When should I use an employment agreement?

Employment agreements may not be appropriate for every employee in your business – generally, they should be reserved for employees occupying key management or sales positions, or persons having access to the most sensitive and valuable information and processes used by the business.  Because employees serve "at-will", an employer can terminate the relationship at any time for any reason or no reason at all (except for certain discriminatory or retaliatory reasons provided by state and federal law), employment agreements are not necessary for lower paying or general administrative positions. 

The prudent business owner, however, should present employment agreements to key staff.  Maintenance of these agreements 1) reduce future conflict over perceived expectations, 2) promote continuity of processes and systems, 3) provide value to potential purchasers of the business and 4) provide strong negotiation positions in the event of employee misconduct or an overt assault on the intangible valuables of a business.

How do employment agreements reduce future conflict?

A properly drafted employment agreement clearly spells out an employer's expectation of its employee's performance and the employer's financial obligations to the employee.  Every employment agreement should list the employee's job description in detail, while allowing flexibility for the needs of the business.  The agreement should also discuss the employee's compensation and benefits in a manner that is clearly understood by each party and should be simple to reduce to a mathematical formula, particularly in the area of bonuses and commissions.  Many claims against employers arise from non-payment of bonuses and commissions thought due by the employee.  Thus, this section should be capable of simple interpretation by persons only casually aware of the business' internal functions.  Lawsuits over compensation can be avoided early if these provisions are clear.

How do employment agreements promote continuity and provide value to potential purchasers?

Employment agreements document the role of personnel necessary to operate a successful business.  Once created, descriptions and compensation schedules can be reused as new employees fill vacant positions or positions created during times of expansion. 

Confidentiality clauses requiring employees to protect e sensitive business information and trade secrets from disclosure put employees on notice that it is the employee's job to promote the businesses best interest by protecting the information that produces revenue or that gives the business a competitive advantage.  Properly protected information through thoughtful systems, procedures and agreements provides lasting value to a business.  Prospective purchasers (and their legal and financial counsel) are impressed by a business that has invested in a workforce that is aware of and adheres to policies and procedures that safeguard the integrity of the business.

How do employment agreements protect intangible values?

Much like confidentiality clauses, non-competition and non-solicitation clauses in an employment contract protect the viability of a business.  Key personnel have access to important information which could be used to gain a competitive advantage over the business.  Non-competition clauses, contrary to popular belief, are enforceable.  Non-competes that are drafted to include only what is necessary to protect the business, coupled with proper procedural formalities, are effective tools to protect the business from being dismantled piece by piece by a former employee.  Likewise, non-solicitation provisions can cover a restriction on former employees from bringing co-workers or contractors with them in a new business enterprise. 

Added up, these restrictions can create the legal barriers to entry necessary to protect the business – and at the very least can allow the business ample time to transitions its most important positions to new hires. For more information, call 612-746-2560 or visit www.skjold-barthel.com.