The Employment Agreement: Five Issues to Consider

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In a perfect world, the relationship between employers and employees would always remain pleasant and free of disputes.  Hiring would occur quickly, on agreeable terms.  Firing would be regrettable and respectful, but necessary for the health of the company.  Professionals could transition from one company to another on smoothly negotiated terms.  And so on…

Of course, experience tells us that the modern business world is not perfect.  As an employment attorney and litigator, I routinely encounter employment disputes at various stages of their development.  Some disputes are driven primarily by business concerns, while others are more personal and emotional.   Some disputes can be resolved with goodwill, while others have already passed the tipping point.  Regardless of the nature of an individual dispute, there is one key document that must be unearthed and addressed: the employment agreement.

The idea that the employment agreement is important may seem obvious, but in reality employment agreements exist in the background during the majority of an employment relationship.  Often, an employer or employee does not truly analyze the contents of their employment agreement until a dispute arises.  Many employment agreements are based on outdated forms or boilerplate language that has not been tailored to suit the specific situation.  Each employment situation is unique, and each dispute has its own distinct facts and quirks. It is possible, however, to identify some commonly disputed provisions of a typical employment agreement.  With the rest of this article, I will highlight five of the most commonly disputed provisions.  (Of course, some scenarios lack a written agreement.  This scenario, along with the “implied contract exception”, will be discussed in a later post.)

1.         Length or Term of Employment

Many employment agreements are “at will”, meaning an employment contract of indefinite duration that can be terminated by either the employer or the employee at any time for any reason.  Employment agreements can also be a contract for a set period of time or “term” of employment.  An example of a term would be “18 months” or “5 years.”  Agreements for a term can provide comfort for the employer or employee, and are often useful for attracting talented professionals.  Understanding whether an employment agreement is for a term is crucial because the rights of the parties to the agreement can vary greatly as a result of the analysis.  Often it is fairly easy to ascertain from the language of an agreement whether a term of employment was intended, but not in every case.  For example, consider the following: an employment agreement for a 9-year term that can be terminated by either party with 6-months’ notice.  Is this employment at-will or for a term?  If it is a term agreement, what is the length of the term, 9 years or 6 months?   The analysis is not always simple, but it is always important.

2.         Noncompetition Clause, or the “Noncompete”

Some employment agreements contain a clause prohibiting a contracting party from engaging in similar employment for a specified period of time within a certain geographical area.  In legal terms, this is known as a “restrictive covenant”, or more colloquially as a “noncompete clause.”   Noncompete clauses arise from the notion that an employer who invests significant time and capital in an employee would like the comfort of knowing that the employee will not leave the company and quickly begin using the new-found skill set to benefit a competitor.  Employees are often willing to agree to the noncompete clause because they are landing a desirable job.  An enforceable noncompete clause must be limited to a reasonable geographic area.  When examining the geographic area, the courts often look at where a company is doing business.  With this in mind, I think it is interesting to consider the impact of mobile technology and the virtual office on a court’s geographic analysis.  Consider the example of a Chicago company, with customers in the Midwest, which employs a project manager who works remotely from San Francisco.  Is the Chicago company “doing business” in San Francisco simply because that is where the project manager logs in to his computer?  (This topic will be explored further in a later post).  Noncompete clauses can be heavily contested and controversial.  Regardless of one’s view on noncompete clauses, and regardless of one’s position as employer or employee, every noncompete clause must be carefully structured and analyzed in order to prevent costly disputes.

3.         Compensation Description

Most employment agreements will indicate the amount of compensation and the manner in which that compensation will be delivered.  In a simple scenario, an employment agreement will provide for an annual salary of “x” dollars to be paid in equal sums at end of each month.  This is clear enough, but the realities of modern business mean that the total amount received by an employee is likely to include some elements from the following list: a bonus, deferred compensation, profit sharing, equity distribution, stock options, merit raises, health and other insurance benefits, and many others.  Due to the increasing number of compensation options, clear and decisive language is crucial when the parties are describing the compensation program.  In a surprising number of cases, the parties to an employment agreement ultimately discover that they do not agree on the total amount the employee was owed under the agreement.

4.         Arbitration Provision

Litigation is usually expensive and time consuming, regardless of the issue that is being disputed.  To hedge against the burdens of litigation, an employer and employee will often agree to resolve any dispute related to the employment agreement through arbitration.  The goal of a typical arbitration provision is simple: get both parties to firmly commit to waive their right to proceed directly to litigation and agree on using arbitration.  Despite this seemingly simple goal, arbitration provisions are often challenged after a dispute has arisen between the parties to an employment agreement.  The challenges typically occur because one of the parties perceives that the arbitration provision will work to the advantage of the other party.  Arbitration provisions are often upheld by the courts, particularly if a provision was clearly identified in the employment agreement.  Occasionally, a court will modify an arbitration provision to include more context or details, which brings me to an observation.  I have noticed that many arbitration provisions are lacking in detail.  The details that are sometimes omitted include: 1) whether the arbitration will be binding, 2) where the arbitration will occur, 3) what rules will apply, 4) who will bear the costs, and 5) how the costs will be allocated.   These details deserve careful consideration, as they can add clarity to an arbitration provision and decrease the likelihood of a costly dispute over the terms of the agreement.

5.         Termination Provision

An employment agreement is often being analyzed because someone has been, or is about to be, terminated.  As discussed above, many employment agreements are “at will” and can be terminated for any reason or for no reason at all.  These employment agreements will often contain only a brief statement explaining that the employee “may be terminated at any time for any reason, with or without cause.”  In some situations, an employer or employee will want to include additional rules or prerequisites regarding an “at will” termination.  For example, an employer and employee may wish to agree that notice of the termination must be in writing with 20 days’ notice.  In contrast to employment that is purely “at will”, some employment agreements will contain a termination provision that sets forth the grounds that are necessary for termination, commonly referred to as “good cause.”  A full discussion of termination for cause would require many more pages, but one point that should be clear is that adding conditions to the termination provision often adds avenues for disputes.  Whether one is addressing a termination provision or any of the provisions discussed above, it is important to consider whether the language clearly captures the agreement of the parties without creating costly confusion.

* George B. Ward’s practice areas include employment law, commercial litigation, and insurance law.