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Understanding Employee Agreements

Written by on Mar 12
employee agreements

Start by knowing the difference between a W2 employee vs 1099 contractor, if you actually have an subcontractor read this article about Subcontractor Agreements.

Purpose of an Employee Agreement

To help facilitate a smooth working relationship between you and your employee, as well as guarantee certain rights and protections that are not otherwise present. Unfortunately, most of them are plagued with confusion and legal mumbo jumbo.

Thankfully, legal options exist to help resolve situations like when an employee steals from you or an employee starts a business based on your ideas.

Hypothetical Employee for Our Agreement

We like to use hypothetical situations in our articles, so we chose to use a computer programmer as the example.

With a programmer, they have access to client servers, so they could know ways to hack the client’s app or could build vulnerabilities into the product. They also know about products and marketing initiatives before they are made public knowledge. They know the product’s flaws and future features that may be implemented.

Define Relationships and Duties

Purpose: To communicate the job duties and account for situations leading to the termination of the relationship.

The section of an employee agreement is actually a two-step process. In the first step, you define the job duties of this employee, but leave a little wiggle room for the possibility of these duties changing over time. The second step (a separate clause) defines valid reasons why an employee can be terminated.

Like…

  • If an employee steals office supplies.
  • If an employee sexually harasses another employee.
  • If an employee drinks the last cup of coffee and doesn’t make another pot of fresh coffee.

Non Compete Section In An Employee Agreement

Purpose: Keep employees from competing with you in the future, either by starting their own company or being hired by your competition.

Are there any limitations to the designer/programmer working for other companies? If so, do these limitations apply only to the period of the contract, or do they continue for a specified time after the contract ends?

Typically, if a non-compete clause is challenged, the court will try to balance the employee’s ability to earn a living versus the potential adverse effects on the business. Given the possibility that the employee’s new business may be based on their former employer’s contacts and proprietary information, how much damage would this do to the original business?

But first, look to see if your state allows for a non-compete clause and review the acceptable standards. Pay attention to the duration as well as the geographic area it covers. For example, you can’t prohibit an employee from competing with you anywhere in the U.S., that would be a bit of a stretch.

An Employee Agreement Needs a Non Disclosure

Purpose: To restrict third-party access to company information by ensuring that all important company information is kept secret during and after the relationship has terminated.

The Non-Disclosure clause is also a two-step process. In the first step for this clause, you identify exactly what constitutes confidential information. For the second step, you discuss what can and cannot be shared and who it can be shared with.

Your first step in drafting this clause is identifying what constitutes confidential information. You shouldn’t have something too general because then your employee will be confused as to what they can share or use while performing their duties. (This is why many people have that lame “confidentially disclaimer” in the signature of their emails.)

Work for Hire, who owns the employee’s work?

Purpose: The vast majority of the time this verbiage defines the employer as the author (and owner) of the work the employee creates. The employer owns any work created by the employee on company equipment.

Arguably, the Work for Hire clause is the most important clause in an employment agreement. Why? Say you hire someone to create a software program for you that you intend to market and make millions of dollars from. If you don’t own it, how else are going to sell it? Ownership to copyrighted material that others contributed to will help establish your use of said copyrighted material and potential future reproduction, distribution, etc.

This includes a collective work (for example, a magazine where many people contribute to a single publication), a contribution to a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, or an atlas. With a work for hire, the employer is considered the author of the work for purposes of the Copyright Act.

What about everything else? It is not considered a Work for Hire but often contract clauses are created in such a way that the creator of the work has no rights to the work.

Other Important Clauses

In previous articles, we’ve covered a majority of these clauses in service contracts. But here is a quick refresher on a few of the important clauses you should consider while creating your employment contract.

Issues relating to basic employment:

  • Term: How long do you want the employment arrangement to go on for?
  • Compensation: How much are you expecting to pay? How will you pay? Is it required by law to be every two weeks? What happens if there is a delay in payment?
  • Bonus: Think about whether there is (i) a signing bonus, (ii) an annual bonus, or (iii) an additional bonus for performance.
  • Benefits: Are you planning on providing group health insurance to your employees?

Issues relating to Dispute Settlement

How are employer-employee disputes settled? Arbitration? Litigation? Most employers will want to keep any disputes in-house and perhaps settle them as quickly and quietly as possible. An informal negotiation is rather suitable for this. Today, the trend seems to favor arbitration for employment disputes, but prior to considering an arbitration clause, one should assess the pros and cons.

Addition of boilerplate clauses such as:

  • Assignability
  • Severability
  • Waiver
  • Entire agreement
  • Governing law

These are just a few clauses to take into consideration. Remember, every employment contract varies based on the type and kind of employment. Please consult your local laws.

We recommend you hire an attorney to help you with your legal documents and/or use legal document services like Docracy and LawDepot.

DISCLAIMER: This article is just friendly advice and only reflects the personal views of a few ‘ordinary’ people. It may not be the kind of advice that you agree with, nor prove to be helpful for your situation. This article is not a substitute for legal advice from an attorney in your own state. By using this website, you understand that there is no attorney-client relationship between you and the author. We encourage comments and viewpoints but try to be nice!

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