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Five Issues When An Employer Is Considering An Employment Agreement

By: Judy Yi

When operating its business, an employer should consider whether and when to implement employment agreements with certain employees.  When considering whether an employee should execute an employment agreement, employers should consider the following five factors: 

1.       Complex or specialized compensation, bonus, equity rights, fringe benefits, or duties: If the employee receives compensation, bonuses, equity rights, or unique fringe benefits that other employees do not receive, employers should strongly consider memorializing same in an employment agreement.

2.       Restrictive covenants: Some states’ laws require restrictive covenants (non-competition, non-solicitation and/or confidentiality) provisions to be a part of an otherwise enforceable agreement and do not permit stand-alone restrictive covenant agreements.  In such cases, to the extent the employer wants the employee to agree to restrictive covenants, the covenants should be included in an employment agreement. 

3.       Employment for a definite term (with severance): When recruiting employees who would be difficult to replace or who hold a significant position with the company, such as a C-suite employee, the employer may wish to negotiate employment for a specified period to time.  The employer should also consider memorializing with the employee whether and when severance payments will be due to the employee upon termination of employment.        

4.       Change in control: Typically, for C-suite or key employees where the employer needs to have certain provisions become operative in the case of a change in control (sale of assets, sale of stock, merger, etc.), placing such terms in an employment agreement is advisable. The employer may also consider including an assignment provision – as permitted under applicable state law – to assign the employment agreement to an entity that buys the employer’s business.     

5.       Memorialize specific post-termination provisions: The employer should memorialize any post-termination obligations in an employment contract, and should also consider whether to include a compulsory mediation or arbitration provision regarding any disputes surrounding any post-termination disputes that may arise. 

When properly implemented, employment agreements can be very beneficial to employers.  Employers considering asking employees to sign such agreements would do well to consult with competent counsel.