by Wendy Heilbut &Erica Kerman

Many, if not most, employer-employee relationships in the U.S. are “at-will,” meaning that the employment term is not for a set duration. Either party can end the relationship at any time for any lawful reason or for no reason. It’s a capitalist tradition as old as time!

Conversely, if you enter into an employment contract for a set duration, you, as the employer, may only terminate your employee for “just cause” (or likely pay severance), and your employee can terminate the relationship only by following the notice requirements set out in the contract. 

Regardless of whether employment is at will or not, as an employer you will want your employees to agree to certain terms to protect your company’s business interests, both while they are employed and after they leave. You will want to be reasonable with their confidentiality and non-compete obligations, for example, so you can balance your legitimate business interests against the needs of your employees to use their skills and experience in future endeavors. 

Below are several key and often-contested terms in employment agreements—as well as other provisions—that may not get as much attention but can have important consequences if there is ever a dispute down the road.

 

Don’t Compete Against Yourself. 

Make Your Non-Competes Enforceable.

 

Some of the most intensely negotiated terms in an employment agreement are its restrictive covenants, commonly known as the non-compete and non-solicit clauses. Here we will focus on non-competes.

Employees owe a duty of loyalty to their employers while employed. In New York, for example, that means an employee can not engage in a business that competes with the employer’s business. However, the duty of loyalty does not prevent the employee from seeking work for a competitor, or preparing to compete with the employer, after the employment relationship ends. That is why many employers require employees to sign non-compete agreements, where an employee promises not to compete with the employer for a specific duration of time after the relationship ends. 

These benefit employers by providing them with greater assurance that their intellectual property, confidential resources, and proprietary information will not be available to or used by their competitors. However, it is important not to be overly restrictive of employees’ post-employment activities. 

First, you do not want to start your employment relationship off by requesting unreasonable and overly burdensome terms. 

Second, the reality is that while most employees have some important company knowledge, typically only a few will have information that, if disclosed, could jeopardize your business. You should identify those employees and enter into effective and enforceable non-competes with them, to the extent allowed by the applicable state law. 

Non-competes have come under much scrutiny by lawmakers and courts across the country, and are becoming increasingly regulated. In several states, like California, non-competes for employees are prohibited (unless in the context of the sale of a business) and should be excluded from the contract for California-based employees. In other states, like Illinois and Massachusetts, non-competes are permitted, but state statutes specify the conditions that must be met for them to be enforceable. 

In many states, like New York, non-competes are permitted and there are no statutes regulating them, but they are not enforceable beyond what is reasonably necessary to protect a legitimate business interest, such as: 

1    Trade secrets and other confidential information;

2    Customer relationships and goodwill; or

3    Investment in employee training

 

Intellectual Property

Ownership 

Of tantamount importance to many, if not all, companies is owning the intellectual property it builds and relies on. If not properly structured in employment agreements, individuals—not the companies they work for—may unintentionally own the intellectual property they create during their tenure with your company. 

Employment agreements should clearly state that any intellectual property brought into the company, or created while working for the company, is owned by the company as work-made-for-hire and, to the extent any laws would dictate otherwise, the employee actually assigns such intellectual property to the company. 

Onboarding new employees should always include an assessment of the intellectual property they are bringing into the company or any intellectual property they are clearly not bringing into the company and retaining as their own (such as side-projects or prior created work for another company).

Given the significant variation between states in their employment laws and contract laws generally, it should come as no surprise that the law you choose to govern your employment contract is crucial. 

Companies are often inclined to select a state law that is comparatively business or employer friendly, such as Delaware rather than California. 

While parties to a contract are generally free to agree to a choice of law clause, a court is not bound to honor the choice reflected in the contract and will not enforce agreements where the chosen law violates a state’s fundamental public policy. 

For example, New York’s highest court refused to enforce an employment agreement’s choice of Florida law in the context of a dispute over a former employee’s solicitation of her former employer’s customers, because Florida’s law on restrictive covenants differed significantly from New York’s law. In evaluating a restrictive covenant, Florida law focuses on the employer’s interests and will not consider the harm to the employee, unlike New York law, which requires courts to narrowly construe restrictive covenants and balance the interests of employer, employee, and the general public. So even though the employer and employee had agreed that Florida law would govern the employment contract, the court applied New York law to the dispute. See Brown & Brown, Inc. v. Johnson, 25 N.Y. 3d 364, 370 (2015). 

