Many business owners believe that the executive employment contract is unnecessary. Or, that by entering into an employment contract with the employee, the employer loses the ability to fire at-will. Perhaps the employer believes that by having less specificity about the job, the employer maintains more flexibility and control. Plus, business owners are put off by the amount of work and time that might be required to establish an employment contract, and therefore choose not to have one. In reality, the executive employment demands the use of an executive employment contract because it is a valuable tool to outline the rights and responsibilities of the employer and the employee and to clarify any uncertainties or ambiguities for both parties. And, both the employer and employee are well-served by thoughtfully negotiating the terms at the outset of employment and memorializing the agreement in written form.
Defining roles and responsibilities helps employees. Most new employees appreciate getting as many details about the new job as possible. They want to know expectations for hours and vacation benefits and sick leave and bonus structures and how success is measured and more. Without a detailed agreement, the terms get lost in the conversation as both sides excitedly anticipate the new arrangement. A detailed employment agreement resolves ambiguities at the start of the job and keeps expectations aligned between the employer and the employee. It can lead to a more successful employee because it can tell the employee how the employer quantifies success and thus where the employee should direct his or her human capital. In short, the agreement can pay dividends by directing the employee in the specific direction outlined by the employer.
At-will employment need not be jeopardized. Washington state is a so-called “at-will” employment state which means that an employer can fire anyone for any reason (no cause, good cause, or even morally wrong). The employment is dual sided, meaning that the employee may also terminate the employment whenever he or she wishes. The employer’s broad discretion to terminate has three exceptions. Generally, the three exceptions include: (1) discharging employees for discriminatory purposes in violation of the federal Civil Rights Act or Washington’s law against discrimination (including discrimination based on race, age, gender, sexual orientation, having children, marital status, etc); (2) discharges that are against public policy (like the armored truck driver who was fired after abandoning his post to prevent murder in Gardener v. Loomis Armored, Inc.); and (3) where the employer and the employee have contractually modified the at-will employment relationship.
The ability to fire someone for any reason is a powerful option for an employer that is unhappy with the performance of an employee or chooses to change the way in which the employer’s business is conducted (which may obviate the need for the specific employee). Importantly, the third exception above may apply in the context of an executive employment agreement. But, it simply need not apply. An employment contract may be very specific to many terms of employment and still provide a provision to the effect that “the parties agree that they are contracting at will. Notwithstanding any written or oral representations to the contrary, either party may terminate this Agreement at any time and for any reason.”
The employment agreement provides protection for employers. The bulk of an employment agreement includes provisions that favor the employer. For example, the employment agreement may provide requirements that the employee: (1) keep company or client information confidential; (2) is prohibited from competing with the employer; (2) is prohibited from soliciting clients, customers, or staff; (4) agrees to less-costly (and speedier) alternative dispute resolution; (5) has no right to intellectual property of the employer whether or not produced by the employee; (6) is prohibited from moonlighting; or (7) must engage and display some degree of effort (which is often a defined term). All of the foregoing terms are important for the company to both limit the company’s downside potential as well as providing advantageous enforcement options.
Bottom Line. The employment agreement is not necessary for all workers. But, if the employer is investing in a highly-compensated executive, it is important for both parties to use an employment agreement. Be sure to use a good attorney to draft the employment agreement to ensure it works as intended
* Licensed, not practicing.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.