An employment agreement is intended to benefit and protect the interests of both employer and employee. It locks in the employee’s obligations and services to the employer, as well as obligating the employer to compensate the employee for those services and obligations.
Further, it provides a legal device for defining issues which might be taken for granted, such as behaviors in the workplace, that are often otherwise left to the discretion of the parties. However, many such issues can be covered in a policies and procedures manual, and the employment agreement can simply bind the employee to those policies and procedures. The standard employment agreement is primarily constructed in favor of the employer and, on its face, can seem slightly one-sided. It is a good idea to study each section of the document to determine whether it is necessary to spell out each of these matters in an individual contract, or whether, keeping in mind that the employment agreement is used most often for upper-tier employees.
An employment agreement can be used, of course, only with an employee who is not an independent contractor and whose pay is subject to withholding taxes by the employer. It is most often used for filling executive or management positions, but is being increasingly used for mid-management, as well as professional positions, such as software programmers or other technical or high-level administrative jobs.
An employment agreement clarifies how the employer and employee will deal with one another regarding issues such as resignation or termination, compensation and benefits, confidentiality, performance standards and severance pay, just to name a few. The agreement can be revised as to specific issues, but cannot bind either party to anything illegal, such as agreeing to work over-time for no pay. It must be constructed within federal and state guidelines. The agreement can also be modified, but it is not advisable to simply skip any of the issues contained in the form unless they clearly do not apply.
Section 1. Duties
- The employee agrees that he is qualified to do the job, and that he is free to enter into this agreement.
- The employee’s role is defined in the agreement as one who is not a partner or otherwise invested in the business. Note that this generic form allows the employee to invest in the company’s stocks or securities. This may or may not apply to your business.
- The employee agrees to report to a particular supervisor and to follow instructions given by his “superiors.” He also agrees to abide by the company’s policies and performance standards. Again, this requirement may cover some of the other issues in the agreement and perhaps make them unnecessary. This agreement presumes that a policies and procedures manual is in place in your company.
- The agreement specifies the location where the work will be performed, and whether there will be travel required of the employee. It also presumes that the employee agrees to be contacted during off-hours and holidays. It is advisable to discuss this in advance.
- The employee agrees not to speak negatively of the employer, or to get into any situation that conflicts with the employer’s interests.
Section 2. Confidentiality
- The employee agrees to hold in confidentiality everything related to the company, including its operations, trade secrets, documents and anything that could possibly give a competitor an advantage.
Section 3. Inventions Belong to Employer
- The employee agrees that anything he might invent while employed at the company, belongs to the company, and he certifies that there are no patents or obligations that he has not divulged to the employer.
Section 4. Non-Solicitation
- The employee must agree to a certain time period before he is allowed to solicit, or do business with any of the employer’s contractors, employees, consultants or vendors. This is a negotiable time period and, as the form itself notes, the larger the period of time, the less likely a court will support this clause. The reason for this is to avoid any competition for a period of time between the parties after the employee has left the company.
Section 5. Salary and Benefits
- Salary, benefits, bonuses and reimbursement of costs to the employee are defined in Section 5. Note that (f) requires the employer to reimburse relocation expenses. Unless you are expecting an employee to relocate to a branch office, it might be wise to eliminate, or “N/A” this particular section.
Using an employment agreement allows the employer to negotiate with the employee with respect to benefits such as vacation; however, it is a good idea to allow the prospective employee to read your company’s employment handbook prior to signing the agreement, so there is no question about how the company’s lower tier-employee benefits are structured. This allows for an intelligent negotiation, as well as avoiding future problems or misunderstandings. The agreement also gives the employer complete discretion as to bonuses, and limits the amount of reimbursement costs the employee can accrue without permission.
Section 6. Termination
- Here the conditions under which the agreement can be terminated are plainly set forth. The employee has only to give written notice to terminate the agreement. However, the employer’s reasons for termination are set forth in detail for legal purposes, and so the employee cannot later allege that there was unlawful discrimination or other litigious reasons for being fired. This clause pretty much covers any situation. This section also addresses balancing out who owes what at the time of termination.
Sections 7 through 20.
- “Litigation Assistance” simply requires the employee to cooperate in furnishing whatever the company might need from him in case of a lawsuit.
- The employer states his right to “Assign” the agreement to another employer in case the business is bought out or goes under. The employee has no rights to assign the agreement to anyone else, however, meaning that he can’t give away his job and its terms and conditions to someone else.
- The “Severability” clause is standard in contracts, and basically states that if any part of the agreement is construed by a court to be void or legally invalid, the other parts remain in effect.
- The “entirety” clause says that this agreement includes everything the parties have agreed to, and supersedes any prior agreement between the parties, whether written or oral. It’s a good idea to make sure that any additional verbal agreements you may have made with your employee are included in the agreement before it is signed.
- The Amendment/Waiver clause states that the only way any part of the agreement can legitimately be “waived” or construed to be invalid, is with a written document signed by the party asserting the waiver, and if one party does not live up to a certain part of the agreement, that does not imply a waiver.
- The “Notices” section defines exactly how the parties will communicate with respect to the agreement. It seems like a fussy technicality, but could become an issue if not complied with.
- The “Remedies” section acknowledges the right of either party to file suit, based on violation of the agreement.
- Choice of Law states that the agreement will be governed and construed under the laws of the state and country designated. If you have a corporate headquarters and your employee will work at an outlying branch, consult with your attorney as to which state should govern the contract.
- The Force Majeure clause excuses a violation of the agreement if the circumstances are due to an act of God.
- The parties agree to sign and deliver any supporting documents related to the agreement. This would include the employees’ proof of citizenship for the I-9, and all other work-related documents.
- The headings, or section titles, are only for the convenience in reading the document. The person who drafted the document cannot be held responsible for any ambiguity or problems with the document.
- Counter-signing means that, as long as each party receives a signed copy, each party can sign his own document individually. In other words, the two parties do not need to sit down together and sign the document, but can each sign their own copy, and this will be sufficient.
- The final section acknowledges that both parties have thoroughly familiarized themselves with the agreement, and that there have been no undue inducements to get the employee to sign it. It also assures that the employee has been allowed to negotiate its terms – very important to note – and that the company is viable.
Although a rather lengthy document, a clearly written Employment Agreement can save you time, money and frustration if issues should arise with an employee. Be sure the employee receives a copy of the document signed by the employer.