It’s a good practice for a business to
have employment agreements with its
key employees. Executive employment agreements can be as simple as a
letter agreement. This article will discuss the customary provisions of a simple agreement.
“There is no business relationship
more important than the one between
employer and employee,” says Dan
Kolber, partner with the law firm
Gambrell & Stolz LLP in Atlanta.
“Unfortunately, the time has passed
where a handshake can seal the deal.
Even the most simple employment contract benefits both sides.”
Smart Business talked to Kobler about
what should be found in every employment agreement.
What is the most important provision of an
employment agreement?
The most important provision is the
term. Many employees think they have
the security of a long-term contract
when in fact they can be terminated on
30- or 60-days notice. Usually it is in the
employee’s interest to have a term of at
least a year. Most employers will release
an employee if he or she gets a better
offer.
Duties are also important. When there
is a change of control of the business or
personalities clash, assigning new
duties is one method used to squeeze
out an executive. Executives should try
to narrowly define the scope of their
duties. On the other hand, the employer
should want as broad a scope of
responsibilities as possible. The
employer will want the employee to
work full time, while the employee usually prefers to devote ‘substantially all’
of his or her time to the affairs of the
business.
How important is compensation?
There are three types of compensation:
the right to earn equity in the business;
the right to receive cash as salary, bonus
or deferred compensation; and the right
to receive fringe benefits. Common
fringe benefits include life and health
insurance, automobiles, country club
membership and first-class travel. The
right to receive bonuses can range from
being discretionary on the part of the
board of directors to a formula based on
the earnings or sales of the business.
What are some other important provisions
of an employment agreement?
Discharge for cause. Of all provisions, this one causes the most problems
if not properly drafted. The employer
wants it as broad as possible. For example, if the employee ‘fails to discharge
his or her duties’ or ‘as a result of conduct that amounts to fraud, dishonesty,
gross negligence or moral turpitude.’
The employee should insist on some standard or right to a hearing from an
impartial decision-maker in determining
discharge for cause.
Restrictive covenants. It is common
to require the employee to agree to certain restrictive covenants during the
term of his or her employment and for a
period after employment is terminated.
These restrictive covenants fall into
three broad areas: an agreement not to
solicit customers, an agreement not to
solicit employees, and an agreement not
to compete with the employer. The
Georgia courts enforce these covenants
only where they are strictly limited in
time, territorial effect and are otherwise
reasonable.
Protection of proprietary information. The employment agreement will
require the employee to keep confidential certain nonpublic information
belonging to the employer. This provision will state that the employer and not
the employee retains ownership of this
material. Proprietary information
includes methods of the business, actual
or potential customers and suppliers and
other intellectual property from which
the business derives economic value.
Remedies. An alternative dispute resolution provision should be included in
every employment agreement. It is better to go to mediation first whereby the
parties attempt to work things out
among themselves with the help of a
neutral mediator who has no power to
decide but simply facilitates negotiations. If that fails, arbitration before an
arbitrator who has the power to decide
the dispute is quicker and less expensive
than going to court.
DAN KOLBER is a partner with the Atlanta law firm of Gambrell
& Stolz LLP. Reach him at [email protected] or (404) 589-3413.