You’ve found your ideal job candidate. The person has the skills and qualifications to perform well in the position you’re hiring him for, and he fits the mold and culture of your company. You’ve sent this person an offer of employment, and he has accepted. The offer may have provided a few details regarding the person’s future employment with your company such as salary, a general description of his future duties, and the title of his position. However, there’s still plenty you may want to set in stone prior to the beginning of the person’s employment. That is where an employment agreement comes into play.
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A well-drafted employment agreement is a useful tool for setting forth key terms of the candidate’s employment, helps put all parties on notice of what is expected of them, and defines what the person’s duties and position will actually look like. However, a poorly drafted employment agreement can often do more harm than good. Perhaps key terms are left out or the agreement includes over-reaching terms that may not be enforceable and could even subject your company to costs, damages, and expenses down the road.
This article intends to provide sage advice on avoiding those issues by providing a checklist of key terms to include in an employment agreement. Each of the terms will be accompanied by brief explanations and analyses as well as words of caution when applicable.
Consideration
A fundamental principle of contract law is that for a contract to be enforceable, each party must give something to the other party to make their promises binding at the time the contract is entered into. That is called “consideration.” Consideration often comes in the form of a promise to do something (e.g., to pay money), but it can also be a promise not to do something that the party making the promise has a right to do (e.g., an employee’s promise not to compete against the employer in the marketplace). In the context of an employment agreement, consideration from the employer is usually a promise to pay a salary or provide benefits to the employee, and the employee’s consideration is usually a promise to serve the employer and, often, a promise not to compete with the employer.
That is generally not a problem when an employee enters into an employment agreement when his employment commences. An employer can get in trouble when it requires employees to enter into an employment agreement well after they have started working for it. Wisconsin courts have held that in those circumstances, the employer is not giving consideration to employees sufficient to make the employment agreement enforceable because it is usually already providing the employees the consideration set forth in the contract (i.e., the employer is already paying the employees for the services they are providing).
Thus, the lesson here is that if an employer requests an employee to enter into an employment agreement after his employment has already commenced, the employer must provide additional consideration to make the employment agreement effective. That can be in the form of an increase in the employee’s wages or salary or the provision of an additional benefit. The Wisconsin Supreme Court has ruled that in the context of noncompete agreements, conditioning continued employment on the employee signing an agreement can be adequate consideration.
Title of Position
This may seem simple, but the employee’s title should be given careful consideration. The title given to a position can help indicate what sort of duties the employee will be required to perform and where she falls within the hierarchy of your company.
For instance, the title “Vice President of Sales” tells a lot about what a person holding that title does for a company and how she likely interacts with other people in the company. Just from the title, it’s safe to assume that the person will report to a senior manager and that she also will likely have people reporting to her. Further, the title indicates that the person will probably have managerial duties geared toward meeting the company’s sales and revenue goals, meeting customers’ needs within the company’s market territory, and perhaps formulating goals to grow market share with new sales tactics.
An employee’s title may also be a factor in answering the question of whether she is properly classified as exempt for overtime purposes. However, she must still pass the duties, minimum salary, and salary basis tests.
Term of Employment
The term of employment can be expressed as a discrete unit of time (e.g., a season or number of years), or it can be expressed as an indefinite length of time, terminable upon the occurrence of certain events. It is also important to note whether the employment is considered “at will.” Under an employment-at-will relationship, the employer or employee may terminate the employee’s employment at any time for any reason not prohibited by law such as a discriminatory reason. Keep in mind, including a specific term (e.g., one year) can trump employment at will.
Duties
While it is important to define what the employee’s duties will be, employment agreements vary in their specificity. Some agreements use general language such as “the Employee shall have the power, authority, duties and responsibilities usually vested in such position of a company of a similar size and similar nature to the Employer.” Other employment agreements include an extensive list of all duties the person will be expected to perform.
One way isn’t necessarily better than the other, and each has its benefits. The more general route gives flexibility to the employer, allowing it to dictate and adapt the employee’s duties as the term of employment progresses. Alternatively, the more specific method of listing duties makes it clear exactly what will be required of the employee from the outset. Duties may be set forth in a position description, which can be appended to the employment agreement.
