Totman Law’s Three Underappreciated Issues Series: Three Common but Tricky Employee-Focused Issues in Written Employment Agreements
Three Overlooked Issues in Written Employment Agreements:
In today’s fast-paced world, employee mobility is a vital part of our individual economic outlook. It is in light of this context – the reasonable ability of the employee to move between opportunities – that we, as employees, must review and consider employment agreements. Not every employee is asked to sign a written employment agreement. Most, in fact, are not. But for the (relative) few who will sign a written agreement of employment, here is a look at three tricky and often overlooked issues in written employment agreements impacting post-employment opportunities and options. Make sure you understand the impact and consequences of each fully before signing the agreement, or you may find yourself signing an employment agreement that unreasonably precludes future opportunities.
Terminating the Contract: For at-will employees, either the employee or the employer can (generally, and subject to certain exceptions) terminate the employment at any time. That is not the case where employment is subject to a written agreement. It will be the agreement that sets out the process and requirements for termination of employment. Some employment agreements will incorporate an at-will relationship into the written document’s legal framework, in which case the rules for terminating at-will employment will apply, except to the extent modified by the agreement. For written agreements that establish an employment relationship that is not at-will, the employee should strive to be fully aware of the requirements and protocol for either party to terminate before signing the document.
Why is it important to be aware of termination requirements? There are numerous reasons, I’m sure. The focus of this blog, however, is the impact on the employee’s ability to pursue other opportunities. It is common for employers to require a certain period of notice from the employee before termination is allowed or effective. The phrase, “two-weeks’ notice,” comes to mind. Don’t assume that two weeks is the required notice period, however, as it is also common for employers to require a greater notice period, particularly in more specialized and skilled employment fields. It may not seem like a big deal to sign a contract requiring 90 days’ (or more) advanced notice, but that is a long time to wait when a lucrative or appealing opportunity comes along, leaving you either waiting out the 90 days and hoping the opportunity doesn’t pass you by, asking the employer to be let out of the employment early and without the notice requirement (which many employers may not be willing to do), or breaching the agreement by quitting without having given the requisite notice. Option number three would give the employer grounds for legal action against the employee. Perhaps the employer would overlook the breach and move on, but perhaps not, especially for those specialized and skilled employees that earn the employer money and goodwill now going to a competitor.
Pay close attention to termination requirements. Is notice required? If so, how much time must be given? In writing? To where? Are there other requirements to be met? Is the employee even allowed to terminate early? Don’t let ignorance of these requirements lead to heartache or missed opportunities.
Definition of “Default”: Another underappreciated and often overlooked issue is establishing just what constitutes a default or breach of an employment agreement. An employee default of the agreement can lead to termination of employment, a prohibition on receiving unemployment benefits and/or legal action against the employee. It is critically important, therefore, to understand just what the term “default” means in the employment agreement.
Depending on the sophistication or comprehensiveness of an employment agreement, which some may cynically call verbosity, “default” may be defined quite simply as the failure to perform one’s obligations under the agreement; or, it may be a multi-layered, multi-pronged web of pitfalls into which the employee may stumble. The definition of default will vary from agreement to agreement, but what tends to remain constant is the employer’s preference to have wide discretion in declaring a default of the contract. As noted above, employee default may let an employer terminate the employee, avoid costly hikes in unemployment insurance by preventing collection of unemployment benefits, or even sue the employee if the incentive is strong enough. In the most general sense, the employee should seek to negotiate “just-cause” termination in the contract, limiting the definition of default and the ability of the employer to declare default. Also beware the contract that empowers the employer to terminate “for cause” without defining “cause,” as this will yield broad employer discretion after the contract is signed to decide just what constitutes appropriate cause to terminate.
Work to get these issues addressed, negotiated and spelled out before signing. While “default” and “cause” may still be broader than you’d like, defining them as specifically and narrowly as possible may help avoid a costly and potentially litigious termination scenario.
Non-Competition and Non-Solicitation: As you may well be aware, these are two of the most important clauses in a written employment agreement, affecting the employee’s post-employment opportunities and ability to earn a living, as well as the employee’s legal liability, more than perhaps any other provision in the contract. At their essence, these clauses (are supposed to) aim to protect an employer’s legitimate business interests in its goodwill, client and professional relationships, revenue streams, etc., doing so by limiting the ability of the employee to operate in the employer’s line of work for a set period after termination of employment. The non-compete, generally, will prevent the employee from going to work for a competitor, starting a competing business or otherwise engaging in competing business activities. The non-solicitation agreement, on the other hand, prevents the employee from interfering with the relationships of the employer with its customers and, in some cases, its other employees and contractors.
That non-competition and non-solicitation agreements present post-employment issues for employees should hardly come as a shock. Many employment agreements, even those that have no business incorporating such provisions, require employees to agree to these types of clauses. And yet, more often than should be the case, an employee finds him or herself in a situation in which ignorance of the terms of the agreement or failure to negotiate reasonable terms preclude pursuing a new opportunity because the agreement prevents it or imposes the risk of lawsuit for breach of contract.
Understanding these terms is consequently and critically important. What type of competitive activity is prevented? For how long and in what area? What constitutes an improper “solicitation” of customers or employees? Consider the example of two or more employees of the same company, each under a non-solicitation agreement preventing solicitous interference with the employee relationships of the company, and each finding themselves on the wrong end of a cease and desist letter because they decided to leave the company and start a business together. Is that a breach of a non-compete or non-solicit agreement?
These clauses present difficult questions for employees. Often the employer will present a take-it-or-leave-it offer of employment: either agree to the non-compete and non-solicit clauses, or find other work. Other times the language of the agreement is so densely and unapologetically unreadable to anyone without a J.D. that the employee may not have any idea to what he or she is agreeing. But that only highlights the importance of understanding these clauses. Trying to negotiate more reasonable terms is an important goal. And even in the take-it-or-leave-it scenario, understanding the terms to which you’re agreeing may help prevent a breach or other missed opportunity down the road.
The information herein is not legal advice and does not create an attorney/client relationship. The information is in the form of legal education and is intended to provide general information about the matter. The above is not, nor is it intended to be, legal advice. Consult your attorney with questions.