As an employer, you’ll want to consider having formal agreements with your employees to memorialize the terms of employment, minimize competition by former employees and protect your confidential information.
A small business or employment lawyer can advise you on the types of contracts you need and prepare agreements that are legally sound and meet your business’s particular needs.
Here are some of the most common types of employment agreements:
An Employment Agreement
In almost every state, employees are presumed to be “at will,” meaning they can quit or be fired at any time, for any reason (other than for reasons that violate state or federal law). An employment agreement can confirm this “at-will” status, it can specify that an employee can only be fired for certain reasons, or it can provide that the employee will be employed for a specified amount of time and can only be fired with good cause.
An employment agreement can guarantee that a key employee won’t leave in the middle of an important project, but it can also prevent you from firing or laying off that employee unless there has been some kind of misconduct.
An employment agreement may also contain other terms, such as the amount of the employee’s compensation, the employee’s entitlement to bonuses and stock options, and a requirement that employee disputes be resolved through arbitration.
A Nondisclosure Agreement
If your employees or independent contractors will have access to sensitive company information, you should consider having them sign a nondisclosure agreement, or NDA. Sensitive information might include sales data, customer or client lists, marketing plans, information about products or projects that are in development, or confidential information about your company’s customers or clients.
An NDA explains what type of information is considered confidential and prohibits your employees or contractors from disclosing confidential information while they are employed at your company and after they leave the company. They may be required to return any confidential documents to the company upon their departure.
If your business receives confidential information from publicly-traded companies, you may want to consider including provisions designed to put employees on notice of potential insider trading liability and prevent them from buying and selling those companies’ stock or encouraging others to do so based upon confidential information.
An NDA can help prevent a former employee or contractor who goes to work for a competitor from divulging information that would benefit the competitor and harm your business.
An Intellectual Property Assignment Agreement
Intellectual property such as software and product designs can be a small business’s biggest asset. But without an intellectual property assignment agreement, your business may not own its intellectual property at all. For example, if one of your founders created copyrighted software before your company was formed, he or she owns the copyright unless it has been assigned to the business. When contractors create copyrighted works for you, they own those copyrights unless they have been assigned to you in writing.
Not owning your intellectual property can cause trouble if you have a dispute with the true owner, or if you want to sell your business or solicit investors who need proof that you own your intellectual property. An intellectual property assignment agreement can be a stand-alone document or can be incorporated in another employment-related contract.
A Non-Compete Agreement
Small business owners are frequently concerned that an employee will leave the company and use what they have learned to work for a competitor or set up a competing business. A non-compete agreement can prevent a former employee from working for a competitor, establishing a competing business or luring your other employees away to work for a competitor.
However, to be enforceable in court, a non-compete agreement must be limited in its scope – specifying a relatively short time period and geographic area, for example. States vary in their approaches to non-compete agreements, and a few states won’t enforce them at all. Consult a business lawyer for guidance on preparing a non-compete agreement.
An Independent Contractor Agreement
If your business hires independent contractors, you can minimize misunderstandings by having a standard independent contractor agreement.
This agreement confirms that the person performing work for you is an independent contractor and not an employee and is therefore not entitled to income tax withholding or company benefits such as vacation and sick pay, health insurance and participation in a retirement plan. An independent contractor agreement should also specify the amount the person is being paid and the work they are expected to perform.