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Offering An Employment Contract That Works

Employment contracts and prenuptial agreements have something in common: We are often reluctant to discuss them amid the excitement of a new relationship, but they can save a lot of conflict and expense if things don’t work out as we hope.

Nobody can call them “romantic,” yet these agreements need not damage the harmony of a household, let alone a workplace. Every marriage and every new job comes with a set of legal rights and responsibilities that applies to both parties. A prenup or an employment contract is appropriate when we want to expand or modify the law’s default settings.

In our January issue, my colleague Eric Meermann wrote about employment contracts from the employee’s point of view. I want to explore this topic from the vantage point of the employer.

Employers and employees have many interests in common; recognizing this is a big step toward getting an agreement that is satisfactory for everyone. Some might see this win-win view of employment contracts as naive. After all, an employment contract is the product of negotiations. The employee is supposed to want to get “more:” more money, more job security, more time off, more responsibility and prestige. The employer is therefore supposed to want to give the employee less of these things, or at least less of those that cost money.

My experience in two decades as a business owner has taught me that this is not the way to approach the question. By the time anyone mentions an employment contract, I have decided that I want this person to work in my company, and the prospective employee has decided that he or she wants to work here — as long as we agree on the terms. With or without a written contract, there will be a negotiation, since I will offer a certain compensation package and the applicant has to decide whether to accept.

All we really do in the employment agreement — which, at our firm, is a standardized four- or five-page offer letter that an applicant signs to accept the terms of employment — is identify various issues and conditions that both parties must understand up front if our collaboration is to last.

Should the employee expect to receive overtime pay, and at what rate? Is the employee allowed to moonlight by performing the same sort of services our firm provides, either directly for private clients or for another firm? If bonuses or profit sharing are part of the employee’s compensation, how are such amounts determined, and when does the employee obtain the legal right to receive them?

Our firm’s offer letter spells out the terms of compensation, job duties, vacation and holidays, insurance and other fringe benefits, as well as the “at-will” nature of our relationship (either side can terminate it at any time for any or no reason) and the severance entitlement if the employee is let go. The agreement also requires the employee to acknowledge and accept certain obligations, including adherence to our policies governing personal investments and trading, protecting the confidential information of the firm and its clients and, for positions where it is relevant, noncompete and nonsolicitation provisions that apply if the employee leaves the firm.

I have two goals in mind when I enter into these arrangements with new employees.

First, because I expect to invest substantial time and effort in training the new hire, I want our relationship to succeed and to last as long as possible. Our written agreement fosters this goal by ensuring that the new employee understands our expectations and is satisfied with the rewards we offer.

Second, I want to protect the business as much as possible from the damage that an irresponsible or selfish employee might cause. For example, our clients include high-level executives at several public companies, and our work with them occasionally provides us with information about their businesses. Any securities trades based on such information could violate insider trading laws and might expose the executives themselves to financial and professional harm, not to mention severely damaging our firm’s reputation. So we have an extensive list of securities in which our employees are not permitted to trade at all, and for which pre-existing positions can only be traded with advance approval from our chief compliance officer. We also require employees to disclose all of their investments and to provide us with statements from custodians for verification. These policies can also extend to other members of the employee’s household.

Having such policies and contract terms is no ironclad defense against deliberate cheating by an individual bent on doing so, but it helps establish and reinforce a culture of compliance from the outset of our relationship. We take considerable time and care to get to know our staff before they reach positions where they are likely to have opportunities to abuse our clients’ trust. The contractual requirement that employees adhere to our rules is one component of a larger structure that helps protect the firm, and thus the livelihood of everyone who works here. Our employees understand this. Rather than viewing such restrictions as a hindrance, they regard them as a personal benefit. This is what I mean when I say the firm and its employees have many objectives in common.

You can put pretty much anything you want in an employment contract, and you can probably get some prospective employees to sign anything you write. But there is a major catch: Courts won’t necessarily enforce all employment agreements, or all of the terms in any particular agreement. By the time you discover which terms in your agreement a court is inclined to disregard, you may already have a significant problem on your hands.

Noncompete provisions are a chronic trouble spot. Workers have to be able to earn a living, and courts are apt to void restrictions that judges believe are unreasonable, or unnecessary to protect the business. Those same judges, for the most part, have never run a business themselves. Their view of what is necessary might be considerably narrower than yours.

Courts will look closely at whether a noncompete provision is overly broad, overly lengthy or both. An agreement with a CPA employee in a very small town might reasonably prevent the employee from going into business for herself in that town for some period of time after leaving the employer’s office, but it is doubtful that a court would enforce such a provision in a city such as New York or Los Angeles.

Restrictions on competition must also be of a reasonable duration. A salesperson’s restriction on soliciting clients might not be sustained beyond six or 12 months; a senior executive’s restrictions could perhaps extend a year or two. Beyond that time, the courts are inclined to believe that a business should be able to retain its customers on its own.

Some businesses may be better served by establishing a specific list of competitors with whom a former employee is temporarily barred from taking a job, or specific customers who are temporarily off-limits to solicitation. It could be easier to show that these provisions are narrowly tailored to meet the legitimate needs of the employer.

Even if you have a valid noncompete arrangement with an employee, courts may not enforce it if you fire the worker. They reason, again, that you cannot fairly deprive someone of the ability to make a living. Suppose you run a construction company in a small city, and you discharge a senior executive who is contractually barred from soliciting work from the developers in your town for 18 months after leaving your firm. A court may find that this provision unreasonably burdens the employee. In this situation, it might be best to enter into a separate agreement at termination, in which you provide enhanced severance benefits in return for the employee’s reaffirmation of the restrictions. Even this might not succeed, however, if a judge decides the employee agreed under duress.

You should never expect to get something for nothing in an employment agreement. “Consideration” is a vital element in any contract; you have to give something to get something. For a new employee, the job itself and its benefits may be adequate consideration, especially for a contract whose terms are reasonable. If you abruptly demand that an existing employee sign a noncompete or other agreement, however, your lawyer will probably advise you to provide some meaningful benefit in exchange. This could be enhanced salary or bonus, greater job security, a significant guaranteed severance package or something else of value.

Intellectual property is another potential trouble spot. In most cases it is clear that “works for hire,” such as images or articles, created by an employee within the scope of her employment are the property of the employer. But what about business ideas, inventions and strategies that an employee claims to have developed on her own time, or that are offered to the employer but are not successfully commercialized? Disputes that arise in these situations are not especially common, but they can be spectacularly bitter and expensive.

Drafting a constructive and enforceable employment agreement is serious business. Decide what protections are most important to your business and consult a good employment law attorney to ensure that what you offer your employees is likely to be respected if you ever go to court.

Remember, to get something you have to give something. In a good employer-employee relationship, everyone comes out ahead. If your employment agreement reflects this philosophy, the relationship with your new colleague can get off to a harmonious start.