The Anatomy of an Employment Agreement

You have found a new candidate that appears to be a great fit for your organization and are preparing to make an offer.  But what should that offer look like – is an offer letter better or an employment agreement or both? In preparing employment candidate document, firms may want to consider building out the Employment Agreement throughout the negotiation phase with the candidate. The benefit of having an Employment Agreement is to memorialize the role(s), responsibilities and expectations for the employment arrangement.  It also provides an opportunity to set forth expectations relating to job requirements, benefits, terms, and conditions for being an employee. Understanding this, does your firm’s Employment Agreements accomplishing these objectives? In this month’s Legal Risk Management Tip, we will discuss each of these considerations. We will explore critical terms that should be evaluated for your Employment Agreements and provide practical guidance on other areas that you may wish to include during your onboarding process.

Essential Terms for Your Employment Agreement

Prior to delivering an Employment Agreement to a candidate for hire, it is important to ensure that the following areas are defined clearly within your Agreement.

1. Define Term and Termination of Agreement

Whether a contract or full-time position, the Employment Agreement should always establish the timeframe of employment. This generally refers to the length of employment. For most positions, the term is indefinite, as all employees in the state of California (and most states in the country) are at-will employees, meaning the employee or the employer can terminate employment at any time with or without cause. Under very few circumstances employment will be for a finite time frame, however those details should be included here. For contract employees, the term of employment will also impact other sections throughout the agreement, like employee benefits, employee logistics, etc. Establishing clear and direct terms within this section, specifically for termed or contract employee, is integral in establishing consistency avoiding uncertainty throughout the entire document.

2. Set Employee Role Expectations and Clarify Responsibilities

Regardless of the employee’s term, this section of the Employment Agreement should clarify and detail the duties and responsibilities of the employee, the position, and overall impact of the role when it comes to the company goals and business objectives. While this section will differ in detail and objectives from role to role, it is integral to establish how the position aligns with the each of their colleagues/team, department, and the function in correlation to the success of the employee’s and team’s collective efforts. This section should also include logistical and operational information about the role, such as: the office location where the employee will work, the employee’s work schedule, and to whom the employee will report. It may also include any applicable requirements to maintain the employee’s professional license(s).

3. Provide Clear Expectations for Compensation and Employee Benefits

Considering compensation may be negotiated during the interview process based on experience and a variety of other factors, this is a very important provision in the agreement (or offer letter). It is imperative that the annual salary or hourly wage of the employee along with any commission details be clearly detailed within the Employment Agreement. It is in this section that the employer may want to disclose other factors such as overtime, exempt v. non-exempt employment, as well as the terms of severance and severance pay. Aside from compensation, employee benefits play a critical role in a potential employee’s decisions throughout their professional career journey. Amidst the struggles of the global pandemic, many employers are growing their workforce and are leveraging a comprehensive and competitive Employee Benefits Program as the tool to expand their teams. This section of the Employment Agreement is important to the onboarding of new and prospective talent. As the details within this section pertain to not only paid leave, insurance and health benefits, retirement plans, and any stock options, but have grown to include additional factors that play to the employee’s well-being and overall work-life balance As prospective employees are now gauging internal organizational values, this portion of the agreement may also include options that are new to benefit packages in the work force, such as: maternity/paternity leave, family and fertility options, gym and health benefits, mobile device options, assisted childcare programs, alternative bonus structures, and more.

4. Set Forth Guidelines for Dispute Resolution

While no prospective employee or employer could forecast a dispute in an employee’s future, this section of the Employment Agreement is key should team dynamics and/or performance fall south of expectations. This portion of the agreement details how disputes arising from the employment contract will be handled. This normally provides for arbitration or mediation as defined by local rules or a governing body, i.e. Judicial Arbitration and Mediations Services (JAMS).

5. Provide Benchmarks to Achieve Equity Interest, as Applicable

While offerings of Equity Interests are made mainly to higher executive employees, the details of the terms are important to the understanding of the parties to the Employment Agreement. This provision normally defines the amount that the employer is offering to the employee along with the price that the employee may need to pay. However, the employee may also be offered an Equity Interest as part of their compensation for employment.

