Contracts Part VI: Employment Contracts- 10 Insights

small businesss employeement contracts

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6.   Termination Provisions

In many employment agreements, the common law, termination-at-will concept is often jettisoned in favor of termination for cause provisions, whereby an employer is restricted to being able to terminate an employee for only a finite number of reasons, such as fraud, criminal activity, breach of loyalty, conduct that adversely reflects upon the employer, failure to meet production targets, etc.

As a counterpoint to termination for cause provisions, employment agreements also can include Good Reasons provisions that restrict the circumstances under which an employee can resign.

For example, the failure of the employer to meet agreed upon levels of compensation or benefits, or salary reductions below certain levels, or material changes are made to the employee’s job description or scope of authority may serve as a good reason for an employee to resign. Because Good Cause and Good Reasons provisions purport to restrict significant common law rights to terminate employees and for employees to resign at will, they should be carefully considered.

7.   Non-Competition and Non-Solicitation Provisions 

Where an employee is likely to be exposed to proprietary and confidential information or knowhow, non-competition and non-solicitation provisions serve to restrict the employee, following the termination of her employment, from engaging in conduct that could adversely affect the employer’s ability to compete in the market place, i.e. the employee becomes re-employed by a competitor who now has access to important knowledge concerning the former employer’s operations, or starts her own venture and then begins contacting customers, or critical suppliers, or other employees of the former employer to solicit their participation in the new venture.

Because such provisions can highly restrict a former employee’s ability to earn a living, courts have construed non-competition and non-solicitation clauses quite narrowly.

The scope of such provisions can become the centerpiece of hotly contested litigation. Yet, even provisions that may not be able to be enforced in whole or in part, oftentimes, have an in terrorem effect on employees who may not have the resources to challenge such provisions or defend against their enforcement.

While non-competition provisions are extremely common, they also may be overused, especially in connection with the separation of first tier employees who may not have had any executive or managerial responsibilities and would not have been expose to confidential and proprietary information, such as the employer’s trade secrets.

Non-solicitation provisions have not been construed as severely as non-competition provisions, but are still construed narrowly, and should be crafted with the employment level of the employee in mind so that they are only as broad as necessary to protect the employer’s interests. 

8.   Confidentiality Provisions

These provisions ordinarily not only restrict employees from divulging confidential information during their term of employment, but sometimes for a term of years afterwards.

These provisions, again, are very common and, similarly, can have an in terrorem effect on employees, but often beg the question what information should be considered proprietary and confidential.

This is a whole topic on its own, but it is sufficient to state that employers should consider carefully how they choose to define “confidential information” and what procedures are in place to protect such information from unauthorized disclosure because information that is not treated appropriately as proprietary or confidential may not be considered as such by the courts. 

9.   Work Made for Hire Provisions

In industries where employees are developing products, or are involved in services, where they are engaged in creating new processes, the copyright doctrine of Work Made for

Hire provides that copyrights in innovations, like software or sound recordings, are owned by the employer. The general rule is that the author, who creates the copyrightable work, owns the copyright.

The Work Made for Hire doctrine purports to define the employer as the “author” of the work so that it is able to benefit from the risks it has undertaken to promote innovation.  For a more comprehensive explanation of this doctrine, please refer to the circular published by the U.S. Copyright Office--https://www.copyright.gov/circs/circ09.pdf.

10.   Non-Disparagement Provisions

While it is hoped that the separation of an employee from her company will not engender bitterness, this is often not the case. For this reason, non-disparagement provisions are commonly found in employment contracts and are designed to prohibit a former employee from disparaging the reputation of her former employer.

What is important to consider is that the concept of disparagement is distinct from related doctrines of slander and libel, the latter of which involve actual misrepresentations of fact.  A disparaging remark does not have to be untrue; it may, in fact, be completely true, but, nevertheless, disparaging of the employer.

While there is not a surfeit of case law on the subject, at least one Federal Court has upheld the integrity of one such provision, even as against a First Amendment challenge.

Related articles:

Hiring? 9 Employment Contract Considerations

Contracts Part V: 7 Unique Features of Distribution Contracts​​​​​​​

Part IV Supplier Contracts- What Small Business Owners Need to Know

Contracts Part III: The Role of Legalese in Contract Drafting

Contracts Part II: Laying the Groundwork

Small Business Contracts Part I: A Different Perspective

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