Effective business planning Featured

8:00pm EDT March 26, 2007
It’s a good practice for a business to have employment agreements with its key employees. Executive employment agreements can be as simple as a letter agreement. This article will discuss the customary provisions of a simple agreement.

“There is no business relationship more important than the one between employer and employee,” says Dan Kolber, partner with the law firm Gambrell & Stolz LLP in Atlanta. “Unfortunately, the time has passed where a handshake can seal the deal. Even the most simple employment contract benefits both sides.”

Smart Business talked to Kobler about what should be found in every employment agreement.

What is the most important provision of an employment agreement?

The most important provision is the term. Many employees think they have the security of a long-term contract when in fact they can be terminated on 30- or 60-days notice. Usually it is in the employee’s interest to have a term of at least a year. Most employers will release an employee if he or she gets a better offer.

Duties are also important. When there is a change of control of the business or personalities clash, assigning new duties is one method used to squeeze out an executive. Executives should try to narrowly define the scope of their duties. On the other hand, the employer should want as broad a scope of responsibilities as possible. The employer will want the employee to work full time, while the employee usually prefers to devote ‘substantially all’ of his or her time to the affairs of the business.

How important is compensation?

There are three types of compensation: the right to earn equity in the business; the right to receive cash as salary, bonus or deferred compensation; and the right to receive fringe benefits. Common fringe benefits include life and health insurance, automobiles, country club membership and first-class travel. The right to receive bonuses can range from being discretionary on the part of the board of directors to a formula based on the earnings or sales of the business.

What are some other important provisions of an employment agreement?

Discharge for cause. Of all provisions, this one causes the most problems if not properly drafted. The employer wants it as broad as possible. For example, if the employee ‘fails to discharge his or her duties’ or ‘as a result of conduct that amounts to fraud, dishonesty, gross negligence or moral turpitude.’ The employee should insist on some standard or right to a hearing from an impartial decision-maker in determining discharge for cause.

Restrictive covenants. It is common to require the employee to agree to certain restrictive covenants during the term of his or her employment and for a period after employment is terminated. These restrictive covenants fall into three broad areas: an agreement not to solicit customers, an agreement not to solicit employees, and an agreement not to compete with the employer. The Georgia courts enforce these covenants only where they are strictly limited in time, territorial effect and are otherwise reasonable.

Protection of proprietary information. The employment agreement will require the employee to keep confidential certain nonpublic information belonging to the employer. This provision will state that the employer and not the employee retains ownership of this material. Proprietary information includes methods of the business, actual or potential customers and suppliers and other intellectual property from which the business derives economic value.

Remedies. An alternative dispute resolution provision should be included in every employment agreement. It is better to go to mediation first whereby the parties attempt to work things out among themselves with the help of a neutral mediator who has no power to decide but simply facilitates negotiations. If that fails, arbitration before an arbitrator who has the power to decide the dispute is quicker and less expensive than going to court.

DAN KOLBER is a partner with the Atlanta law firm of Gambrell & Stolz LLP. Reach him at dkolber@gambrell.com or (404) 589-3413.