legal is here for you. Get in touch with us today and let's discuss how we can lend our experience as an employment agreement lawyer to ensure your business has the protection it needs.
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