Employment Contract Considerations for Small Businesses and Startups
March 25, 2011 | By Vela Wood
You know the saying, “An ounce of prevention is worth a pound of cure“…well, that axiom most certainly applies to small businesses. While many today do not enter into written employment agreements with their employees, it would certainly be in any small business’ best interest to do so. Small businesses that do not use employment agreements can quickly run into problems when an employee is fired or leaves the company.
One of the most common frustrations is when a former employee uses company information (including customer lists) or begins working for a direct competitor. If a well-written employment agreement is in place from the get-go, a demand letter or a temporary restraining order can easily put the issue to rest.
The more terms that are spelled out at the beginning of the employment relationship, the smoother the transition when the employee exits the company. As a general rule, if you are fairly certain that your 8-year-old can understand the process that must be followed when an employee leaves the company, then your employment agreement is probably right on track.
A good employment agreement can stop problems before they even start. A bad or nonexistent one can cost you money and customers. When utilizing a written employment agreement, here are a few items that an employer can use to its advantage:
1. Restrictive Covenants
Arguably, one of the most important provisions for an employer is restrictive covenants.
Here’s every small-business owner’s nightmare: You hire an employee. You train him on the ins and outs of your business. You mentor him. He learns the strategies and methods that make your company successful. He interfaces with your customers and clients. Then, the employee quits. He immediately begins working for your direct competitor down the street. He begins soliciting your clients. He hires your best salesperson. And he’s using your marketing strategies.
Without an employment contract that contains restrictive covenants, a former employee armed with your strategies and customers is free to leave your company, hire your employees, and use your strategies to benefit your direct competitor.
Here are a few restriction-related provisions that will help a small business protect itself from such a situation:
- A restriction that will not allow the former employee to work for a direct competitor within a certain geographical area.
- A restriction that will prohibit the former employee from doing business with your clients for a specified period of time.
- A restriction forbidding the former employee from hiring your employees.
- A restriction on disclosing trade secrets or other confidential information.
While Texas law puts certain constraints upon the extent of the geographic area and length of time in which certain covenants last, they are nonetheless a powerful tool at an employer’s disposal.
When it comes to payment, small businesses are notoriously sloppy in their offer letters. In some situations, courts have interpreted an offer letter as an employment contract, and thus the employer was bound by unintentional “promises” made in the letter.
Instead, a well-written employment agreement should carefully explain when and how the employee’s compensation ends. Without a clear-cut policy, the following questions might loom: If you promised a guaranteed salary or commission, was that severance pay? Does that mean it must be paid . . . even if you fire an employee for embezzlement? Or, if the employee quits the first week of January, are you still obligated to pay the previous year’s bonus? Must the employer pay for all accrued but unused sick or vacation pay?
Each of these questions can be easily answered in the employer’s favor if (and only if!) a written employment agreement is utilized.
3. Duties and Obligations
The occasional employee will complain or even downright refuse to take on an assignment because it is “not in my job description.” Thus, it is important to specify duties. When listing them, employers should think broadly. Even more importantly, however, employers should add language such as “and any other duties as required” to the typical task list.
It is also imperative that an employer specify certain obligations with respect to employees. Below are a few of the obligations that should be spelled out in advance to protect the employer’s interests:
- Whether the employee can moonlight for another company or competitor.
- Whether the employee must devote his full-time efforts to the company.
- Whether the employee owns all work, work product, and inventions created by the employee.
4. Termination Provisions
Employment in Texas is “at will,” unless otherwise specified. This means that a Texas employer can terminate an employee for any reason . . . or no reason at all. The only caveat is that the termination cannot be motivated by the employee’s status as part of a protected class—including age, race, gender, national origin, or handicap.
This can be illustrated by looking at a hypothetical based on the sitcom The Office. Under Texas law, Michael Scott could not legally fire Phyllis because she is female, or Creed because he is old, or Pam because she was pregnant, or Stanley because of his race.
Even though Texas is an employment-at-will state, employers will benefit by including termination provisions to ensure all parties understand what happens when the employment relationship ends.
For example, if the employment is for a one-year term (which could be construed as a one-year commitment by the employer), the agreement should explicitly state that the employee is an at-will employee and should spell out ways in which the employer can end the employment without the requirement to pay the remaining compensation for the year.
Notice provisions also prove helpful. Should the employee have to provide you with two weeks’ notice in order to terminate? If so, specify.
The importance of a well-drafted employment agreement cannot be understated. For small businesses, the costs for such an agreement are often surprisingly reasonable, especially when you consider the negative consequences of having a poorly written employment agreement or no agreement at all. Just remember: A little prevention can go a long way in curing many employment-related problems!
Please note that this article is for information purposes only and does not constitute legal advice.