Why Are Employment Agreements So Important?

Why Are Employment Agreements So Important?

employer talking to employee about employment agreements

Employment agreements can often fall into the category of contracts you didn’t know you needed until it’s too late. Start-ups and growing businesses, in particular, often dispense drafting and negotiating employment agreements in service of filling roles quickly. 

That can be a costly mistake. Employment agreements serve numerous purposes. In this post, we take a look at why employment agreements are important. 

Basics of Employment Agreements

An employment agreement broadly has two core purposes. First, it sets the basic terms of a business’s relationship with an employee during the period of employment. Second, it serves to protect the businesses if and when that employment ends.

Concerning the scope of employment, an agreement may be created to include the following: 

  • Job title and description
  • Compensation, including salary, benefits, and incentive bonuses
  • Conditions of employment, such as maintaining qualifications or meeting performance targets
  • The business’s ownership of intellectual property generated by the employee
  • Grounds for termination of the employment

For protecting the business post-employment, the agreement may also contain: 

  • Obligations of confidentiality and non-disclosure
  • Restrictive covenants (non-competition and non-solicitation provisions)
  • Alternative dispute resolution (mediation and arbitration) provisions

Several of these typical provisions merit additional discussion due to their importance to the long-term health of a business. 

Protecting Trade Secrets and Intellectual Property Through Non-Disclosure and Other Means

During employment, an employee will often have access to sensitive information that has commercial value. If this information is disclosed to a competitor, it could harm the business. What constitutes this sort of trade secret varies by business and industry but often includes customer lists, financial performance information, business processes, and recipes or formulas. 

Employees also frequently generate intellectual property (“IP”), such as creative works or product designs, during their employment with a business. Some of this intellectual property may also constitute trade secrets. Some need not, or cannot, necessarily be kept secret, but do have commercial value worthy of protection. 

A well-drafted employment agreement seeks to safeguard the value of information by limiting an employee’s right to know, own, disclose, or exploit this IP. The agreement will typically define these categories as broadly as possible without being so general as to lack meaning. The agreement will also place specific constraints on that information that is applicable during and after the term of employment. As noted above, these may include obligating the employee to neither disclose nor use the information for their ends. Furthermore, it clarifies that all information the employee generates during the period of employment belongs to the business. 

As a complement to the employment agreement, a business should also follow procedures to protect its trade secrets and IP. These may include adopting and enforcing internal rules for handling trade secret information, routinely registering trademarks and copyrights, and applying for patents.

Crafting Enforceable Non-Competition Provisions

Businesses have a legitimate interest in preventing employees they have trained, nurtured, and entrusted with sensitive information from leaving the fold and using that skill and knowledge to compete with their former employer. However, crafting provisions to serve that legitimate business interest, while not overreaching in the eyes of the law, is easier said than done. 

Courts in most states are notoriously wary of enforcing any agreement that constrains a person’s ability to work, which they see as contrary to the public interest. Broadly speaking, they will only enforce such an agreement if it: 

  • Imposes obligations no greater than necessary to protect the employer’s legitimate interests, such as trade secrets and IP
  • Does not impose an undue hardship on the former employee
  • Does not harm the public
  • Is reasonably limited in duration and geographic scope

Remuneration paid to the former employee as severance can help convince a court to enforce provisions it otherwise might reject as unreasonable. However, in many cases, businesses must always anticipate that a court might someday review a non-compete provision for its reasonableness.

Avoiding Public Disputes Through Mediation and Arbitration

Litigation in court against current or former employees can attract costly negative publicity. Forward-thinking businesses can avoid the expense and harm of a public dispute with an employee by including binding dispute resolution provisions in their employment agreements. Employment agreements can require: 

  • Mandatory mediation of employment-related disputes before they can proceed to litigation
  • Litigation of employment disputes in an arbitration forum, instead of in a court

An employment agreement should spell out the procedures. For example, the business could state that rules promulgated by the American Arbitration Association for employment-related disputes will apply. Businesses may, however, need to pay careful attention to legislative efforts to limit these provisions in some contexts, like in cases of workplace sexual harassment or discrimination.

Contact us about Employment Agreements

Have questions about how your business can draft and execute smart, enforceable employment agreements? Contact the Law Office of Elliott J. Brown today. 

Adam Blaier, Esq.

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