Laying the Legal Groundwork: Understanding Employment Agreements

Various beakers with fish in them

It is hard to underestimate the value of a properly created employment agreement, also referred to as an employment contract.

When done correctly, this binding agreement establishes an employment relationship between employer and employee. It clearly outlines if an employee is working at will, as well as what their benefits, responsibilities, schedule, wages, and employment length of time are.

When done incorrectly, there is an increased chance of disgruntled employees and former employees taking legal action against you. Due to the costliness of not getting it right, having a trusted legal professional help you create your employment agreements and provide legal advice is key. 

Details Matter

As the saying goes, the devil is in the details, and details matter greatly when hiring, especially when considering possible legal ramifications.

Many employment opportunities first come as a verbal job offer or written offer letter. However, having a legally-binding written contract that outlines the type of employment, the terms of employment, and the contract provisions is crucial for you and your employee’s wellbeing.

Oral agreements can devolve into squabbles over ill-defined details, while written and signed contracts decrease the chances of any misunderstandings by thoroughly outlining the terms of employment the employee is agreeing to, namely their base salary, benefits (health insurance, vacation time, etc.), and responsibilities (daily tasks, quarterly goals, KPIs, etc.)

Written employment agreement terms and provisions can also include non-disclosure agreements (NDA), where an employee will not share or disclose confidential information unless otherwise authorized, and noncompete agreements. Noncompete agreements are an agreement between an employer and employee that restrict the employee from competing with the employer for a certain period of time in a specific geographical area after employment has ended.

These details can be especially important for biotech and biopharmaceutical companies developing or using intellectual property (patents, trade secrets, copyrights, etc.).

Order of Operations

While the order isn’t strictly necessary, oftentimes a company will provide an offer letter for the employee to acknowledge and agree to, while some higher level positions will require an employment agreement to be signed.

The offer letter delineates the basic terms of the contract, including salary, bonuses, equity, and other potential types of compensation. 

Once the offer letter is signed and accepted by the potential employee, a potential next step can be to provide them with an at-will employment agreement. Like contract employment, this can include a good faith clause, confidentiality agreements, and any intellectual property assignment provisions necessary.

If you are comfortable with simply having them sign an offer letter without the need for an employment agreement, you can provide confidentiality and IP agreements to sign in conjunction with the letter. The intellectual property portion can be very important, as if it isn’t signed when the individual is hired and they created something for your company, by default they own the rights to it.

Fixing these potential legal loopholes early means preventing larger, more costly problems in the future.

Employees Leaving the Company

For both involuntary and voluntary termination at a company, signing exit paperwork is important. Provide your employees with a written letter or agreement on their exit which reminds them of their confidentiality and what intellectual property belongs to them versus the company. 

Another thing to consider is a separation agreement, which lays out the details of what the ex-employee can and cannot do with regard to their shares, legal suits, and the like.

These agreements aren’t necessary for every employee to sign, but for co-founders and key employees these agreements can be critical in preventing future problems. A separation agreement is more common when offering severance, while a written letter of reminder is standard when severance is not provided.

Once these documents have been provided, and potentially signed, a best practice is to email them copies of all of these documents for their records. 

Understanding Your State’s Policies

A key part of any written agreement you create is understanding how your state’s laws play into it. While there are some things that you may wish to have in your contract, if they contradict with state laws your entire agreement could be rendered unenforceable or have certain clauses removed or modified by the courts.

In California for example, a non-compete provision in your contract can cause problems. These kinds of clauses are frowned on in California, making your whole contract potentially void because you included one part that doesn’t match with the state’s legal precedents. 

These sensitive legal reasons are why it is important to hire a legal expert or law firm to help you draft your employment agreements. Each state often has its own considerations and rule sets, all of which need to be accounted for when making an employment agreement.

The Value of Clarity & Specificity

Clear and specific employee contract terms benefit both employers and employees. When curating your agreements and offer letters, being direct and thorough with all legal details makes the process simpler.

By following these tips you can successfully bring on new employees without worrying about future legal concerns caused by improper contracts of employment.