BUSINESS ESSENTIALS: EFFECTIVE EMPLOYMENT CONTRACTS
July 18, 2012
By James Forrest
In previous pieces, we’ve shared the importance of having a set of template contracts to govern your relationship with various third parties that you interact with (i.e., customers, partner, vendors, etc.). With regard to these types of agreements, perhaps the most foundational among them are the contracts you put in place with your own employees, as they serve in many ways as the foundation of your company.
Having powerful, comprehensive employment agreements in place are absolutely critical to the ongoing health of a business. Employment contracts should cover several topics, starting with the terms and conditions of the position. Companies should fully outline aspects of the position such as the effective dates for beginning and end of the term of employment, as well as any conditions—for example, many professional athletes and operators of heavy equipment must agree to periodic, random drug testing as a condition of their employment, whether the impetus is compliance with league rules or, in the case of the equipment operators, commercial insurance carrier guidelines.
Solid employment agreements must also form a baseline for performance expectations and outline the duties of the position. While companies can be more expansive in their expression of expectations and duties during coaching and evaluation sessions, the contract itself, while discussing other terms and conditions, must at least convey basic guidelines for the position to the prospective employee. These agreements also mark great opportunities to communicate proper use of company property, as well as character expectations for integrity and avoiding conflicts of interest.
In addition to terms, conditions, expectations, and duties, employment contracts should also communicate salaries, benefits, and other ancillary compensation. The employment agreement is an appropriate umbrella document to capture a 360-degree view of the position. Thus, in addition to the work to be performed and under what particular parameters, the agreement will show the direct ways in which the employee will receive compensation for the work. This is the perfect vehicle for capturing areas such as expense reimbursements, allowances for automobiles, computers, and smart phones, as well as other forms of compensation such as stock options and retirement plans.
In addition to laying out terms and conditions of employment, as well as expectations for ongoing duties and performance, effective employment contracts deal with termination parameters. Many employment agreements are “at-will”, meaning that the employer may terminate the employment relationship at any time, with or without cause. With key executives, sometimes employment relationships are not at-will, and in this context, the employment agreement should clearly memorialize the different circumstances of separation (i.e., employee resignation, employer termination for cause, employer termination not for cause) and the effects of each.
Finally, and probably most importantly, employment agreements should protect the business by outlining confidentiality, non-solicitation and non-compete restrictions. In virtually all circumstances, employees should agree to keep company information confidential, both during and after employment. In many cases, the employee should also agree to refrain from soliciting employees and/or customers of the company both during employment and for a certain period of time thereafter. Lastly, it is sometimes appropriate to ask an employee not to engage with (via employment or ownership) a competing business in a certain geographic territory for a certain period of time after employment with the original employer has ended. This protects the investment made by the company in the employee from being usurped by the competition across the street.