Category Archives: Employment agreements

TOP TEN THINGS TO CONSIDER WHEN DRAFTING EMPLOYMENT AGREEMENTS

Drafting a solid, enforceable employment agreement is essential to (1) understanding your relationship with your employee and (2) determining what will happen at the end of employment — whether the end is good, bad, or ugly.

Despite the importance of employment agreements, many businesses use old or borrowed forms, make a few “tweaks” to the forms, and proceed to start the employment relationship with a bad agreement.  Only when the relationship sours or ends does the employer realize that it has a lousy agreement.  Oftentimes this results in getting out the checkbook to pay the ex-employee a large sum of money.

Do not put your company in a position of having to enforce or defend a bad agreement.  Instead,  consider the following ten action items.

1.  DO NOT USE A FORM AGREEMENT

Form is a four letter word when it comes to drafting employment —  and many other  — agreements.  Avoid form agreements.  Draft an employment agreement that is appropriate for your business.

2.  AT WILL OR FOR CAUSE OR…?

Decide upon the nature of the relationship with your employee.  Most businesses will want an “at will” relationship.  This allows employers maximum discretion in the relationship.  “At-will” employment means that the employee may be terminated from employment at any time for any lawful reason or for no reason.

Key employees or others may require that they only be terminated “for cause.”  If a business must engage in this kind of employment relationship it should carefully consider what circumstances will constitute “good cause” and who gets to decide whether it applies to a given scenario.

Employers typically want “good cause” to include a broad range of non-performance and misconduct; they also want to have maximum discretion to determine whether non-performance or misconduct has occurred.  I have seen numerous drafting mistakes in this area which have led to significant pain for employers by way of litigation and writing large checks.

There are any number of permutations on the spectrum between a pure at will relationship and a for cause relationship.  The trick — which is not really a trick so much as understanding  your objectives — is to decide upon what you want and write an agreement consistent therewith.

3.  TERM AGREEMENTS

Employers (or employees) sometimes desire a so-called “term” agreement.  This type of agreement calls for the employment relationship to last a specified period of time, unless an event occurs to cause early termination.

Term agreements can be an effective way to demonstrate confidence in the budding employment relationship.  They can also provide the security of locking the parties into a long term relationship — one which is not subject to the “whims” of a pure at will relationship, where either party may exit at any time.

Term agreements, however, must be drafted very carefully.  On one hand, employers cannot allow themselves to be stuck in a bad relationships with underperforming employees for a long term with no way out; yet on the other, employees want to be assured that if they perform the employer cannot end the term early on a whim.

Both of these needs can be served with a well-drafted agreement.  Conversely, a poorly drafted or inapplicable agreement can trigger a domino effect of misunderstandings and disagreements.

4.  WHAT WILL HAPPEN UPON TERMINATION?

Ironically, one of the first issues to consider in starting an employment relationship is what will happen when it ends.  There are many issues to consider but, in most cases, money tops the list.

Employers typically want to pay nothing upon the termination of the employment relationship.  However, many employment agreements call for payment to the employee upon an early termination (where there is a term agreement) and/or if the employment is terminated without cause (where there is a for cause agreement).

There is often a significant amount of interplay between (1) the term of an agreement, (2) the type of relationship, (3) who initiated the termination (employer or employee), and (4)what will happen upon termination.  Employers should always play out a number of hypotheticals to ensure they fully understand the variety of situations that may occur and their corresponding obligations.

5.  SCOPE OF JOB RESPONSIBILITIES

Both parties to the employment relationship should know what is expected of the employee.  The best way  to “get on the same page” is to have a provision describing the employee’s job responsibilities.

Significant thought and care should go into describing an employee’s job responsibilities.   Management should carefully discuss and formulate the best job responsibility clause possible.  Otherwise, the relationship may get off to a bad start when expectations are not fulfilled.

No employer, however, can accurately predict every task an employee may be asked to perform.  Changing needs caused by a shifting business environment may dictate that the employee’s job responsibilities be broadened or reduced.  Thus, include language that affords your business with maximum discretion to change job responsibilities.

