Employment Contract Primer


In the past five years, more top level executives are demanding an employment agreement before taking a position with a new company or staying with their existing employer. When asked why, these executives and professionals invariably reply that they do not feel economically secure, do not trust employers' loyalty, and fear office politics. With the current merger mania, profit performing pressures and downsizing, their fears are not unjustified. Here are some basics you should know whether you are the employer or employee.

Illinois is an "at will" state in terms of employment status. At-will employment means, as a general rule, that an employer can fire an employee for no reason. The exceptions to this general rule are a) a union contract, b) an individual contract with termination-for-cause provision, c) an implied contract, e.g. employee handbook, d) a public policy being violated such as being fired for jury duty, serving as a military reservist, filing a workers' compensation claim, refusing to do an illegal act or whistle blowing, and e) violation of civil rights laws concerning race, sex, disability, religion, disability, etc.

An employee may use an employment agreement to negotiate the following: a minimum employment term (the longer the better), termination for cause only (specifically defined), job title, more guaranteed salary and less contingent bonuses based on performance, stock options, more benefits like medical and life insurance, tuition reimbursements, car, club memberships, moving expenses, cell phones, laptops, parking, housing and entertainment allowances, low or no interest loans, income tax preparation, and severance pay and outplacement. An employee will sometimes negotiate the right to outside employment. Finally, an employee may resist a non-compete clause which restricts his post-employment ability to work in the same business and same geographic area for a period of time. My experience has been that the typical executive will place most emphasis on salary, stock options, severance payment, and non-compete clauses in his negotiations.

Most employers focus their negotiation efforts on at-will provisions (termination without cause), no severance, performance based compensation and bonuses, job description, confidentiality (trade secrets), non-disparagement, arbitration and non-compete clauses.

A court will view the enforceability of a non-compete agreement through the lens of the reasonableness of the restriction used to protect the legitimate interests of an employer. The analysis will be whether the geographic area is too large and whether the length of time is too long for the industry or the profession in question. Because of the time and expense of litigation, employers are pleased that courts are increasingly willing to enforce arbitration clauses involving employment disputes, including discrimination rights claims.

Closely held corporations and partnerships often will have their principals or employee/shareholders execute employment agreements in conjunction with shareholder agreements. The reasons are manifold: the principals may want to have an objective mechanism to set out the expectations in terms of duties, compensation, conduct and termination by which to manage the employment relationships and keep control of the company. In Illinois, there is a legal question as to whether and to what extent a shareholder of a closely held corporation, after resigning as an officer and director, owes a continuing duty not to compete with the corporation; hence, a corporation may wish to establish a contractual basis for non-competition.

Employers should carefully consider severance provisions in employment agreements. These provisions can often generate goodwill from a departing employee thereby reducing lawsuits and binding the employee to confidentiality and non-disparagement clauses. The amount of severance pay will vary from industry to industry and will depend on the executive's level. Sometimes a neutral letter of reference, assuming there has been no criminal or unethical behavior by the employee, may be part of the severance provision.

Neither the employer nor the employee should underestimate the utility of confidentiality and nondisclosure provisions. Proprietary business information is a critical, but under appreciated, asset of many companies. In Illinois, the Trade Secrets Act protects a company's information that is treated as secret and has economic value because it is not generally known to other persons. This information includes technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers. A confidentiality agreement protects the employer's trade secrets and informs the employee what information is permissible for him to utilize post-employment. The employee should understand at the time of signing an agreement that much of the intellectual capital and information he creates for the company may not go with him when he leaves the company

The two most important things to remember about employment agreements are 1) everything is negotiable and 2) put them in writing.