Employment relationships are presumed to be at-will in Texas. When employee turnover becomes costly, or a particular employee would create exceptional value in the company, a contract is often written to retain the employee.
A contract, when dealing with low-level employee turnover, may consist of no more than a one-page form describing duties, expectations, and benefits.
First Things First
First, consider the responsibilities of the employee. The general responsibilities should be set out in the contract. If you have written a job description, then this language can be duplicated in the contract. If you have not written a job description then conduct a job analysis. Think about what the ideal candidate for the position would be capable of doing, and think about the problems he or she might encounter in the span of one week or one month.
The language should be broad and all-encompassing. It may help to talk to people who are or were in that employment position.
Employment contracts have some common clauses, which will be explained in detail over the next few weeks.
Not every clause will be necessary for every contract, and each business will have different requirements. A service business will not have the same contract as a technology business which will not have the same contract as a sales business. Consider the issues that are important to your venture, and decide what issues the employee will deal with.
Common clauses include non-compete, confidentiality, the exclusivity of employment, and ownership of inventions agreements.
An important consideration for many businesses is a confidentiality agreement. A confidentiality agreement states that employee promises not to share any information about the details of the employer’s business or the employer’s secret processes, plans, formulas, data, or machinery. It is acceptable to have a confidentiality agreement that lasts longer than the employment and may be endless. This paragraph of the employment contract may read similarly to a nondisclosure agreement.
In a noncompetition clause, the employee agrees that for a certain amount of time after he or she stops working for the employer, the employee will not become employed by a rival company or any company engaged in a similar type of business, and the employee will not set up a company that will compete with the employer’s business (or solicit the employer’s customers).
Non-competition clauses can be very difficult to enforce so your attorney should look up state-specific laws on this issue. As a general rule, the clause must be reasonable in geographic scope and in time. That is, it may not extend further geographically than your business’ normal business area, and cannot ban the employee from that line of work for any length of a period of time than is reasonable. A period of time is reasonable if it is approximately the length of time you expect it to take to find a replacement and train him or her.
Ownership of Inventions
A clause about ownership of inventions applies to employees who invent things as part of their jobs. The employee agrees that anything she invents at work (and possibly during a set period of time after termination) becomes the employer’s invention, not the employee’s own invention.
Additionally, employees usually agree to assign their inventions to the employer, cooperate with the employer in getting inventions patented, and keep information about the invention confidential, like any other trade secret. In return, sometimes the employer agrees to share with employee-inventors a percentage of the royalties paid for inventions.
This sort of clause is used both for physical inventions, chemical inventions and also for technological inventions. If your business deals in any type of product, you should consider this type of clause.
Exclusivity of Employment
An exclusive employment provision can be helpful. In this provision, the employee promises that as long as he or she works for the company, the employee will not work for anyone else in the same or a similar type of business, while working for you. The provision may also extend to a promise not to be a shareholder or director in a similar business, or even to provide services voluntarily to a competitor business. This type of provision is a loyalty provision and is helpful when there is a competitive field or a particular trade secret in your company.
“No Additional Compensation” Clauses
A clause to consider for an employment contract for a person who is expected to be a great managerial asset the business is a “no additional compensation” clause. The “no additional compensation” clause states that if the employee becomes an elected director or officer of the company or serves on a company managing committee, the employee will not be entitled to additional compensation for doing that work. The purpose of the clause is to allow full utilization of an employee’s skills, even where they may not have been a part of the original agreement, without adding financial strain to the company.
You may wish to include in the employee’s contract that he or she has no right to contract on behalf of the company. This is called an “agency” provision. It makes clear that the employer and employee only have an employment relationship only, not an agency relationship. An agent has a right to bind a principal (in this case, you), and acts with the principal’s authority in all matters legal and business. This provision makes it clear that the employee has no right to enter into a contract or otherwise obligate the employer unless the employer gives express written consent to do so. Another way to prevent an agency relationship is merely to hold the employee out as nothing more than an employee; never refer to him or her as your agent, and do not allow the employee to contract or act on the company’s behalf.
Best Efforts Clause
Although it is often just assumed that the employee will work hard for the employer, sometimes employers add a best-efforts provision to the employment contract. It states that the employee promises to work to the best of his or her ability and to be loyal to the employer. Sometimes it also states that the employee specifically agrees to make suggestions and recommendations to the employer that will be of benefit to the company.
This type of clause, when properly used, can help foster communication between an employee and an employer. Additionally, the best efforts clause can give good cause for dismissal if the employee is not exerting his best efforts.
It may be obvious, but for most contracts, you will want to mention a time frame, and for the more complex contracts, you may wish to tie the time in with advancements in pay or stock options.
For a standard form contract, it is a good idea to include a length of time of a few months or a year. If the employee is one who is a staple of the company or with whom you expect to invest a large amount of training, you may consider up to five years. It is not wise to make a contract that is excessively long (probably longer than five years); long contracts are difficult to enforce and a lot of changes may occur in five years.
Think about the evolution you expect the business to go through, as well as the technological and personal changes involved in a period of five years.
The Salary Clause
Another clause in contracts is the salary clause. The salary clause may also include benefits. For form contracts, a salary clause may be a discussion of an hourly wage, standard healthcare information and a discussion of employee review in conjunction with raises.
In a more complex contract you may have to find an amenable annual salary, and, if the contract is for more than one year you may need to discuss increases for inflation. Benefits will probably only be acknowledged, any employee should get an in-depth packet of information on how to use their healthcare benefits, provider information and information on the deductible.
It is helpful for all involved to have an upfront discussion of what amounts are being taken out of the salary of the employee for healthcare benefits and how to utilize those benefits. Any other benefits or perks may be discussed in this clause as well. You should also state a fair market value of the benefits, for tax purposes. The employee will be taxed on benefits he or she uses as a portion of income, and so stating the value up front will save confusion later.