As the economy continues to rise and fall, quality employees become harder to find. Employment and noncompete agreements are increasingly prudent for senior executives or key employees. And as intellectual property becomes the most important asset for more companies, these agreements can provide critical protections for employers.
Smart Business spoke with Suzanne L. DeWalt, a Shareholder at the law firm of Sherrard, German & Kelly, P.C. and Chair of its Employment Services Group, about drafting employment and noncompete agreements that withstand legal scrutiny.
What are the key elements of an employment agreement?
Fundamentally, employment agreements are intended to define the employee’s title and job duties; the compensation in terms of salary, benefits, stock options, etc.; and under what circumstances the parties can separate and what happens when they do. Separation terms often include restrictions on the kind of employment the employee can accept after leaving the employer and whether the employer will pay severance to an employee terminated without cause.
A company should have a protective agreement between itself and key employees. This is especially important if there is confidential or proprietary information or relationships to protect.
How can companies ensure these agreements can withstand legal scrutiny?
Any agreement can be challenged, but some areas are particularly scrutinized and deserve even more attention when they are crafted.
Post-employment restrictions, written by a company to prevent former employees from revealing trade secrets or competing against it unfairly, are typically the most litigated if the restrictions are considered too limiting.
Payment provisions are another area of potential conflict. An employer will run into problems if bonuses, commission plans or severance agreements are unclear.
A good commission plan addresses when a commission is earned, when it must be paid and what happens if the employee leaves the employer before that happens. For example, Pennsylvania law has strict penalties if an employer fails to pay an employee in full and on time, so being clear on this issue is key.
How do employment agreements differ from noncompete agreements?
A noncompete agreement is a subset of an employment agreement. The noncompete can be included in a broader employment agreement, but need not be. Having it stand alone maintains the obligation to honor confidentially separate from compensation. This also means a compensation change will not likely affect a noncompete provision’s enforceability.
There are four separate post-employment obligations that should be considered for inclusion in any noncompete agreement:
- A duty of confidentiality drafted to preserve trade or company secrets.
- Nonsolicitation restrictions preventing former employees from calling on any of the employer’s current customers.
- Antipiracy/antiraiding terms barring former employees from encouraging other employees to leave the company.
- Restrictions preventing former employees from working for competing businesses.
Where must careful wording be used when drafting noncompete agreements?
Any wording that indicates that the noncompete agreement’s purpose is mainly to stifle competition will not likely hold up in court. Their only intent can be the protection of legitimate business interests.
Pennsylvania law does not support enforcing anything longer than a two-year restriction, except when a business is being sold. But even in that situation, the two-year length of time has its skeptics.
Courts will look to determine if the noncompete has a reasonable geographic scope. For example, a nationwide restriction is too broad for a company that only sells goods or services in Pittsburgh.
The agreement also will be judged by whether the activity that is restricted is reasonable. A specific list of direct competitors will likely hold up in court.
A good employment agreement clarifies expectations and protects business interests. A poorly drafted agreement, by contrast, can subject employers to lawsuits and resulting legal fees.
Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.