Compensation
The employee’s compensation should be clearly set forth in an employment agreement or in an appendix to the agreement. As discussed earlier, a promise to compensate the employee during the term of employment will provide sufficient consideration on the employer’s part to make the contract enforceable.
In addition to the employee’s wages or salary, an employment agreement should include information about what types of benefits the employee will receive, whether he will be eligible for bonuses or commissions, and whether he will be entitled to participate in a company-managed retirement plan. Unless the employee will have a special benefits package, it is acceptable to state in the agreement that his benefits will be the same as those available to other company employees or those set forth in the employee handbook.
Termination
An employment agreement should indicate under what circumstances the employee’s employment will come to an end and what implications termination will have. Generally, an employment relationship will end upon the employee’s resignation, the employer’s termination of the employee, the employee’s death, or an event that causes the employee to become disabled to an extent to which she is unable to perform her employment duties with or without a reasonable accommodation.
This is your opportunity to make clear how compensation and benefits will be dealt with upon the employee’s termination. Most often, upon termination of employment, the employee will be eligible to receive any wages or salary she earned through the date the termination occurs. However, you may want to set particular protocols for various contingencies, such as whether an employee’s estate will receive unpaid compensation in the event her employment is terminated because of her death, whether she will be compensated for unused vacation days or paid time off (PTO), or whether the payment of compensation or the provision of benefits depends on whether she is terminated for cause or another reason.
Restrictive Covenants
The most common restrictive covenants in employment agreements are promises by the employee not to compete with the employer, not to interfere with the employer’s opportunities, and not to share the employer’s confidential information. Let’s take a look at those in turn.
Under a noncompetition restrictive covenant, the employee makes a promise not to take any action that would result in increased marketplace competition with his employer. However, competition can take various forms, and the employer should spell that out in the employment agreement. The most basic and common form of a noncompetition restrictive covenant is a promise by an employee not to engage in any line of work that would draw market share away from his former employer.
Along those lines, an employment agreement will often include a promise by the employee not to work for a direct competitor of the employer. Additional examples include promises not to make business solicitations to customers and to refrain from making employment offers to any employees of a former employer. These restrictive covenants generally apply during and after the employee’s term of employment.
Restrictive covenants concerning an employee’s duty of loyalty during employment focus on promises by the employee to refrain from taking any actions that would harm the employer. Examples include promises not to redirect corporate opportunities for purposes of the employee’s profit and not to accept employment with anyone other than the company to which the promise is made.
Another common form of restrictive covenant centers on an employee’s promise to keep confidential information secret. Generally, an employment agreement will preclude an employee from disclosing any of the company’s data, documents, business plans, customer lists, and trade secrets to third parties. For numerous reasons, it is important to clearly define in the employment agreement what constitutes confidential information. First, it gives the employer an opportunity to put the employee on notice of exactly what it deems worthy of keeping secret. Second, it gives the employer recourse down the road if any of the information defined as confidential in the employment agreement is shared with a third party by the employee during the period of restriction.
As a note of caution, restrictive covenants are some of the most landmine-filled areas in employment agreements. The effect of restrictive covenants must be limited in time and geographic scope, and they must be necessary for the reasonable protection of the employer’s interests. Wisconsin courts review restrictive covenants in the light most favorable to the employee. An employer that includes over-reaching restrictive covenants may find that they are completely unenforceable. For that reason, it’s extremely important to take care or seek legal advice in drafting those provisions in employment agreements.
Bottom Line
Employment agreements are highly customizable, and many terms relevant to the position, the employee, the company, and the applicable industry can be included. An employer may want to include terms related to company policies like vacation, PTO, and the withholding of taxes or terms that reflect an acknowledgment of the applicability of certain laws.
This article is not intended to be a comprehensive list of every type of term or clause that may be included in an employment agreement. Rather, it is meant to highlight major terms that every employment agreement should include. Likewise, this article is not meant to be an in-depth analysis of the laws that affect and govern employment agreements. Wisconsin statutory and case law applicable to employment agreements is extensive, ever-changing, and, at times, complicated. To be sure your employment agreement contains all it should and nothing it shouldn’t, consult a qualified attorney.
Conor Leedom is an attorney with Axley Brynelson, LLP. He can be reached at 262-409-2286 or cleedom@axley.com.