Beware Before Signing that Employment Contract!

An employment contract can benefit both employee and employer if the terms are clearly written as to compensation/benefits, performance reviews/raises, job duties, grounds for termination, bonuses, commissions, severance, noncompetition, stock options and term of employment.

In a perfect world, employees would know exactly what they are agreeing to before signing employment contracts. Most people, in the “honeymoon “phase who receive job offers, quickly read the offer letters or agreements and sign on the spot. Only after the employment relationship changes (demotion, layoff, termination), will an employee dust off the employment agreement and realize that certain promises or expectations (such as non-competes, severance pay or final payment of “pipeline” bonuses/commissions) were not clearly defined or were totally missing from the agreement.

Unfortunately, some companies are not willing to go through the expense of having a properly drafted contract for each new hire and most employees do not want to pay a lawyer to review the contract before signing.  This may be penny wise, but pound foolish. Some companies think having vague or general descriptions of job duties and benefits will allow them wiggle room for addressing those issues. However, unclear terms rarely help either party. It’s like providing vague directions to someone without specific street names or an address and then wondering why that person got lost. When employment contracts are properly drafted, they provide clear road maps for the employment relationship. Legal fees at the beginning of contract negotiations will be substantially less expensive than fees incurred litigating over disputed terms.

At-will or term contract?

An employee needs to determine if a contract is a true “term” contract for a specific time frame or if it is an “at will” contract.  Sometimes it may be both. An “at will” contract means either party can terminate the employment relationship with or without notice (even if a specific term is also in the agreement). “At will” or specific term contracts (or contracts that provide for both) usually have different triggers for receiving severance, stock options and contract renewals. Some companies only pay severance if an employee is terminated without cause.

Even if the contract is for a specific term, most companies reserve the right to unilaterally end an employment relationship “for cause.” For example, “for cause” may be triggered if the employee has not followed company policies/procedures, acted in some detrimental way against the company, failed to meet certain production goals, or was merely “charged “with a crime (even though no conviction yet occurred). Most employees will not be given a chance to correct the problem before termination unless there is a “notice and cure” provision.

Entitled to severance?

To avoid paying severance, most corporate attorneys would advise employers to trigger the “for cause”’ provision for terminating an employee.

Often a contract does not provide the employee with an option to terminate the employment relationship for “good reason “(required to move more than 30 miles from home, change of control, reduced pay or job responsibilities) and still receive severance pay.

Some contracts do not even provide for paying terminated   employees earned bonuses or commissions that are in the “pipe line “even if the employee is terminated without cause. Unless a specific state law or contract clause prohibits forfeiture of bonuses/commissions, the employee will lose those payments.

Valid non-compete?

Many employees agree to non-compete clauses for one or two years, even if they are laid off or terminated.  Yet, they receive no severance pay during that time frame. Ideally, an employee should be paid to sit on the “sidelines “during a noncompete, especially if a layoff is involved.
Some contracts have very broad noncompete agreements which are not reasonable as to time, geographic scope, scope of customer base or specific markets. It is a mistake to think that all overbroad agreements will automatically be unenforceable. Non-competes are reviewed under specific state laws. If a state allows for non-competes, a court may decide to re-write an otherwise enforceable noncompete rather than completely disregarding it.

Mandatory arbitration or forum selection?

Given the 2018 U.S. Supreme Court decision in Epic Systems Corp. v. Lewis, more employers will be adding mandatory arbitration and class action waiver provisions to employment agreements. Those companies may also add a “forum selection “provision stating an employee must litigate in a certain court, in a certain state and under a certain state law (which may have little relation to where the employee lives or works).

There are many other contract issues that may arise but are beyond the scope of this article. For this reason, companies and employees would be well advised to have employment agreements negotiated, reviewed and clarified before signing them.