Choosing an Employment Agreement that’s best for your Business

In the employer-employee relationship, creating a thorough employment agreement is important not only for the employer, but also the employee.

This is part one of a two-part series in which I will review some provisions that should be considered for both businesses and employees when entering into an employment agreement. In this article, we will examine the employer’s point-of-view and items that should be included to protect their best interests.

Employee handbook: The handbook should cover the policies, terms and conditions that an employee is expected to adhere to while working at the business. Important topics like work hours, attendance policies, sick time, and vacations should be covered. The handbook is also a good place for employers to plainly state to employees that both parties have entered into an at-will arrangement, meaning that the employee can be terminated for any reason or no reason whatsoever, at any time.  Likewise, the employee can terminate the employment arrangement at any time for any reason, or no reason whatsoever.

Policy on equal opportunity & harassment: This is where the employer conveys that there will not be any discrimination based on race, color, religion, gender, sexual orientation or national origin. This is a sound business practice, and ensures compliance by the employer with the laws of the state of Washington. Presenting this policy helps protect employers against lawsuits while demonstrating to employees that the business is fair and will not tolerate discrimination.

Progressive discipline policy: An employment agreement should include a progressive discipline policy. That is, if there is misconduct or a complaint about an employee, proper procedures should be followed to ensure the employee is given an opportunity to correct the behavior.

In this regard, the employer is protected from harmful acts by the employee. Issuing a warning is an opportunity to correct the behavior or conduct, but if the behavior or conduct is not corrected, then the employee could be terminated. There should be a firm understanding on both sides what the conduct is, as well as what the practices are for warning an employee of misbehavior, misconduct, and problems with their employment.

Email/Internet/social media policy:  With the expansion of social media, policies with regards to email, Facebook, Twitter, and other social media postings should be addressed. No information gleaned about the employer or clients through the course of employment should be shared on social networking sites at any time. With regards to email, it should be clearly stated that the employee should not expect a guarantee of privacy using a workplace email account. In other words, employers can look at individual work email accounts at any time.

Full-time employees vs. contractors:

More often than not, employers want to retain people as contractors rather than employees. They do this to save on employment taxes, but solely relying on this arrangement can become problematic, especially if the work is closely overseen. As a business, it’s very important that you inform any independent contractors that they are free to work their own hours and at a location of their choosing.

Documentation of job performance: Employers need to keep documentation of each employee’s job performance for discussion during periodic performance reviews. Employers should clearly lay out the specifics of such reviews. For example, at what interval will they be performed; who should be present (certain members of management); will evaluations be given in writing or orally, etc. A detailed written job description is also needed not only for performance reviews, but also so that both parties have a clear understanding of what the duties and expectations of a position are.

Severance pay: Employers need to find ways to retain valued employees and their beneficial skills and expertise. A severance package can be a good incentive for an employee to stay with the company. However, it should be conveyed that if an employee leaves voluntarily, he or she will not be awarded a severance package.

Confidentiality agreement: Both sides should automatically agree that confidentiality is essential to their best interests. In my opinion, the employer and employee should always agree in writing to keep information between them confidential, and out of the hands of a third party.

In part 2, I’ll review items that pertain to employees and what they should be mindful of when reaching an employment agreement.

If you have questions about employment agreements, please feel free to contact my office. We can discuss the employment agreement that you are considering and how it could affect you and your business.

Disclaimer: Nothing in this posting should be construed as legal advice or the commencement of an attorney -relationship.  The opinions are solely those of the author acting in his capacity as an author, not an attorney.

Key Provisions of an Effective Operating Agreement

Every limited liability company should have an operating agreement reflecting the understanding of the parties on how the business should be run.  In part 1 of this series, we examined some real-world business relationships pertaining to operating agreements. In this post, I’ll discuss some important provisions that an effective operating agreement should have to protect the business parties.

Most operating agreements have standard sections, but that doesn't mean that changes can’t be made. An operating agreement should not be viewed as a one-size-fits-all document. Each business is unique and these provisions should be clearly laid out to handle issues as they arise.

Here are some sections and key points that deserve special consideration when a business draws up an operating agreement.

• Capital and capital contributions — Subsequent contributions should only be an obligation if unanimously agreed upon by all the members.
• Allocations and distributions — The company should have the right to distribute cash and property to the members pro rata, based on the relative membership interests.
• Management — The managing member should have the power pursuant to the operating agreement to perform the following on a day-to-day basis: open and manage bank accounts, borrow funds or establish lines of credit up to $5,000, purchase insurance on company assets, enter into agreements with vendors, suppliers, and contractors, and perform other operational tasks and duties.

