Best Practices in Employment Agreements
Well-written agreements can help companies and employees alike
Donald Brown had worked for Charles T. Creech Inc. for 16 years when the company gave him a “conflicts of interest” agreement to sign if he wanted to keep his job. Part of the agreement included language that he would not work for a competing company for three years after leaving Creech.
Brown did leave Creech to join a competitor in 2008, and Creech sued him for breaking the agreement. The case wound its way through the courts for years until the Kentucky Supreme Court ruled in Brown’s favor in 2014. In part, the court noted, Brown did not receive any promotions, raises, or special training for signing the agreement.
The Creech case is part of a growing trend, according to the Wall Street Journal, which conducted a study finding that the number of published U.S. court decisions involving non-compete agreements rose 61 percent from 2002 to 2013. “Since most cases are settled out of court and most opinions aren’t reported, that tally is likely low,” the WSJ noted.
Well-written employment agreements, which can include non-compete and non-solicitation agreements, can help companies and employees alike by clarifying expectations and decreasing the chances of disputes. They can also help companies remain competitive in an increasingly challenging marketplace. However, if employers are not careful with their employment agreements, they can end up in trouble with regulators or dragged into court by employees. In order to avoid problems, companies need to follow a few best practices to execute agreements that will help both employers and employees achieve their goals, and that will stand up to court challenges.
ELEMENTS OF EMPLOYMENT AGREEMENTS
Companies can customize employee agreements in a number of different ways. They can have contracts for all employees at a certain job level, or they may only require contracts for employees with particular job duties. There are a number of common provisions in employment agreements:
The scope of employment lays out the responsibilities, expectations, job location, and hours.
Depending on a company’s industry, invention assignments may make sense. With an invention assignment agreement, companies own any inventions or business ideas that employees come up with that relate to the company’s business.
Through non-disclosure agreements (NDAs), employees agree not to disclose any confidential information they learn while working for the company. This allows employees to acquire the information they need to do their jobs, while protecting the company’s intellectual property and other key information.
By signing a non-compete agreement, or a covenant not to compete, an employee agrees not to work for a direct competitor for a specific period of time after leaving the company.
Non-solicitation agreements prevent a former employee from soliciting a company’s clients, customers, or co-workers after the employee leaves the company.
Employment agreements can also lay out grounds for termination and what qualifies as being fired for cause, such as conviction of a felony, committing theft or fraud, or breaching the employment agreement.
CREATING AN AGREEMENT THAT WILL NOT LEAD TO LAWSUITS
There are several things employers should consider when creating employment agreements.
• Talk to the Experts
If employers are considering using employment agreements for the first time or have not reviewed their employment agreements in a while, it’s a good idea to consult with human resources professionals and legal counsel. They will have insights into current legal trends and best practices for particular industries, as well as making sure any employment agreement complies with applicable law.
• Think about Incentives
Agreements should not be one sided and only benefit employers. There needs to be something in it for employees, too. In a 2014 case, an Illinois state appeals court ruled that employees needed to work for a company for at least two years in order to have an enforceable non-compete agreement, if there wasn’t some other benefit like a bonus. In the case of Prairie Rheumatology Associates, S.C. v. Maria Francis, D.O., Dr. Francis signed an employment agreement with PRA that included a two-year non-compete. She gave her resignation after working there for 15 months and resigned after 19 months. PRA sued her to enforce the noncompete. The court sided with her, finding she did not work there for 24 months and that she “received little or no additional benefit from PRA in exchange for her agreement not to compete.”
• Make Arbitration Agreements Fair
Many employment agreements include an arbitration clause, requiring employees to use alternative dispute resolution approaches instead of litigation. Arbitration tends to be cheaper, and the entire process can be much less stressful than going to court. However, arbitration agreements that favor employers against employees can be thrown out of court or get employers in trouble with regulators.
In 2014, the U.S. Equal Employment Opportunity Commission (EEOC), the agency that enforces federal anti-discrimination law, sued Doherty Enterprises Inc., which operates more than 140 franchise restaurants, over its binding arbitration employment agreements. According to the EEOC, the agreements unlawfully violated employees’ right to file charges of discrimination with the commission. “Employee communication with the EEOC is integral to the agency’s mission of eradicating employment discrimination,” said EEOC Regional Attorney Robert E. Weisberg in a statement at the time charges were filed. “When an employer forces all complaints about employment discrimination into confidential arbitration, it shields itself from federal oversight of its employment practices. This practice violates the law, and the EEOC will take action to deter further use of these types of overly broad arbitration agreements.” In September 2015, a federal judge denied Doherty’s motion to dismiss the case.
• Consider All State and Local Laws
Employers also need to keep state laws in mind. Some states have specific legislation governing employment agreements around trade secrets and non-compete agreements. For example, the California Business and Professions Code bans non-compete agreements, with a few exceptions. All aspects of an employment agreement should be thoroughly reviewed by a labor and employment attorney experienced with the particular state’s laws.
• Be Specific
The more specific language and less “legalese” an employment agreement contains, the less likely employees will be able to say they were confused by its terms. With specific language and targeted approaches, employers can also better ensure that employment agreements are written to protect legitimate business interests. That also means employment agreements will be more likely to stand up to legal challenges.
Companies should also consider whether they need employment agreements for each employee. For example, according to media reports, fast food franchiser Jimmy John’s has been sued over its non-compete agreements, which requires employees not to work for a competitor, defined as any business that derives at least 10 percent of its sales from sandwiches and that is located within a prescribed radius of the Jimmy John’s shop where the employee formerly worked. While the company’s non-compete agreement survived a legal challenge in U.S. District Court in Illinois in April 2015, several members of Congress have asked the Federal Trade Commission and U.S. Department of Labor to investigate the legality of these agreements.
A solid employment agreement should protect the employer’s interests, while also being fair to employees. If employers decide that employees need an employment agreement, it should be drafted with the help of experienced employment counsel, in order to help ensure the company avoids litigation and does not end up in court or become the victim of bad publicity.
Publication date: 12/21/2015