January 24, 2014
Negotiating an employment contract can be smooth or complex. Legally, the employment relationship is a contract. In return for the services of the employee, the employer is obligated to pay wages as agreed. Although many employment relationships are based on oral contracts, a written contract is advisable if the parties wish to have the ability to alter presumptions if a future needs arises. When asked to draft or review an employment agreement, I ask my client to consider the following issues:.
- Should the contract be at-will? Employment is presumed to be at-will, i.e., either party may end or change the employment relationship at any time. To overcome the presumption of at-will employment, a contract must specify the duration of employment or recite conditions precedent to termination. For example, a contract may require advance notice or progressive discipline as a prerequisite to termination.
- For property subject to copyright, trademark, or trade secret laws, the “work for hire” doctrine gives the employer ownership of property created by the employee within the scope of employment. The ownership of patentable inventions depends on whether an employee, e.g., an engineer or researcher, was hired to invent. Default rights to intellectual property ownership may vary according to state law. If intellectual property may be created in the scope of employment, a written contract should clarify ownership rights. Also, confidentiality and non-solicitation clauses may protect interests to proprietary information shared with the employee.
- A written contract should clearly describe the computation of compensation, particularly commissions or bonuses. Is there a draw against commissions? Can the employer recover an excess draw from the employee? What are the consequences of termination of employment on commissions earned but not due as of the date of termination? How is vacation accrued? Must the employee use or lose vacation?
- Employers have an expectation of loyalty from the employees, who must act in the employer’s interest in the course of employment. The employment contract should clarify restrictions on outside activities and entitlement to fees or honoraria generated from outside activities.
- Before signing a contract with a non-compete clause, both parties should assess the legitimate business interest of the employer and the need of the employee to earn a living. In the majority of states, courts may enforce a non-compete clause that is reasonable in scope and duration.
- Contracts may specify remedies for breach of the agreement, e.g., shifting attorney’s fees to the breaching party or providing for liquidated damages. Generally, only the named party in the contract is liable for a breach; therefore, it is important to properly identify the business entity.