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Employment Agreements

Know what to expect with offer letters, non-competes and confidentiality agreements.

A small-business owner with a company similar in size to a small material handling distributorship asked for my consulting help with a termination issue. A key member of his management team, an African-American female, failed miserably at work she agreed to do, and her failure put the company’s ISO certification in jeopardy. After repeated attempts to help her, he sought her resignation. When she refused, he terminated her under the assumption he could use his “at will” privilege. Now, a lawsuit looms. His request to me: “Make it go away.”

Sorry, this one won’t go away. He needs the best employment practices lawyer he can afford. It is not a done deal, but there is only a glimmer of hope we can get him out of this without litigation. Why? First, the employee had an employment contract. The contract included a non-compete agreement, a confidentiality agreement, an ethics policy, the terms of the compensation package and the terms of separation. A job description was tacked to the back. Once the company signed the employment contract, the employment-at-will privilege went away. An employment contract negates an “at will” agreement.

Secondly, this contract specifically stated she could only be terminated for cause. When this business owner told me he had 20 more just like it back at the office, I needed a defibrillator.

  • He had quoted an annual salary to this employee, which means he may be required to pay her for a full year, even though she only worked a few months. This issue has been litigated many times. Courts have generally concluded that if you quote an annual salary, you may owe a year of pay because the quoted salary is the agreed-upon compensation.
  • They agreed to a termination for cause only, which negated any “at will” separation. (Remember, he terminated her “at will.”)
  • The agreement had no time limit, which means she is employed “for life” unless she is discharged for cause.
  • The non-compete was three years and 500 miles, which may be considered excessive by the court, if challenged.

This business owner explained that he had the employment agreement created to protect his company. He said he sought the resignation to spare this employee embarrassment and to keep a discharge off of her employment record. His motive was admirable, but this entire matter is a litigator’s paradise. Let’s look at what he may have done differently to accomplish the need to protect the company and avoid forfeiting the “at will” privilege. There are no guarantees that a terminated employee won’t sue, but it is possible to reduce the odds by careful planning at the time of employment.

Offer Letters
This letter should contain the offer of employment, the job title, the title of the position to whom the new employee will report, the date the employment will commence and the salary. Salary should be stated carefully. If an annual salary is quoted, be certain to inform the employee that “salary is actually paid on a bi-weekly (or weekly or semi-monthly, etc.) basis as a result of work performed and quoted as an annual sum here merely as a convenience.”

A statement regarding any special circumstances, such as a variance from the standard benefit program, is part of the offer letter. Include a statement in the closing that reads, “The contents of this letter do not constitute a contract of employment. (Name of Company) is an ‘at-will employer,’ which means the company may terminate an employee, with or without cause, at any time, and the employee may resign at any time, without forfeiting benefits.”

The employment offer letter should be as brief as possible. I learned in my work in the newspaper industry that “there is nothing easier to scrutinize than the printed word.” Every extraneous word provides the opportunity for legal dissection.

Confidentiality Agreements
The confidentiality agreement can be included with the non-compete agreement or included in a code of ethics. If it is presented as a stand-alone document, then be certain it contains language that protects all information the employee learns during the course of employment. This includes personnel information, price lists, marketing strategies and plans, customer lists and all other proprietary information the employee has access to—into perpetuity. There are standard confidentiality agreements around that cover all of this and are regularly used in HR work.

Non-Compete Agreements
The non-compete can also be a stand-alone document. Most states recognize non-competes as binding agreements, if they are reasonable. However, if it binds the employee too tightly, the court will likely strike it down. A sharp attorney will have no difficulty convincing a judge to throw out a non-compete that seems unreasonable and keeps an employee from earning a living in his or her profession.

Enforceable non-compete agreements prohibit a separated employee from contacting customers within a reasonable time period (one to two years) and a reasonable distance (no greater than the service area).

Enforceable documents prohibit a separated employee from contacting customers within a reasonable time period (one to two years) and a reasonable distance (no greater than the service area). They prohibit recruiting away existing employees from the company and becoming a competitor in any way. I have heard more than one attorney brag, “I can break any non-compete you put in front of me.” This is a very sensitive area.

Once again, there are templates around that can be customized for specific situations. Some language is standard. It is not necessary to reinvent the wheel and it is important to know that non-competes still exist and are enforced.

Code of Ethics
Now, more than ever, an ethics policy is necessary. Liability insurance companies want the businesses they insure to have written policies on very important issues. They include policies prohibiting sexual harassment, substance abuse, abuse of technology (Internet) and workplace violence. Policies regarding confidentiality, whistle-blowing for financial wrongdoing, nepotism, soliciting or accepting gifts, conflicts of interest, employee privacy, relationships with competitors and outside employment should be part of the code of ethics every new employee signs.

Change of Control Agreement
For certain key employees, you may want to have a change of control agreement, which is designed specifically to assure the employee of an agreed-upon compensation package in the event the company is sold or the employee’s job is eliminated. It is not a standard part of the usual employment relationship.

Timing Is Everything
It is absolutely critical that a new employee be required to sign all of the employment-related documents before commencing work. Once the employment re-lationship begins, any attempt to alter the terms and conditions of employment may be challenged. The argument put forth against the company by the legal community may go something like this, “The employer changed the conditions of employment by requiring the employee to sign a non-compete after the employee commenced work. Since the employer required the employee to give up certain freedoms, without offering any- thing in return, no contractual agreement exists.” If the argument sticks, then the non-compete is worthless.

If there is a well-written offer letter, a confidentiality agreement, a non-compete document and a code of ethics, all of which are signed and delivered prior to the employee commencing work, why complicate life by entering into a formal employment contract? It negates your at-will freedoms and sets you up for post-termination legal problems you and your material handling distributorship don’t need.

Material Handling Equipment Distributors Association

Nancye Combs Meet the Author
Nancye Combs is a management consultant and president of HR Enterprise, Inc., located in Louisville, Kentucky, and on the Web at www.hrenterprise.com.

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