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.

The Key Sections of an Effective Master Services Agreement

In our previous discussion, we looked at the major benefits of master services agreements (MSAs), particularly how they can streamline future business opportunities for your organization. As a quick review: A MSA serves as a general blueprint for how mutual business interests will be addressed and conducted on one project or on multiple or ensuing contracts.

Although a MSA can be a less formal contractual approach for project work, its development still requires careful thought and attention to detail in crafting an effective document. The initial step begins with the scope of work — a statement explaining what the parties are seeking in the agreement and a description of the services to be performed. The scope spells out the “bigger picture” of the business relationship, noting that future scopes of work will be issued pursuant to the master agreement.

A key element of a MSA is the provision for timely payment of services, with a 30-day time frame considered the general standard for most industries. Payment should also be conditional upon approval of the work performed satisfactorily. However, be cautious. Prevent line-item invoicing disputes from placing your entire payment at risk, or at the very least, from delaying payment beyond 30 days. I always include language noting that if any part of the invoice is disputed, the undisputed costs shall still be paid according to the agreement terms as a show of good faith among the parties in resolving their dispute.

A termination clause is another necessary provision of a MSA. I generally advise setting contract terms for specific time frames, say for one year, which automatically renew unless officially terminated. As accepted practice, either party should be able to terminate with reasonable notice at any time. Although such notice usually depends on the nature of the business itself, 60 days is considered preferable, especially if you have numerous subcontractors involved with a project. However, some organizations do lean toward shorter notification periods.

Confidentiality is an important part of any contractual relationship or when following a termination, unexpected or planned. A provision regarding confidentiality and nondisclosure of proprietary information should always be standard. The language should be explicit — and mutual, not unilateral confidentiality — whenever possible. It is preferable that both parties, not one, should agree not to disclose any valued information to third parties.

If the creation of intellectual property is part of the MSA scope of work, the rights to that creation must be defined among the parties. In Washington, the inventor of any property as a service provider automatically retains all intellectual property rights, if not stated otherwise in the agreement. However, most contracting parties prefer the insertion of a “work-for-hire” provision in the MSA, which states that any inventions, patents, copyrights, or trademarks created during the course of the contract are considered intellectual property, whose rights will be retained by the contracting party, not the service provider.

Indemnification provisions are another standard feature of MSAs. The indemnification process basically means that one party will step in and defend the other if a mistake, error or omission occurs. Like confidentiality agreements, indemnification provisions can be mutual or unilateral, although usually they are unilateral because one party — often the contracting party — will have greater bargaining power to position unilateral indemnification in its favor. Regardless, should you find yourself in the situation where contractually you have a unilateral indemnification provision that’s not in your favor, make sure that you have proper liability and risk insurance as a safeguard.

It is also typical for a MSA to have a non-assignment provision, meaning that the scope of work contractually tendered cannot be assigned to someone else without the approval of the other party. Obviously, you don’t want to enter into an agreement only to find that your contractual interest is later assigned to another party with whom you’ve not encountered or dealt with before.

Other sections common to MSAs include no waiver, notification, entire agreement, and severability provisions. A no-waiver clause basically points out that just because one or more aspects of the contract have been ignored, intentionally or otherwise, the entire agreement cannot be invalidated. A notification provision simply identifies the communication format for notifying contractual parties.

An entire agreement provision, also known as an “integration clause,” prevents later oral contradictions from either party to the basic terms of the entire contract, usually aimed at altering or adding language that was not in the original MSA. Severability, which is similar to the no-waiver clause, states that if any provision is found to be contrary to law or unenforceable, it doesn’t invalidate the entire contract.

Finally, I’m an advocate for spirit of cooperation provisions. Although a contract is a formal agreement, it shouldn’t be viewed as adversarial or negative in a litigious sense. It should relate how the parties are going to move forward in a partnering effort to develop a positive business relationship. To that end, I always build in mediation and arbitration clauses as vehicles for negotiating resolutions in good faith when problems arise.

Master Services Agreements Can Help Cultivate Long-Term Business Interests

If your organization is seeking to expand business opportunities and foster long-term relationships, one of the most beneficial tools to use is a master services agreement (MSA). This document not only serves as a blueprint for how mutual business interests or projects between two parties are to be addressed and conducted, but it also helps organize business relationships in a contractual but not burdensome manner, making it a very user friendly tool.

MSAs are popular for establishing relationships among a wide array of businesses, including information technology, communications, and life sciences. Traditionally, they have been used frequently for union negotiations, government contracts, and supply chains aimed at long-term relationships.