California has also made it difficult to bypass its protective employment laws through its Labor Code Section 925, which, with limited exception, prohibits employers from requiring employees who primarily live and work in California to adhere to a different state’s law for their employment terms.

Choice of Governing Law

Given the significant variation between states in their employment laws and contract laws generally, it should come as no surprise that the law you choose to govern your employment contract is crucial. 

Companies are often inclined to select a state law that is comparatively business or employer friendly, such as Delaware rather than California. 

While parties to a contract are generally free to agree to a choice of law clause, a court is not bound to honor the choice reflected in the contract and will not enforce agreements where the chosen law violates a state’s fundamental public policy. 

For example, New York’s highest court refused to enforce an employment agreement’s choice of Florida law in the context of a dispute over a former employee’s solicitation of her former employer’s customers, because Florida’s law on restrictive covenants differed significantly from New York’s law. In evaluating a restrictive covenant, Florida law focuses on the employer’s interests and will not consider the harm to the employee, unlike New York law, which requires courts to narrowly construe restrictive covenants and balance the interests of employer, employee, and the general public. So even though the employer and employee had agreed that Florida law would govern the employment contract, the court applied New York law to the dispute. See Brown & Brown, Inc. v. Johnson, 25 N.Y. 3d 364, 370 (2015). 

California has also made it difficult to bypass its protective employment laws through its Labor Code Section 925, which, with limited exception, prohibits employers from requiring employees who primarily live and work in California to adhere to a different state’s law for their employment terms.

Defining “For Cause” Termination

When an employment contract is for a set term, the employer cannot terminate the employee before the term ends unless the employer has “just cause” (or simply “cause”). If the employer wishes to terminate the employee early without cause, the contract will usually require the employer to pay the employee severance. 

If an employee is terminated for cause, they may forfeit equity in the company under the terms of the employer’s equity incentive plan, or other compensation. 

Because of these potentially significant financial consequences (for employer or employee, depending on the circumstances), defining what constitutes “just cause” for termination is key. Not surprisingly, employers typically want greater flexibility in the definition, while employees often seek narrower bases for just cause termination. 

Common grounds for just cause termination include:

1    Theft and dishonesty concerning employment matters

2    Insubordination

3    Disloyalty or breach of fiduciary duty to the company

4    Incompetence and inefficiency

5    Employer dissatisfaction

6   Absenteeism and tardiness

In New York, it is important to know that when there is a dispute over whether an employee’s conduct gave rise to just cause, courts defer to the employer’s determination, especially for high-level employees. 

New York courts have said that the ultimate criterion of just cause is whether an employer acted reasonably in terminating the employee based on misconduct, and a termination for cause may be upheld if: 1) it is reasonable to terminate employees because of the conduct at hand, and 2) the employee had notice (express or implied) that such conduct would be grounds for termination. See Scholem v. Acadia Realty Ltd. P’ship, 45 Misc. 3d 562, 567-568 (N.Y. Sup. 2014).

Considerations

There are many important business considerations that come into play when hiring employees, of which a few are:

1    How to ensure you have enforceable non-compete agreements with your employees to prevent trade secrets and other confidential information from becoming available to competitors

2    How to protect the ownership of your intellectual property, both during employment relationships, and after they end

3   Maintaining flexibility to terminate an employment relationship if it does not work out 

There are also significant differences between states on what you can require of your employees after employment ends, and the law is constantly evolving in this area, with new legislation being proposed and enacted to protect employees’ interests. Don’t be afraid to think of creative ways to protect both your company and employees when it comes to this important aspect of hiring. Just be sure to clear it with your attorney or other counsel first!

The post Suite Talk – Exploring the in’s and out’s, what if’s and but’s of C-Suite matters Crafting Legal Terms of Employment first appeared on Jayaram Law.