When it is time to take on employees, you need to make sure that your company’s employment agreement is rock solid. From setting expectations to protecting your company’s key intellectual property (IP) assets, the more thorough your employment agreement is, the less likely it is that you will run into unexpected issues along the way.
If your startup is getting ready to hire, here are 12 key issues you will almost certainly want to cover in writing with your employees:
1. Compensation Structure
Compensation structure is likely to be among your employees’ top concerns; and, if you hope to attract top talent, it is important that you treat it accordingly. The terms of each employee’s compensation – including salary or wages, equity, and any incentive compensation – must be unambiguous, from scheduling of paychecks to the conditions for receiving bonuses or exercising stock options. Founders have a lot of options when it comes to the compensation packages they offer to their employees, and the option(s) selected will dictate the necessary terms in the company’s employment agreements.
Benefits are a key priority for employees as well, and these days companies of all sizes are using both traditional and more unique benefits to attract and retain high-performing employees. Will you offer health insurance? A 401(k) or Individual Retirement Account (IRA)? Will your company match a portion of employees’ retirement account contributions? Does it make sense to offer flexible hours or remote working opportunities? If so, what expectations do you need to set (and how should you set them)? Do you want to treat vacation days and sick days differently, or offer the more-flexible option of “paid time off?”
3. Job Responsibilities
Your company’s employment agreements should also clearly define each employee’s key job responsibilities. While this may seem like a given – and with employees in high-level and professional positions it often will be – you would be surprised how often employers and employees reach disagreements because they have different expectations about the employee’s role within the company.
4. Job Title
Job titles can be important to employees. Many employees will want authoritative titles, but they will usually also want to know that there is opportunity for growth within the company. Employees may also want their job titles to be commensurate with their level of education and experience as compared to other company employees, or with their peers at other organizations. Job titles can potentially have legal implications as well (for example, an employee with a more-senior title may be deemed to have “apparent authority” to enter into agreements on your company’s behalf), and the job titles you grant should also be reflective of your company’s organizational structure.
5. Policies and Procedures
If your company has written policies and procedures (and it should), your employment agreements should include provisions that incorporate the terms of these other documents. That way, it is clear that your employees are bound by these additional terms, even if they evolve over time.
6. Term of Employment
The term (or duration) of employment is a key provision as well. While companies can enter into agreements with “at will” employees, it may be in either or both parties’ best interests to specify a minimum term of employment. In any case, it is important to clearly establish that the employee’s continued relationship with the company is contingent upon his or her compliance with the terms of the agreement and applicable law.
7. Grounds for Termination
One of the ways to establish these contingencies is by enumerating specific grounds for termination in the contract. Some of the most common grounds to terminate an employment agreement “for cause” include:
- Providing false information during the employment application process;
- Failing to perform the employee’s specified job responsibilities;
- A felony conviction or other legal issue that reflects negatively on the company; and,
- Violating material provisions of the employment agreement, such as those governing confidentiality, ownership of intellectual property, non-competition, and non-solicitation.
Your employment agreements’ termination provisions should also address issues such as severance pay (if any), return of company materials, and post-termination continuation of health insurance benefits (i.e., COBRA).
In addition to entering into non-disclosure agreements (NDAs) with vendors and other third parties, you will also want to be sure to include comprehensive confidentiality provisions in your company’s employment agreements. All employees should be restricted from sharing any sensitive, proprietary, or other non-public information outside of the company unless authorized to do so (and then only to third parties that have signed NDAs), and you may want to consider establishing mandatory protocols for identifying and storing confidential information (in both electronic and hard-copy format) as well.
9. Ownership of IP
While intellectual property laws in the United States generally provide that an employer is deemed the legal owner of any IP assets its employees develop within the scope of employment, it is still imperative for many companies to include clear IP ownership provisions in their employment agreements. There are exceptions to the general rule, and issues can arise in situations such as when an employee works after hours from home or claims ownership of an “independent” project that is closely related to the company’s products or services.
Employment agreements with employees who have access to confidential information and who play key roles in the company’s operations should often include non-competition covenants. These covenants can apply both during and after the employment relationship (for a limited period of time), and can provide critical protection against employees using knowledge gained during their employment to launch or help grow a competing business.
Non-solicitation covenants serve a similar purpose to non-competition covenants, but do so in a different way. There are two common types of non-solicitation clauses: (i) non-solicitation of employees, and (ii) non-solicitation of customers. The first is designed to protect against one employee leaving for a new opportunity and taking others along for the ride. The second is designed to ensure that employees do not take advantage of the relationships they have built while in your employ for their own personal (or another company’s benefit), even if doing so does not result in direct competition.
12. Dispute Resolution and Boilerplate
Employment disputes can be costly financially, for the company’s reputation (if they become public), and in terms of company morale. To limit the potential expense and fallout of contentious employment litigation, employers in most US jurisdictions can include mandatory dispute resolution provisions in their agreements with their employees. Method of resolution (i.e., mediation or resolution), geographic location (i.e., venue and jurisdiction), and choice of law should all be addressed – and this must be done in a way that does not raise questions of legal enforceability.
Along with dispute resolution, there are various other “boilerplate” provisions that can play important roles for employers as well. For example, a good “integration” clause can help prevent an employee from claiming that he or she had differing expectations based upon pre-employment discussions.
Jiah Kim & Associates | Legal Representation for Startups and Founders
If you would like more information about the legal ramifications of taking on employees, or if you are ready to get started on your company’s standard employment agreement, we encourage you to get in touch. You can call (646) 389-5065 to schedule an appointment, or go ahead and book a meeting with attorney Jiah Kim now.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.