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Use extreme caution with employment
agreements
by Nancye
Combs
A small business owner asked for my
human resources consulting help concerning a termination issue. A
key member of his management team, an African-American female,
failed miserably to do the work she agreed to do and her failure put
the company’s International Standard of Operation (ISO)
certification in jeopardy. After repeated attempts to help her, they
asked for her resignation. When she refused, he terminated her under
his assumption that he could use his “at will” privilege. Now, he
has the threat of a lawsuit. His request of me, “Make it go away.”
Sorry,
this one won’t go away. What he probably needs is the best
employment practices lawyer he can get. 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. Remember that.
An employment contract negates an “at will” agreement. Secondly, the
employment contract for this employee specifically stated she could
only be terminated for cause. As I reviewed the document and the
business owner told me he had 20 more just like it back at the
office, I needed a defibrillator.
• They had quoted an annual salary to
this employee, which means they may be required to pay her for a
full year, even though she only worked a few months. That issue has
been litigated many times, and courts have 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 for three years and 500 miles, which may be
considered excessive by the court, if challenged.
This
young business owner explained that he had the employment agreement
created to protect his company. He added that he sought the
resignation to spare this employee embarrassment and to keep a
discharge off of her employment record. His motive was admirable but
you can be certain this entire matter is a litigater’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.
The
offer letter
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 very carefully. If an annual salary is quoted, be certain to
inform the employee that “salary is actually paid on a bi-weekly
(weekly, 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.
The Confidentiality Agreement
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. We use them in HR work regularly.
The
Non-Compete Agreement
The Non-Compete can also be a stand-alone document. They are
recognized by most states as binding agreements. However, if it
binds the employee too tightly, you can be certain the court will
strike it down. Even the sharpest 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/her
profession.
The enforceable documents I have seen
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. Keep in mind I have heard more than one attorney brag that he
can “break any non-compete you put in front of me.” This is a very
sensitive area.
Once
again, there are templates around that we use in HR to customize 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.
The
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
sex harassment, substance abuse, abuse of technology (Internet), and
workplace violence. Policies regarding confidentiality,
whistleblowing for financial wrongdoing, nepotism, solicitation of
and 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 relationship 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 anything in return, no
contractual agreement exists.” That argument may stick and the
Non-Compete may be thrown out.
If there is a well-written Offer Letter,
a Confidentiality Agreement, a Non-Compete document, and a Code of
Ethics, all signed and delivered prior to commencing work, why
complicate life by entering into a formal Employment Contract? It
negates your at-will freedoms and it sets you up for
post-termination legal problems you don’t need.
Unfortunately, the young CEO sitting in front of me was unaware that
his voluminous catch-all document, entitled “Employment Agreement,”
was unnecessary and a lawsuit waiting to happen.
This advisory was not designed to
replace the services of a competent legal advisor and is not
specific to the laws of any specific state. Nancye Combs is the
STAFDA-endorsed Human Resources consultant. STAFDA will pay for the
first 1/2 hour of consulting with Nancye. Please identify yourself
and your company as a STAFDA member when you call her. Nancye has
more than 35 years of practical experience in human resources. A
recognized authority, she speaks, writes, and offers expert witness
testimony on management issues. She is a university instructor for
human resources professionals seeking to become nationally certified
by the Human Resources Certification Institute.
She can be reached
at: Nancye M. Combs, AEP•SPHR,
HR Enterprise Inc., P.O. Box 6507, Louisville, KY 40206-0507, (502)
896-0503, FAX (502) 896-0033,
www.hrenterprise.com,
nancyecombs@aol.com.
This article appeared in the
October 2006 STAFDA issue of
Progressive Distributor. Copyright 2006. back
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