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Employment Law Blog

Tuesday, August 08, 2006

Should you have employees sign employment contracts?

Parties enter into written agreements in order to manage expectations.  A written agreement should clearly specify the parties’ rights, duties, and obligations.  The agreement is an insurance policy against a party’s failure to act in accordance with the agreement terms.  That said, deciding on whether to enter into employment agreement with an employee is not like deciding to enter into any other type of agreement.  That’s because common-law already provides the foundation (i.e., the rights, duties and obligations) for the relationship between an employer and employee.  That foundation is the employment at-will doctrine.

In most states an employer is free to terminate an employee for any reason or no reason at all.  So long as the employer doesn’t violate a statutory prohibition (e.g., discrimination based on race, sex, age, religion or disability) it’s entirely free to discharge an employee for good cause, bad cause or no cause at all.  Some states do place additional statutory limits on an employer’s right to discharge an employee (e.g., termination in violation of some broad public policy), while other states recognize the possibility that an employer can limit its own rights to discharge (e.g., by providing a step-by-step discharge policy in their employee manual).  In relative comparison to the broad right to discharge, however, these limitations are exceedingly narrow.

Some employees (and most unions) consider an employer’s power to discharge as being too great.  Of course, no one ever questions an employee’s absolute right to terminate his or her employment at any time and for any reason.  In part, this is the basis of the bargain between an employer and employee.

So what does this have to do with deciding whether or not to enter into an employment agreement?  Everything!  It makes no sense whatsoever for an employer to enter into an employment agreement with 99% of employees.  That’s because an employer has no need to manage expectations—he has the right to demand an employee’s adherence.  It may sound like common sense, but it’s not.  It’s just a well understood workplace rule.  Entering into an employment agreement with most employees is an unnecessary exercise that provides an employer with no greater protection than it would otherwise already have.

That’s not to say that employment agreements never make sense.  There is that 1% of employees who present a problem.  They are almost always high-level executives, sales employees, or employees with other technical expertise.  These employees possess confidential information and know-how, so you enter into an employment agreement with these employees in order to protect yourself against future competitive disadvantage.  Stated simply, you don’t want your competitors to get their hands on these employees or the information they possess.  The agreement adds a layer of protection that you otherwise would not have: a restriction on the employee’s ability to harm you or to aid your competitors.

While the agreement may contain clauses that provide obligations on the employer, the main focus of the agreement is to restrict an employee’s ability in a few key areas:

Competition.  A noncompete clause restricts an employee’s right to accept employment with a competitor or start his own competitive venture. 

Solicitation.   A nonsolicitation clause is also designed to prevent a former employee from competing against you, but by limiting his ability to solicit your clients, customers or suppliers.

Disclosure of Information.  A nondisclosure clause restricts an employee’s right to divulge nonpublic or proprietary information. To be enforceable, the agreement should define what constitutes confidential information.

Hiring Current Employees.  An anti-raiding provision restricts an employee’s right to solicit current employees from leaving their employment.

Disparagement.  An anti-disparagement provision prohibits an employee from making statements that are contrary the company’s best interests or the best interests of your current executives.

In both the noncompete and nonsolicitation situations, the court will look at the reasonableness of the restrictions in deciding on whether to enforce the provisions.  Reasonableness almost always is determined by reviewing the time limit and geographic scope imposed by the covenants.  Clauses that are determined to be overly broad may be struck or reformed by a court.  Of course, a court will look at the nature of the company’s operations and industry in deciding whether any particular restriction is overbroad.

Please bear in mind that I haven’t attempted to outline every single topic that should be covered in an employment agreement.  If you are interested in reviewing a list of some of the most common employment contract provisions, just click on the link in this sentence.  The question discussed here is whether you should enter into an agreement with an employee and not what the agreement should include.

<u>The Bottom Line</u>

Companies rarely need to enter into written employment agreements with the overwhelming majority of their employees.  There are the situations, however, when a written employment agreement is not only recommended but necessary.  As always, the decision on whether to enter into a written employment agreement should be made in consultation with your employment counsel.  Drafting this type of agreement is not something that should be done in a cavalier manner, but takes thoughtful consideration and the help of an expert in the field.


Please let me know if I’ve missed anything that I should’ve included.  You can enter comments by clicking on the comment link below.  Thank you!

Posted by Patrick Della Valle on 08/08 at 03:17 PM
Employment Law
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