More substantial actions should require the approval of a majority percentage of the members. These can include: borrowing more than $5,000 or making any capital expenditure in excess of $5,000, commencing lawsuits or other legal proceedings, making a filing under the Bankruptcy Code, purchasing, leasing, or disposing of property—including real property—in excess of $5,000. Lastly, any action to dissolve the company would fall under a majority percentage of member participation as well.

Adding new members to the company (or altering the percentage ownership in the company) should require the unanimous approval by all members.

Withdrawal and transfers of membership interests — This should cover such issues as how a member may withdraw from the company prior to the winding down and dissolution of the company, such as if a 60-day prior notice should be given. Also, restrictions on transfer should be clearly laid out, and sale of membership interest details should be given so that adequate time requirements are made known to all members.

A very important provision you always want to include is what would happen in the event of a member’s death, or if a member gets divorced. Washington is a community property state, which means that a spouse has a 50% interest in every single dollar made by a spouse. In every business, a spouse automatically shares a 50% economic interest with the other spouse. So a divorce could significantly impact the business if provisions aren’t made.

I always recommend a clause that says in the event of disillusion of marriage, we’ll recognize that the divorcing spouse has a 50% interest that’s economic only. The divorcing parties agree to put a dollar figure on that interest and the non-member spouse is given 50% monetary value, but not membership in the company, so he or she would not be able to make any decisions pertaining to the business. 

Since each business is unique, your business may require special language to protect all members. If you are considering drafting an operating agreement for your business, contact us to set up a consultation. 

Protecting Your Business with an Operating Agreement

When forming a business partnership, it’s important for the parties to protect themselves with an operating agreement so that issues can be resolved in an orderly fashion.

This is part 1 of a 2-part series examining operating agreements. In this post, I’ll begin by looking at two real-world examples that illustrate why it’s crucial to create and abide by an operating agreement. In part 2, I’ll discuss some key provisions needed in a standard operating agreement.

The first case involves two people who had a 50-50 arrangement in a business they co-owned as an S-Corporation. The business was succeeding and everything was fine between the two sharehholders. However, as the months passed, one partner was doing far more work than the other. I was representing the active business partner, who was handling the operational and business side of things, while the other partner just wanted to collect a check from the monthly profits.

Understandably, the partner doing all of the work wanted to buy out the other partner, since she was collecting a check for doing nothing. Because the two didn't have an agreement, the non-active partner had been hiring accountants and lawyers to do things that my client didn't agree with. A considerable amount of time was spent answering his legal questions about what his partner could or couldn’t do, and what the legal ramifications of dissolving the corporation would be going forward. Unfortunately, the way they formed their corporation, evenly dividing everything, required a unanimous decision by both partners on every matter. Once they became adversarial, the only solution legally was to dissolve the partnership.

Having had an operational agreement in place in the beginning could have gone a long way to avoiding the problems that had arisen. Specifically addressing such important matters in the decision-making process is something I advise for any partnership looking to do business.

The alternative to seeking legal counsel in this situation might have been to hire a life coach or business coach. A lot of times, people seek me out for legal counsel, but the problems they have aren’t (yet) of the legal nature. This is a great solution when people are not getting along and need to find a way to resolve interpersonal conflicts. In other words, they think they've got a legal problem, but that’s not necessarily true. These coaches can talk you through decision-making and how to be happy in your business. Irene Leonard and her business, Coaching for Change, is someone I highly regard offering this service.

In the second case I encountered, another client thought ahead about decision-making. He and his partner drew up an operating agreement where a coin flip would be the deciding factor for disputed management decisions.

They had been working together for 15 years, and they were positive that they'd work together for more.  I pointed out that, while there may not be disagreements at this exact moment, they could arise years from now. For example, what if one wanted to move the location, but the other person didn’t? Neither wanted to decide who would have to make these kinds of decisions, so they entered into an agreement where they would have to flip a coin and abide by the outcome. The partnership has been working just fine the last three years, and if any issues arise, they will pick up a coin and toss it.

No matter what way a business decides to resolve issues, they should be in writing to protect all parties. Each business partnership is different, so if you feel you should have a formal arrangement drawn up, contact us to set up a meeting.

Employment Contracts at the Executive Level

In the previous post, I discussed the importance of, and need for, employer/employee contracts and focused on agreements for entry-level or mid-level positions. Part 2 of this series examines executive-level employment agreements.

Executive employment agreements are for officers of the corporation who have management level authority. They typically contain more protection for the executive-level employee than an entry-level agreement would afford.

With the executive agreement, the company may recognize that it has a valuable prospective employee whose employment will benefit the company. Therefore, company leadership frequently allows agreement terms to be beneficial to that executive candidate. There are, however, a few key provisions that should be included in an executive contract.

