An Employment Agreement is a contract between an employer and an employee, establishing the scope of employment, wages, benefits and any other terms of an employer-employee relationship. A formal agreement is not legally required to establish an employer-employee relationship, but Employment Agreements are nevertheless widely used, particularly with regard to high level executives and other key employees. Such agreements may serve a number of needs of both the employee and the employer, such as:
• guaranteeing a certain term of employment to attract talent;
• providing merit based compensation to incentivize an employee to work toward a certain goal;
• limiting an employee’s ability to leave to go work for a competing company; and
• protecting the employer’s intellectual property, trade secrets, know how and intellectual capital.
Characteristics of Employment Agreements
While Employment Agreements vary depending on the circumstances of employment, they typically contain certain common elements, such as a job description, a compensation package, employment termination provisions and restrictive covenants, each described below in more detail.
An Employment Agreement needs to set forth the scope of employment, describing the duties and responsibilities of the employee and identifying the place of employment and the employer. Where the employing company is comprised of multiple divisions, subsidiaries or affiliated companies, the agreement should set forth which such entities the employee is intended to serve. Additionally, the agreement may include other information, such as the extent of expected travel, telecommuting abilities, intended promotion schedules, when the employee will be eligible for promotion and the frequency of performance reviews.
The Employment Agreement will describe the overall compensation package for the employee. The compensation package will typically include salary, bonus and benefits.
The salary provisions of an Employment Agreement will specify how much will be paid, when it will be paid, and how it will be calculated (annually, hourly, commission based or otherwise).
Bonuses may be provided in addition to salary. Two common types are signing bonuses and performance-based bonuses. Signing bonuses are sometimes used to compensate an employee for compensation forfeited by leaving a prior position. These are typically paid when the employee begins the new job, but may need to be returned if the employee leaves before a specified date. Performance-based bonuses, on the other hand, are paid after the employee, the employee’s department or the employer meets certain performance metrics.
Part of the compensation package will be typically comprised of various benefits offered to the employee. These benefits may include paid vacation and sick leave, health, medical, dental and life insurance, deferred compensation, pension and profit sharing, 401k plan and tuition reimbursement. Should the employee be required to relocate in connection with a job, the Employment Agreement may provide for payment of relocation expenses such as travel, temporary lodging, and costs associated with buying or selling a home and moving.
Termination of the Employer-Employee Relationship
Most Employment Agreements will be specific in addressing the consequences of, and reasons for, an employee’s termination. The agreement will identify the basis of termination and the economic consequences to the employer and employee. Generally, either party will be able to terminate for “cause” without further obligation. The definition of what constitutes “cause” is one of the most heavily negotiated terms in an Employment Agreement. Common elements of “cause” for termination are the employee’s:
• fraud, embezzlement or theft;
• willful misconduct damaging to the company;
• material, intentional violation of any law or regulation;
• continued failure to perform ones duties to the company; and
• being charged with a felony or a misdemeanor involving moral turpitude.
If the employment relationship is terminated for cause, the Employment Agreement will typically provide that the employee is not entitled to any further compensation or benefits. However, if an employee is terminated for any other reason, the employer may be obligated to provide some form of compensation, which could include severance, performance bonuses, acceleration of a vesting schedule for any equity compensation, continuation of certain benefits and outplacement services. If the employee is subject to restrictive covenants (described below), early termination may trigger the extinguishment of such obligations.
An Employment Agreement may also provide for compensation to an employee in the case of a “constructive” termination. The definition of constructive termination typically includes a demotion in terms of pay, benefits or duties, or a demand that the employee relocate to continue employment.
Employment Agreements will usually describe dispute resolution strategies and obligations in connection with termination, generally preferring alternative forms of dispute resolution over potentially extended, expensive and complicated legal battles in the courts.
Change in Control Provisions
Employment Agreements may provide for additional compensation, beyond what would be paid in the case of a typical without cause termination, if the termination is as a result of a “change in control” of the company. Where such compensation is significant, it is often referred to as a “Golden Parachute.” The primary justifications for these additional benefits are: (1) to entice an employee to join, or remain with, a company that is, or is likely to become, the target of a takeover; and (2) to align the interests of management and shareholders (or the equivalent thereof) in pursuing the sale of the company.
Where change in control provisions are involved, the definition of “change in control” will vary based on the circumstances and structure of the company. Constructive termination is typically sufficient to trigger payments under such provisions.
An Employment Agreement may contain a number of restrictive covenants, some of which may be contained in separate agreements. Common restrictive covenants include confidentiality, non-competition and non-solicitation.
• Confidentiality: binds the employee to keep confidential any proprietary information received from the employer during the employment period, subject to limited exceptions.
• Non-competition: restricts the employee from leaving his or her employer to go into direct competition with the employer.
• Non-solicitation: restricts the employee from soliciting all or some of the employer’s clients or personnel for a period of time beyond termination of the employer-employee relationship.
• Employee’s job description
• Compensation for the employee
• Benefits, expense reimbursement and other “perks” due the employee
• Rights to terminate the employer-employee relationship
• Consequences of terminating the employer-employee relationship if for “good cause,” without “good cause” or after a change in control of the employer
• Restrictive covenants binding on the employee
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