If you're in the process of hiring employees, one of the things that you want to make sure you have in place is an employment agreement. Now, an employment agreement is a contract. In this lesson, we're going to talk about the basics of contracts and some of the key issues you want to consider when drafting up an employment agreement. Contract basics, we'll go through the basics of an employment agreement. We'll talk about key terms to make sure you include in your employment agreement, and then factors around dispute resolution. How you will resolve disputes that may come up between the company and its employees. What is a contract? A contract is a voluntary agreement between two or more parties that's legally enforceable. An employment agreement is essentially a contract between your company and the particular employee. All the issues around contracts are things that you want to make sure you have in place as you're making an agreement with your prospective or future employees. Elements of a contract are: One, you must have a legal purpose. You can't have a contract to engage in illegal activity. In order to form a contract, you must have offer and acceptance, consideration or some bargain for exchange, and the parties must have capacity to enter into the contract. With respect to an employment agreement, it's a contract that memorializes the terms of an employment relationship. The idea behind an employment agreement is to make sure that you avoid any confusion or misunderstandings about the relationship. Issues around pay, or start date, or termination date, duration of employment. All of these things can be discussed orally, but without reducing them to an employment agreement, there can be confusion or misunderstandings about those key terms as the relationship progresses. It is very important to have this employment agreement as a written contract. You can have it in the form of an offer letter, that's eventually signed by the employee. Or you can do it in a traditional log form agreement, where it's a formalized agreement and you spell out the terms of the relationship. Either way, whether you have the formalized agreement or an offer letter that's signed by the employee, you want to make sure that it contains the essential terms of the employment relationship. Let's talk about those key terms. First, the contract should spell out the employee's responsibilities, which is the job that you're hiring this person to do. But you want to be careful about this. You don't want to be too specific. You want it to be somewhat broad that will allow you as the employer, to have some flexibility in how you use this employee in the future. You may hire this person to be a Database Engineer initially, but you may want that person to also work on other aspects of your software, you may want them to get into marketing at some point. You want to spell out the employee's responsibilities, but do it in a way that maximizes your flexibility as an employer, to use this employee in different ways. Compensation, this is a big one. You should spell out how you will pay your employee. Is it an annual salary? Is it an hourly pay? What other methods of compensation will you use to compensate the employee for their services? Equity. When you're getting an equity, you may say in your employment agreement the number of shares that you're giving an employee, what the vesting schedule may look like. Any issues around equity, you want to ensure that that it spelled out fairly clearly in your employment agreement. The duration of the employment relationship. How termination may or may not occur. Is this at-will employment or is this a contract term of employment for a specified period of time? Are there any IP issues, intellectual property issues? Is the employee bringing certain IP to the table that should be disclosed? If an employee develops intellectual property while working for you, is that IP assigned to the company? Those are issues you want to make sure you address in the employment agreement. Then issues around non-competes and non solicitation. Non-competes have two flavors: One is, as the employee is working for your company, you don't want the employee to also be working in an area that competes with your company, that's like during the time of employment, no competing with your business. Those types of clauses are usually fairly straightforward and aren't subject to any high legal scrutiny. However, another flavor of non-competes is post termination non-competes. This is essentially says that after the employment relationship terminates, this employee can engage in a business that competes with your business. This is what a law steps in and provides a lot more scrutiny on post employment non-competes. A lot of states allow this to happen. Some states don't allow it to happen. But even in those states that do allow post employment non-competes, they scrutinize very heavily. The non-compete must have a legitimate business purpose for your company, and it must be severely limited. It must be limited in scope and duration. In geography, there must be some serious limits on the non-compete, so that you're not tying up a former employee from the ability to get another job and to engage in other work. The non solicitation is another issue that you want to include in your employment agreement. This also usually deals with post employment. The idea here is that your employee will not solicit other employees. They will solicit their coworkers, to go work for another business. This issue comes up, oftentimes, when you're leaving your job to work on your business venture full time. The issue is around soliciting your current coworkers to come along with you with your new venture. In your employment agreement, you want to protect your company from similar issues. As employees come on board to work for you, you want to ensure you have a mechanism in place to ensure that they won't be recruiting your talent away from your company. Then, finally, an integration clause. An integration cause is essentially a clause in the employment agreement that says, the entire agreement is spelled out here in this written document. This is very important because a contract can be written, oral, or implied. In the context of hiring an employee, there may be several conversations that you're having with the employee. During the application process, during the interview process, once an offer letter is given to the employee, there may be some back and forth with your recruiting staff and that employee. All those representations may come into play when you're thinking about what are the terms of the employment agreement. By having an integration clause and saying everything that's here in this written document, or the terms of the agreement, you prevent the chance of some statement that may have been made, throughout that recruitment process being applied as a term of the employment. Dispute resolution. Now, there's always a chance that you and an employee may have a falling out. There may be some dispute between you and an employee. As an employer, in this employment agreement, you want to make sure that you're having an early view as to how you will handle those potential disputes. You want to make sure in your dispute resolution clause of your employment agreement, you're talking about ways to resolve disputes. Should our disputes be resolved in court via litigation? Should we go to arbitration, which is typically a little less expensive than litigation, but also provides a neutral party to help resolve a case? Private mediation is another way, where you aren't using arbitrator, you're using some private third party, that will help you and their employee work out your differences. Also, you want to think about where any dispute will occur, what jurisdiction will occur it at, and what law should be applied to the issues that are being disputed. If you are doing business in a particular state, oftentimes you want that jurisdiction to be the state in which you're doing business. Oftentimes, your company or your lawyers will be familiar with the law, in the state that you operate in. As such, all your lawyers will be in a position to best advise you as to what your rights and obligations may be. At any rate, you want to think about these things early on, before hiring an employee, so that you can memorialize this dispute resolution process in your employment agreement. In summary, employee agreements, like other contracts, they bring predictability, clarity, and accountability, to the employment relationship. This allows you and your employees to have a very clear understanding of what responsibilities are, what compensation looks like, how disputes will be resolved, and what the employer-employee relationship entails. The agreement should be in writing. It should include the essential terms of the agreement. It doesn't have to have a particular form. It could be the offer letter that's then signed by the employee, or it can be a formal separate document that's a formal agreement, that lays out those key terms. Keep in mind though that employment agreements are contracts. Contracts can be oral, written, or even implied. Given the fact that several conversations would have happened with an employee leading up to the decision to hire that employee, some of those conversations may have statements that can cause confusion and misunderstandings. You want to make sure you have integration clause that clarifies that the entire agreement is part of that written document.