Severance After Termination

Unlike the entry-level agreement, the executive contract would likely have language included for a severance package. For example, it might read that for every year the executive works for the company, he or she would get one month's salary as compensation, if the company terminated him or her. Rarely would you see a written severance package for entry-level or mid-level employees.

In an executive employment agreement, there are usually two termination provisions: termination for cause and termination other than for cause. Termination for cause is if the executive does something contrary to the best interest of the company, such as dishonesty, for example. If the executive is terminated for cause, he or she is not entitled to any severance pay. Termination other than for cause means that the executive is let go due to a downturn in business or he or she decides to leave for other reasons.

Generally, when an executive decides to leave voluntarily, there is no severance pay. The executive will only receive the severance pay if the company terminates employment, other than for cause.

Other Differences between Executive and Entry-Level Agreements

• Unlike entry-level agreements, executive-level ones might include bonus provisions if the executive meets certain goals or targets.
• Another key difference relates to disability. If the executive employee becomes disabled, that is not considered a voluntary leave — it's a "constructive discharge," so there should be a severance package.
  
  To satisfy the disability clauses, employers often offer a disability insurance package. That is, if the employee becomes disabled, the insurance company will compensate the executive for not being able to work. This is in lieu of severance pay and as long as the benefit of the insurance policy equals or exceeds the severance compensation that would be due, it is a fair way for the two parties to resolve the situation.

An executive-level agreement is a commitment for both the prospective employee and the business. If you are an employer or employee and you have questions about an executive-level employment agreement, contact us to set up a consultation.

Key Provisions of an Employment Contract

The employer/employee contract is a simple document that should be used to protect both parties when they agree upon an employment position.

This is part 1 of a 2-series post. This article will examine entry-level or mid-level employment agreements. In part 2, I will walk you through the executive employment agreement.

An entry-level contract should have a configuration that can be used for most employer/employee agreements, meaning that the layout and sections should resemble each other from contract to contract. An example follows below. This is favorable for the business since it doesn’t have to expend time and resources to draft a unique document each time a new employee is hired.

In this article, I will briefly discuss some of the provisions that a standard employment contract should include.  Two, however, are critical; the non‑compete and non-solicitation clauses.

Non-compete Clause

In entry-level or mid-level employment, a non-compete clause is included primarily to protect the employer’s interests. In practice, it is preventing an employee from leaving the company to work for another business — or start a business — in the same industry. For example, if an employee spends years learning a very specialized set of skills, he is prevented from quitting his job and starting a business that offers the same services as his now former-employer.

Non-compete agreements have to be reasonable in terms of duration to be effective. In Washington, three to five years is considered reasonable.

Non-solicitation Clause

A non-solicitation clause restricts an employee who has left a company from contacting the clients or customers of her now former-employer. Clearly, if an employee spends a number of years at an employer’s company, relationships can build and the possibility for an employee to solicit business from those relationships is very real. By including the non-solicitation provision, the company is protecting itself from a potential loss of business and revenue.

To Sign or Not to Sign?

Employers include these provisions to keep their business intact and guard against clients or customers from leaving and potentially taking new skills and clients with them. But what should a prospective employee do? A consideration of future plans should be the first order of business. If your career goal is to start your own business in the line of work that you’re being offered, you’ll want to seriously consider signing a non-compete, unless you’re going to move out of state.

In my law practice, I hear from people who want to start their own venture after years of employment at a business. They’re excited to strike out on their own, but they are surprised to discover that they signed a non-compete or a non-solicitation clause. Maybe they had forgotten about that part of the contract, or they overlooked it at the time, but that agreement may still be binding.

When you sign that important document, it is crucial to read it carefully and understand what implications might affect your future plans.

Other Aspects of the Contract

In addition to the non-compete and non-solicitation clauses, there are other aspects covered by a general employer/employee contract:

1. Employment Duties — a listing of job expectations.
2. Term — the date which employment starts and how long it is expected to last. This is typically either a fixed-term or automatically renewing.
3. Compensation — payment and vacation time allotted.
4. Benefits — health insurance, disability, life insurance, etc.
5. Confidentiality and Competitive Activities — prohibitions (described above), which might include names of direct competitors that an employee may not work for.
6. Company’s Property — terms of how the employee should act on company property.
7. Termination — the reasons for and the methods by which an employee can be terminated from employment.
8. Miscellaneous — extra provisions, which can include Titles and Subtitles, No Implied Waivers, Personal Services, Severability, Applicable Law, Notices and others.

Although these employer/employee agreements are intended to be simple and routine, you may still have questions that are specific to you. If you are an employer or employee and you have concerns regarding an employment contract, contact us to set up a consultation.

The Fair Labor Standards Act and Your Internship Program

Internships can be a valuable experience for both the intern and the company offering the internship. Under the right circumstances, internships can serve as extended interviews, in which you, as the employer, can learn more about the intern’s personality and capabilities in the workplace, while the intern gains potentially valuable on-the-job experience.

