The first step in executing any good employment contract is to be the drafter. If you draft it, it’ll be favorable to you! There are some employment laws out there that stack the deck against employers, but writing the contracts for your company is the best way to ensure it serves your best interests.
Of course, your employees can always push back on the contract and redline it. “C Level” Employees often do, and that’s great because it gives you an even stronger argument that the deal between the two of you was unique. If they don’t do what they promised to do, you have a “winning case” in any future disputes.
It’s best to have a new employee sign their contract the day they start to work for your company, BUT that doesn’t always happen. Oftentimes, business owners don’t figure out that they NEED an employment contract until they notice a toxic employee is wreaking havoc on their company. By the time that happens, you’ll be forced to fire them and work two people’s jobs as you attempt to find a replacement.
The second best time to get an employee to sign an employment contract is when you give them a raise or bonus (usually around the holidays). Why? In order to be binding, contracts need a little thing called “consideration.” Consideration is simply what the other party gets in return for agreeing to something more than they’ve already agreed to.
For example, if you hire a mechanic to change your oil for $50 and they noticed that you need your transmission fluid replaced as well, you would have to give them more money (consideration) to do the extra work (replace the transmission fluid). Agreeing to a new employment contract (even if you didn’t have one in the past) usually takes consideration that’s different from the consideration you had before.
You could consider “continued employment” sufficient consideration for a new employment contract (in most states). However, that tiny amount of consideration would make it harder for an attorney to enforce your contract. Giving your employee a bonus bump as well would make it easier to implement.
The terms you draft in an employment contract should protect your company from potential issues like wage disputes and misclassification lawsuits. You should also include provisions that prevent valuable employees from taking your trade secrets and setting up a competing business.
All great employment contracts include provisions such as Non-Competes, Non-Disparagement, and Non-Solicitation clauses that protect your business from workers who may try to tank the company.
You also need to protect your company’s valuable intellectual property (IP). Using the work for hire (WFH) language in the United States Copyright Act, you can mandate that any intellectual property that an employee makes for your company is immediately “transferred” to your company by way of the contract.
If you don’t include such terms, your employees may have a solid argument that they own the IP, and you have to forever pay them a licensing fee in order to use it—if they continue to allow you to use it at all!
Examples of IP that are typically created by employees include:
Before you get into writing provisions to protect your IP, ask yourself, “Do I actually OWN my Trademarks, Patents, and Trade Secrets?” If you don’t actually “own” them, you can’t do a lot with them—and you certainly can’t sell them when selling your company.
The Department of Labor (DOL) and the Internal Revenue Service (IRS) require that employees are paid on a W2 basis (with all overtime paid and withholdings made) unless you can prove that they are an “Independent Contractor.” There is a presumption is that all your workers are not contractors, so you must overcome that presumption by stating it in your employment contracts.
A typical misclassification claim will cost over $70,000 per employee. And, to make matters worse, the business owner is PERSONALLY LIABLE for this. A misclassification lawsuit will affect your credit, meaning you can lose your house, your savings, your car—all of it. Further, not only do you have to pay the employee’s costs, but you also have to pay their entire legal bill, which often costs over $50,000!
Because employment laws are always written in the workers’ favor, you should take caution when drafting new contracts. A lawyer can conduct an analysis of your documents to make sure you’re not liable for a misclassification claim.
Detailing compensation in an employment contract is not always as straightforward as you may think. Not only do you have to specify how much money they get, but you must state what they DO NOT get.
Do your workers get Paid Time Off? And if they do, is it granted at the start of the year for the entire year, or is it instead “accrued” depending on the hours and times that they work for your company? Is their compensation tied to performance metrics, such as sales they bring to your company, efficiency, production work, or marketing efforts?
If you do not specify the compensation rules, the courts will assume the worst for you and the best for the employee. So, make the rules yourself and have your contracts professionally drafted!
Job descriptions are another thing you may underestimate the importance of. We recommend using very broad terms when detailing your workers’ responsibilities. Phrases like “any other administrative tasks requested during normal business hours by the staff” can protect you from employees who claim you are asking for things outside of their job description. It is also important to draft handbooks that can protect you from false claims of discrimination or harassment.
It can be great to offer your rock star team members incentives like Profit Shares, Equity, or Stock Options. However, due to the complexity of these terms, you should update your organizational documents (Operating Agreement, Corporate Binder, Bylaws, Shareholder Agreement, etc.) in tandem with these considerations.
It can be difficult to keep track of all the important provisions that need to be in your employment contracts, which is why you should hire a lawyer to worry about it for you. Our attorneys at Sparks Law can assess your business goals and help you execute a contract that makes sense for you. Reach out to our firm today to schedule a consultation ad get started.