The Importance for Including Confidentiality Provisions and Restrictive Covenants

Every employer has sensitive information and also often trade secrets relating to their business.  Adding a confidentiality provision is essential to safeguard employees, past and present, from divulging sensitive information. Such confidentiality provisions are essential to the protections of the organization as they prohibit the ability to share sensitive information and business secrets with others, and continue during after the termination of employment. Similarly, restrictive covenants in an employment agreement disallows certain actions from occurring.  For example, such clauses in an Employment Agreement often prohibit individuals from competing with their former employer for a certain period of time and most typically involve non-solicitation of clients and employees and/or non-competes within a certain geographical region.  Terms and enforceability of restrictive covenants differ from jurisdiction to jurisdiction.

1. Establishing Terms within Confidentiality and Privacy

Confidentiality and Privacy terms will always differ from firm to firm, as well as from position to position, but the goal and premise remains constant; protect the firm and its clients. As expected, some roles within a business are privy to sensitive information regarding clients and internal business insight. This section of any Employment Agreement clearly defines what information belonging to the employer is confidential and the degree of privacy such confidential information should be handled by the employee. While the majority of this section pertains to internal firm information regarding business and client information of the firm, often, this section also provides specifics on employee information and protection, such as image use and identity within the organization’s marketing. It is within this section that firms should ensure that they have included terms for the firm using and sharing the images, videos and speeches of the employee.

2. Determining Specifics Regarding Non-Disclosure Agreements

Non-disclosure Agreements are a common and essential section in Employment Agreement today, as they prevent employees from revealing confidential, sensitive or valuable information about or owned by the firm (and their clients). Within these terms, employees are restricted from discussing or sharing any such confidential, sensitive, or valuable information with any non-authorized person or entity.

3. Constructing the Provisions of Non-compete Clauses

While restricted/prohibited in some states, Non-compete Clauses restrict employees from seeking employment with a competitor of their employer. There are a few considerations when firm’s implement a Non-compete Clause within their agreements.  Some clauses include preventing an employee from sharing the learned processes and trade secrets of their former employer, leveraging their prior company’s client list for business creation, and/or exploiting the learned knowledge and materials used to create and model their own new business. This section can include the timeframe, location and type of services provided by the employee post-termination.

4. Building the Stipulations for Notice to Future Employers

The Notice to Future Employers section is growing to become a common addition to Employment Agreement. As this section creates a duty for the employee, their acknowledgement and responsibility to inform any subsequent employers that they are subject to certain restrictions in their new employment, this section is supremely important for many firms. By having the details of the employee’s responsibilities described in the Employment Agreement, the employee and the employer have certain protections and a full understanding of next steps in the progression of the employee’s career.

Streamline the Onboarding Process

For all employers, it’s also essential to have a New Hire checklist to streamline the on-boarding process so that new employees can expeditiously commence the work they were hired to perform (instead of handling time-consuming, administrative matters). We’ve provided a basic list that can be tailored for your company and the different categories of employees from administrative staff to professionals to executive officers.

1. Complete a background check to ensure the safety and security of clients and other employees.
2. Review the schedule and job basics with the new employee before they report to the office.
3. Review the job description and duties with the employee for a clear understanding how they fit into the department and company.
4. Complete employment forms ahead of the first day so you can focus on more important matters.
5. Introduce the employee ahead of the first day to help integrate and welcome them.
6. Prepare their work environment by establishing email, telephone, computer and systems access.
7. Schedule employee trainings and have a schedule ready for the new employee’s arrival.

Conclusion

While creating and navigating the structure of an Employment Agreement can be daunting, ensuring that the essential provisions are included will provide comprehensive protections and set expectations for employers and employees alike. Engaging experienced legal counsel is highly recommended. Dependent upon the industry that you are in, it is prudent to ensure that your counsel is familiar with other provisions that could govern employee activities.  For example, employees within the securities industry may be required to have certain securities licenses or professional designations, which should be specified within the Employment Agreement. While drafting your agreements, counsel can provide guidance on such provisions and customize provisions based on the needs of your company. If you or your firm require assistance in drafting, reviewing or revising your Employment Agreements, contact the experienced team at Jacko Law Group, PC for assistance.

Author: Jeremiah Baba Pagno, Attorney; Editor: Michelle L. Jacko, Managing Partner of Jacko Law Group, PC (“JLG”). JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities, employment and corporate counsel matters.  For more information, please visit https://www.jackolg.com/.

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