October 19th, 2020
October 19th, 2020
Employment Agreements are common these days, especially for salaried, high-level roles. Often, there are too many specific terms that need to be included to utilize just an offer letter without other written documentation. The Employment Agreement is a document between employer and employee that lays out all of the most significant conditions of employment.
Before either party signs one of these agreements, however, it's really important to make sure that the document is absolutely perfect for the work and the relationship both parties want.
In general, there are a few specific clauses each party should examine before signing their Employment Agreement. In this guide, we'll discuss five important clauses employees should review before signing an Employment Agreement. We'll also discuss five important clauses employers should review and/or have drafted carefully. Keep in mind as you read this guide that all the provisions listed are applicable to both parties. In other words, just because you are an employee doesn't mean you shouldn't also take care to review the provisions applicable to employers. It's just that some, more than others, may be more relevant to you depending upon your position.
By the end of this guide, you'll have a strong understanding of the most important clauses in Employment Agreements.
Please be advised that nothing in this guide is meant to constitute legal advice, and it should instead be taken as informational only.
How is your employment described within the contract? Is it part-time, full-time, fixed-term, or other (such as for example, seasonal)?
Although this may seem like a minor detail, it is possible that you and the employer miscommunicated throughout the interview process. The Employment Agreement is the legal, binding version of your understanding. After it is signed, you won't be able to correct any misunderstandings or issues, so it is best to ensure your understanding aligns with your employers now.
Final takeaway: Carefully read the sections about what type of employment you are entering into.
Is the employer requiring you to remain in a probationary period for a few weeks or months? This is common in full-time, salaried roles. If the employer is requiring a probationary period, however, you'll want to ensure you are comfortable with it, as well as its specific terms. For example, if you quit your current role to take this new job and are let go within the probationary period, you won't be left in a good position.
If you aren't comfortable with the probationary period terms, now is the time to negotiate.
Final takeaway: Review the clause about any probationary period to ensure that you are okay with its terms.
Of course, you'll want to check that the contractual terms for the compensation you receive align with what you discussed with your new employer. However, you'll also want to check the specific structure and schedule of that compensation. For example, perhaps your new employer told you that you would be receiving $50,000 annually, which you assumed was a salary. But when you read the contract, you find that the $50,000 is actually a $30,000 base salary and then $20,000 in expected commissions. If this does not align with what you want, this should be corrected before you sign.
Another thing you should check is whether your salary is stated before or after taxes. In most employment agreements, the salary will be listed as a gross salary, meaning it is what will be paid from the company to you before any applicable taxes. After the taxes are assessed, you'll likely be making much less than the gross amount. Double-check this so you are sure to understand your compensation structure.
Similarly, check on the payment schedule. If you were expected to be paid biweekly but the contract has payment terms as monthly, this is something you'll need to correct.
Final takeaway: Check on the compensation amount, structure, and schedule before signing.
In the termination provision, there are two primary things that should have your attention: how you can terminate and how the employer can terminate.
The agreement will likely have a notice provision outlining how much time you need to give the employer when you leave. Similarly, it may have conditions for your termination if the employer decides to terminate (this is usually true in high-level employment roles). It may not, however, as most employment in the United States is at-will, meaning the employer can let go of you at any time.
No matter what, take the time to review this provision to understand how the employment can be terminated.
Final takeaway: Review the termination provision to understand your obligations upon leaving your role.
The Employment Agreement might refer to additional terms in other documents that you also need to be aware of and follow. Usually, the agreement may refer to an Employee Handbook or other training manuals or company policies. This generally is not something that can be negotiated, but it is something for you to be aware of to make sure you are fully compliant with your employer's requirements.
The Employment Agreement might also describe penalties that will be applicable to you in case of certain breaches - for example, if you utilize company property to do something that is not approved or even illegal. Pay attention to these clauses so you know what is expected of you, but also to determine whether they are reasonable in the penalties they describe.
Final takeaway: Review any information in the contract about additional rules you need to follow and policies you need to abide by.
How are the employee's specific responsibilities defined? If you are hiring someone for a high-level role, you'll want to ensure their important responsibilities are laid out clearly. Conversely, if you are hiring someone for a role that you need a lot of flexibility with, you may want to put that in the contract.
The Employment Agreement lays out the requirements for the employment relationship, so if there are certain things you expect of your new employee, be sure to include them.
Final takeaway: Craft the new employee's specific responsibilities to suit the role and your needs.
Employee covenants are the section in the contract where the employee promises to act in certain ways in relation to the employment. Usually, this section contains promises that the employee will carry out their employment duties in a professional manner. It also generally asks the employee to warrant that it is not a party to any other agreement that would prevent them from signing your Employment Agreement.
Read over this section carefully and adjust it as needed.
Final takeaway: Ensure the "employee covenants" section of the contract is carefully drafted to your needs.
Generally, employment in the United States is considered at-will (with the exception of one state, Montana). This means that you can let go of your employee at any time or they can choose to leave at any time for any reason. However, you may wish to ask the employee to contract to a certain notice period. Conversely, if it is a high-level position, you may have to give the employee certain assurances (for example, that you will also give them notice and time to find another job) if they are let go in certain circumstances.
Either way, make sure to carefully draft the termination provision to give yourself the room you need to let go of your employee but also require the employee to give you notice when they depart.
Final takeaway: Draft the termination provision to give yourself and the employee the allowances that are needed on both sides.
A non-competition provision won't be appropriate in every employment relationship, but it may be critical for certain roles, like professionals. You may wish to prevent your employee from competing directly with you when they leave.
Although a non-compete clause will not be legal in certain states, it is in most. If you do want to prevent unfair competition when your employee leaves, be sure to include a non-competition provision within your Employment Agreement, drafted to be effective in the state where you live.
Some employers also wish to have their staff sign an entirely new agreement, called a Non-Compete Agreement, in addition to the employment agreement. This is a way to describe more specifics regarding the terms of any non-competition restrictions you want to implement.
Final takeaway: Consider whether you need to include a non-compete clause in your Employment Agreement.
In most circumstances, you will want to be the owner of the intellectual property your employee creates. Intellectual property includes any creative work the employee does for you on the job. It wouldn't make sense to have the employee own that; otherwise, they would be able to take it with them when they left.
Therefore, it's a good idea to include a clause in your Employment Agreement that specifically outlines your ownership of any work the employment creates.
Intellectual property usually also consists of confidential information owned by the employer. That's why some employers prefer including separate clauses in their employment agreements dealing with employee's responsibility in case of disclosure of confidential information. Others consider drafting and executing separate Non-Disclosure Agreements with their employees instead.
Final takeaway: Carefully craft the intellectual property provisions in your contract to ensure you, as an employer, retain the rights to your employee's work.
The start of a new employment relationship can be exciting for both parties, especially if it is the right fit for a high-level role. The Employment Agreement between employer and employee will have long-reaching consequences throughout the duration of the parties' relationship and even after. Therefore, it is important that this document is well-crafted and tailored to the specific role at issue.
It's also a good idea to get a licensed attorney's help in drafting the Employment Agreement to make sure it has everything needed. Keep in mind, however, the attorney won't be able to represent both parties. Usually, either the employer or employee should be the one hiring an attorney to draft the document. Then, the other party can hire another attorney as counsel.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.