Because of the experience students can gain, many are open to taking unpaid internships. However, as an employer, you need to be aware of guidelines governing whether internships need to be paid or may be unpaid.

Generally, internships at for-profit businesses should be paid unless the intern is receiving training for his or her educational benefit. The U.S. Department of Labor provides the following six guidelines to consider when deciding if an internship is to be paid or unpaid:

1.       The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

2.       The internship experience is for the benefit of the intern;

3.       The intern does not displace regular employees, but works under close supervision of existing staff;

4.       The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;

5.       The intern is not necessarily entitled to a job at the conclusion of the internship; and

6.       The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Determining whether an internship needs to be paid can be complicated and involves many different variables. The Department of Labor also provides additional situations to consider.

Likely to Qualify as Educational

An internship is likely to be considered an educational experience (and therefore will not need to be paid) if the internship is structured around a classroom experience. This is often the situation when a college or university provides oversight and educational credit for the internship. Additionally, if an internship provides the intern with widely applicable experience, rather than simply providing training for a specific job at the company, it is more likely to be viewed as an educational experience.

During my last quarter at the University of Washington School of Law, I was an intern and worked in the chambers of United States District Court Judge Dimmick.  I received full school credit for basically serving as an assistant law clerk.  I did research for pending cases and wrote draft opinions for Judge Dimmick’s signature.  It was a fantastic learning experience for me, and took a bit of the work load off of Judge Dimmick’s two paid clerks.

May Not Qualify as Educational

Alternatively, If the intern is responsible for duties that paid employees would otherwise handle, then the intern may need to be paid for his or her services. Note that if interns are completing productive work for your business, the educational experience may not exempt the intern from minimum wage requirements. Finally, if an internship is used as a trial period before considering hiring the intern for full-time employment, it is likely that the intern should be paid.

The guidelines for internship programs under The Fair Labor Standards Act can be complicated. If you are unsure how the law applies to your business, please contact us to schedule a consultation.

Using Letters of Intent to Initiate Effective Business Negotiations

When exploring possibilities for a company merger, an acquisition of assets, or just a simple business arrangement, the standard and most effective approach to this challenge is through a letter of intent with a confidentiality provision. The advantage of this strategy is that you can “test the waters” of entering a potential business relationship without losing control of any information you deem proprietary.

Within any letter of intent, exclusivity and confidentiality are key elements; business interests are mutual, and neither party should divulge or share any of the private information contained in the letter with third parties. It’s important to note that while all letters of intent always include a non-disclosure or confidentiality provision, a non-disclosure agreement can also stand alone or serve as an addendum to other contractual documents.  

When developing a letter of intent, your desired goals need to be spelled out and tailored specifically to the proposed business relationship you’re seeking. You also need to state any contingencies that make the business relationship conditional. These provisions usually relate to financing or logistics requirements, which if not satisfied, will void the proposed agreement. Equally important, you need to secure some protection for both parties regarding sensitive or confidential information. A non-disclosure provision allows you to work together without fear that you’re going to be subverted or undermined by someone else’s actions — perhaps a price-bidding maneuver, high or low, depending on your positioning.

Recently, I helped two companies in merging their businesses into one larger operation, all of which began with a letter of intent to explore the possibilities. Part of that process required the sharing of financial records, private information that no company wants escaping into the public domain. Consequently, we created a non-disclosure provision citing mutual confidentiality in exchanging certain information. We needed to confirm that if the business relationship were not successful, then all the exchanged documents on paper would have to be returned or destroyed, including originals and photocopies, and that an agreed-upon mechanism for purging sensitive e-mails and attachments would have to be established.

I generally advise setting a long-term non-disclosure period, regardless of the planned success or unexpected failure of the business relationship, and that any exchanged information shared outside of the signing parties within their respective organizations should be on a strictly need-to-know basis. In proposed agreements where subcontractors may be involved, they too must be bound by the same terms of confidentiality contained in the original letter of intent and sign a non-disclosure agreement.

As noted earlier, exclusivity is important, much like having a serious, committed relationship with someone — engaged but not yet married. In fact, any letter of intent should always point out that during the course of specific business negotiations, both parties are mutually exclusive and must not deal with anyone else with the same agenda. In other words, both parties need to be able to proceed in good faith with some assurance that they are going to be working together exclusively during the term of the letter of intent. As in the case of a personal engagement that doesn’t work out, if the business relationship doesn’t come to fruition, then either party is free to pursue further transactions with other parties.

In summary, it is important to remember that the primary objective within any letter of intent is to assure exclusivity and confidentiality regarding the business relationship you’re proposing and to ensure an effective negotiation, with all parties protected.