Three Agreements That Can Make Or Break Business Value: Part 2 Employment Agreements
In the first article of this series, I discussed the first of three key agreements that can increase or harm business value: the lease.
In this article we’ll discuss the second: employment agreements and practices.
Having an in-place capable, happy and high performing team represents a significant portion of business goodwill. In some startup company sales – such as when Google pays millions of dollars for a startup technology company with little or no revenue – the team represents all of the value of the company (commonly referred to as an “acqui-hire”).
However, even outside of the technology space, employees will (or should) be making the sales, providing the services or making the product, paying the bills, collecting the money and keeping your customers happy. They are a critical party of the machine that is your business and generate your profits and cash flow.
The key elements of the employment relationship – agreement and policies – are all centered around making sure that what your company owns or has paid to develop, remains the property of the company after the employment relationship ends.
The primary purpose of the employment agreement is to protect the company’s value by preventing the employee from siphoning off your company’s assets or value to benefit his startup or new employer.
Your ‘key employee’ employment agreements should have the following provisions:
Florida law provides that what an employee creates during his work hours that is related to his employer’s business is the property of the employer. This also known as work-for-hire.
Often, the work-for-hire provisions of the law are not broad enough to take into account all of the things that an employee might create that apply to your business. Therefore, all employment agreements should contain a provision that assigns to the employer all work product created by an employee, whether on or off the job, that is even remotely related to the employer’s business.
That provision should also require the employee to fully disclose and assist the employer with securing intellectual property protection such as, for example, signing documents to be filed with governmental agencies.
Again, an employee is bound to keep his employer’s secrets confidential by Florida law. However, rather than rely on the bounds of judge decided policy in the event of a dispute, each employment agreement should
- Define confidential information in a way that is meaningful to the employer’s business;
- Prohibit use as well as disclosure;
- Require return of tangible property that describes confidential information;
- Require the employee to adhere to the employer’s requirements for storing confidential information (e.g., employer permitted online platforms, encryption requirements, and password policies); and
- Require the employee to notify the employer if the employee is compelled to make a disclosure.
This type of clause should, in addition to delivery of tangible property at the request of the employer, require the employee to ‘deliver’ access to accounts used by the employee in his conduct of the employer’s business. Many times employees will use their own devices, telephone numbers or e-mail or social media accounts, or change passwords on company provided accounts. This clause would give your company the right to all of these.
. Agreements with key employees should also contain one, two or three types of restrictive covenants, including:
- Non-piracy. A non-piracy clause prohibits your employee from
· Hiring the best of your team for himself or his new employer; and
· Causing vendors to change their relationship with your company.
- Non-Solicitation. A non-solicitation clause prohibits your employee from soliciting your customers and, with the addition of certain language, from accepting business from your customers (all in an area that competes with your business).
- Non-Compete. A non-compete clause prohibits your employee from competing with your business, whether for himself or through an employer, within a geographical area. This is the most controversial of the restrictive covenants with many believing it prohibits the employee from working ‘in his field.’
A common question I hear from business owners is: Aren’t non-compete agreements unenforceable because Florida is a right-to-work state?
First, right to work has nothing to do with non-compete agreements or any other type of restrictive covenant. It is a union / non-union issue. In fact, and other types of restrictive covenants they comply with Florida Statutes Section 542.335.
That statute requires:
- The restriction is necessary to protect a legitimate business interest of the employer;
- There is a reasonable geographic scope;
- There is a limited time period (typically two years or less for employment relationships); and
- The agreement is signed by the employee.
Restrictive covenants are often necessary to enforce the confidentiality provision. In order to enforce a confidentiality agreement, the employer must show disclosure or use or intent to disclose or use the confidential information. That can be difficult.
Consider an employee that goes to work for a competitor. Unless the competitor begins picking off customers at a few points below your pricing or suddenly produces
products using your trade secret based process, you might not be able to show a direct use of your company’s confidential information.
With a non-compete, the mere fact that the employee went to work for a competitor is all you need to seek enforcement.
. In addition to the employment agreement, company value will be enhanced by:
- A well drafted employee manual that actually reflects the practices of your business (i.e., don’t download a sample and use it without substantial modification).
- Annual reviews that ACCURATELY reflect each employee’s performance and checklists for preparing and conducting those reviews. It is a problem when an employee is terminated ‘for cause,’ but their file contains only glowing reviews.
- A termination process that includes written notice to an under-performing employee specifying the under-performance, the requirements (time and outcome) to correct the problem, and the result if the employee fails to correct it.
- Detailed job descriptions and qualifications requirements.
- A hiring system.