One of the primary benefits of crafting a MSA at the beginning of any business relationship is for expediting future opportunities. There is a true advantage to this approach, especially if the signing parties to the agreement are working together on more than one project at a time or plan to engage in multiple projects in the future. In many instances, the original MSA requires little or no revision of its basic contract provisions — saving time and overhead dollars. Subsequent agreements generally only call for a new scope of work, perhaps a revised purchase order, or some other change order that complements the original MSA.   

This happened to be the recent case with one of my life sciences clients, a Clinical Research Organization providing support for drug trial testing for the Food and Drug Administration. My client was hired to monitor the drug administering protocol and patient results for one particular drug at various health clinics. The MSA spelled out the business relationship for that particular project. When another drug is to be tested through clinical trials — next week, next month, or next year — a new scope of work will be issued for this second project, which will just basically outline what the new drug is and its planned use or purpose. However, the terms of the original MSA will still apply to this new project.

I’ve also observed long-term applications of MSAs in installation contracting: cell phone towers, cable systems, and communications infrastructure. Some of these agreements have been in effect for more than 10 years, and the process is simple. The parent company just forwards a revised purchase order or directive to the contracting interest, stating, “Pursuant to our master services agreement, please install . . . .” Revisions to the location, cost, and completion time are specified on the MSA as usual, but the minor terms of the contract remain intact from earlier versions.

As you can see, building a foundation for business longevity is a key benefit of MSAs. If you let your client know going forward that you can add to the MSA by tacking on an addendum or a scope of work change order, then you won’t have to negotiate the basic terms all over again.

In our next discussion, I’ll address some of the key sections of a MSA and where to begin in developing a document that has flexibility for long-term use.

A Solo Legal Practice May Afford More Flexibility, Balance of Work and Lifestyle

If you’re an avid fan of the television drama “The Good Wife,” you may sometimes wonder what it’s like to work for a large legal firm. Yes, the hours do seem long and grueling, yet there’s that attraction of a high salary plus the glamor of high-profile litigation and courtroom challenges. I will admit that television does a fair job of portraying the ambiance of large legal practices, but as they say, the devil is in the details.

Here in Seattle, a partner in a larger firm must generate about $200,000 of billable hours just to cover overhead costs — associates, paralegals, secretaries and office leasing — before he or she starts yielding any individual profit. That’s a lot of financial posturing for the luxury of serving a larger practice with staff and office overhead. Still, bigger firms do provide valuable training for attorneys just beginning their careers. They learn the practice of law in their chosen niche or specialization, and they gain valuable experience in developing a clientele base.

My legal career, too, essentially began in a large firm, but I felt somewhat trapped in a field of practice that was heavily litigious and full of conflict. I didn’t like the combative nature of the litigation process, and I really felt I would be happier if I were working with people to avoidproblems in the first place, rather than solving them later down the road. So I approached my litigation clients, informing them of my decision to leave the firm and go “solo.” Basically, I said, “I want to help you grow as a business and be successful in business. You’ve hired me before to defend you in litigation. Why not consider me as your business attorney?” With this convincing premise, I hit the ground running with no interruption in business activities or income and have never looked back!

Having the freedom and independence as a solo practicing attorney is truly incredible. In one sense, you are tied to your practice because you must be available 24/7 for clients, but your workday is your own. You can create the hours that you work and the hours that you don’t. Although my work day may often be interrupted with phone calls or emails from clients, I also have the flexibility to work 12 or 13 days straight and then take a week off. More importantly, I’m able to balance my personal lifestyle with the enjoyment of my practice by working from several different locations, including Seattle and Whistler, British Columbia. I have done that since the 2010 Olympics, when I served as a volunteer for the event and realized that I could practice effectively from both locales with some help of modern technology.

Over the last five years of operating my solo practice, I’ve encountered other attorneys, too, that have successfully established their own practices with better incomes, leaving behind the larger high-profile firms and their overhead pressures. Why not? A big office tower with high-figure floor rents and maintenance costs is no longer necessary to practice law. Technology has revolutionized the legal marketplace. All you need is a desktop or laptop computer, a printer, a scanner and some mobile communication equipment, and your office can be any size anywhere, even at home. And when scheduling clients, you now have the flexibility of visiting their offices. In fact, I actually think clients are more appreciative of the fact that an attorney is willing to come to them on their turf. Instead of being preoccupied with billable hours at high rates, clients can now develop more cost-effective business relationships withtheir attorneys, where they feel more like partners rather than line items on a profit statement.

Even today I’m still surprised when new clients tell me of their disappointment with previous attorneys who were not responsive in returning phone calls or emails, or who scheduled meetings and then failed to show. I don’t understand it, especially with all the modes of communication technology available. Moreover, this behavior delivers a poor impression of the legal profession to the public. What are these attorneys thinking? Success only prevails when clients are serviced in a respectful manner. If we can provide this service to our clients from our home offices, so much the better.