6.  NON-DISCLOSURE AND CONFIDENTIALITY

Non-disclosure and confidentiality provisions should be part of any employment agreement.  Businesses should ensure that these provisions are as broad as possible to protect their interests.  In my experience, form agreements can be excessively narrow, fail to accurately describe the applicable documents and information sought to be protected, and can fail to afford the employer with maximum discretion to enforce the agreement.

7.  NON-COMPETITION AND N0N-SOLICITATION

Is it important to ensure that you do not invest in and train your new employee, only to have that employee compete against you and solicit employees and customers upon termination?  Then include non-compete and non-solicitation provisions in your employment agreement.

Do not use form agreements to draft non-compete and non-solicitation provisions in your employment agreement.  They may arise from other states that have different laws, and may include language that is outdated or inapplicable.  If you care about competition at the end of employment, start planning wisely with  appropriate non-compete and non-solicitation provisions at the beginning of employment.

8.  DISPUTE RESOLUTION AND REMEDIES FOR BREACH

Hope for the best, but prepare for the worst:  decide up front what mechanisms you want to use to resolve any disputes or pursue legal claims.  Issues to consider in this area include, for example:

  • The benefit or detriment of a cure period for breaches of the agreement
  • Whether mandatory mediation or arbitration provisions are advisable
  • Whether liquidated damages in the event of breach are appropriate
  • What laws should apply and the applicable forum (court) to decide the dispute

9.  OTHER “STANDARD” PROVISIONS

There are many other so-called “standard” provisions in employment agreements (e.g. integration clauses; notice provisions; etc.).  Please read each of them.  You may find that one business’ standard provision does not work for your business.

10.  PLAN LIKE A GREEN BERET

I recently read that our Green Berets and Special Forces  train for missions by spending a significant amount of time on what can go right and on what can go wrong.  Of course, everyone wants the former.  Then why are Green Berets arguably at there best when things turn ugly?  Because they have planned for any number of scenarios — good, bad, and ugly.

Your employment agreement should embody this same principle of planning  — focusing both on the potential success and potential failure of the relationship.  As observed by Daniel Coyle, author of the Talent Code:

“When it comes to approaching a major performance test, most of us follow advice that can be distilled into three words:  Focus on success.

That is, we prepare ourselves by banishing doubt and visualizing the positive. We vividly imagine ourselves making all the right moves with fluid grace, with zero mistakes or missteps. And it feels good.

What’s interesting, though, is that when you look closely at world-class performers, most don’t use this feel-good approach. In fact, they do the opposite — what you might call the Feel-Bad-First approach.

It goes like this: First they focus on the mistakes — and figure out, in detail, how they will react to them. Then they visualize the positive.

A great example of this is the Green Berets, the U.S. Army Special Forces soldiers. Teams spend weeks training for a mission (most of which happen at night). On the day of the mission they follow a two-part routine.

First, they spend the entire morning going over every possible mistake or disaster that could happen during the mission. Every possible screwup is mercilessly examined, and linked to an appropriate response: if the helicopter crash-lands, we’ll do X. If we are dropped off at the wrong spot, we’ll do Y. If we are outnumbered, we’ll do Z.

After some hours of doing this, the team takes a break and has lunch together. They socialize, relax, and maybe take a nap.

Then they spend the afternoon in phase two, talking about everything going exactly right. They review each move, visualizing each step, and vividly imagine it going 100 percent perfectly.

You might call this Balanced-Positive Approach: equally split between negative and positive, and ending on the positive. Notice the complete wall of separation between the two phases. They don’t toggle back and forth between positive and negative. The two phases are kept as separate as night and day: first comes all negative, then all positive.

Many top performers (Peyton Manning and Steve Jobs jump to mind) embody this approach. Half the time, they are persnickety, chronically dissatisfied, negative, doubtful, obsessed with potential failures. The other half of the time, they’re incredibly positive, confident performers.”

Approach your employment agreement like a Green Beret would his next mission:  plan for success and a smooth mission, but also allot significant thought and preparation into what will happen if the employment relationship hits the proverbial rocks.  It all begins with a solid employment agreement.

CONCLUSION

An employment agreement can be a useful, necessary tool; or, it can be a hammer that is used against your business.   Which employment agreement is your company going to choose?  I thought so.  Nice job!