Is Your Start-Up Ready to Hire Employees? Here Are Some Employment Contract Basics

Once your startup is ready to hire employees, it is important to do it right.

A written employment contract is recommendable to establish and structure the legal relationship when it you start to hire employees. If artfully drawn, the contract helps to ensure that everyone is “on the same page” when it comes to the obligations and expectations of the position. This should help to prevent misunderstandings down the road for the parties as well as a court if called upon to resolve a claim or dispute.

While the agreement should be tailored to the needs of your business and address the specific expectations and duties of the position, here are some essential provisions that should be included:

Wages/hours:

The agreement should outline how the employee will be paid, i.e. “exempt/non-exempt,” salary, hourly rate, commission, or a combination thereof, as well as the availability of bonuses and the criteria for awarding them. If the employee is expected to be in the office during certain hours, the anticipated schedule should be set forth in the agreement. The employee’s ability to work remotely should also be discussed, if it is to be permitted. Working off-site, although increasingly common, raises a number of largely uncharted employment law and liability issues that should be sorted out to avoid unwanted surprises and possible claims for wages and/or damages.

Equity grants:

Many startups use the grant of stock or “profit interests” to attract talented employees. If you plan to grant rights to equity and/or profits in your company, it is important to detail the terms in the employee’s contract (or formal plan). Issues to address include the type of grant (incentive stock options, non-qualified stock options, stock appreciation rights, or restricted stock units), the exercise price, the vesting period, and acceleration of options. Careful consideration of valuation methods and the requirements for compliance under IRC 409A must be given. Making an employee an equity holder has its own set of problems under laws the protect minority shareholders. Sometimes it is better to grant “artificial equity” (which is only a contract right) rather than real equity. If the business is an LLC, this presents a different set of legal issues to be carefully considered.

Benefits:

Companies generally provide a range of benefits to their employees. Issues you may want to address include health insurance, vacation and/or personal time off, 401-k or pension programs, transportation reimbursement, maternity/paternity leave, and other job perks. Any conditions that must be satisfied prior to exercising the benefits (i.e. months of service) should also be detailed.

Confidentiality:

Although there is a common law duty of confidentiality, the employment agreement should contain specific non-disclosure provisions if your start-up does not provide a separate agreement. Confidentiality provisions should define exactly what must be protected as well as the consequences of noncompliance. Should the employee breach the agreement, your company will have legal recourse, including asking the court to prevent further disclosure and monetary damages. Please keep in mind that these requirements only have meaning where the employer has affirmatively acted to protect the confidentiality of the information.

Work-for–hire:

Are you in the business of creating intellectual property? If so, you should make clear that any creative work that the employee touches is the property of the employer. Even though the common law basically provides for this, in order to dispel any doubts, it is wise to strengthen and clarify the employer’s rights in a specific provision.

Termination:

The contract should define the term of employment or specify that the employment is “at will.” Other key issues to include are the grounds on which the company can terminate the worker and what type of compensation will be paid, if any. Please understand that employment that is “at will” is not as a simple as many lay people believe as courts generally will permit an employee to speculate on the reason(s) for termination in the absence of the employer providing some logical, non-discriminatory basis for its decision.

Non-compete and Non-solicitation:

Many companies, particularly those in competitive industries, include a covenant not to compete after termination of employment. Since courts do not favor restraints on employment and some states have a strong public policies concerning this issue (see, for example, California law), it is essential to work with an attorney to determine to what extent this provision is enforceable in your state. The requirement that terminated employees not solicit customers and key people (including current and former employees) is universally enforceable, and should appear in all contracts.