When you hire a worker, you effectively have an agreement that you’ll pay the worker for the work performed and treat the worker fairly. But depending on the nature of the worker—skilled, management, etc.—and the nature of your company, you may want additional agreements. Agreements are really contracts reflecting terms and conditions that each party understands and the breach of which can result in consequences. So, which agreements (contracts) do you want or need with your employees and what’s the best way to handle these agreements?
Which agreements with your employees are advisable?
Most employees in the U.S. are “at will,” which means they don’t have a fixed period of employment that’s contractually required—no written agreement is required. (Montana limits at-will status to the first 6 months of employment.) At-will employees usually can be terminated when the employer deems it necessary as long as there’s a rationale for termination that doesn’t violate the law. So, usually employees can be laid off if a company downsizes; they can’t be terminated if it’s discriminatory, retaliatory, etc. But there are nuances when it comes to at-will employees, with some states creating “exemptions” from an employers unfettered discretion. Paycor has a list of the rules in each state.
There are some written agreements that may be useful to a company, such as:
- Employment contracts. This type of agreement typically is used when “talent” is involved, such as a web designer, an engineer working on development, and anyone else with unique skills and abilities. The contract lays out the terms of employment, such as how long, what compensation, what duties, etc. It also says what happens if there’s a breach, such as termination before the end of the contract period.
- Nondisclosure agreements. This type of agreement bars an employee from disclosing company secrets. These may be customer names, price lists, and trade secrets. The most famous trade secrets—the knowledge of which is highly restricted—is the formulas for Coca Cola and WD-40 and the recipes for Kentucky Fried Chicken and McDonald’s Big Mac special sauce.
- Non-compete agreements. This type of agreement bars employees who leave the company from competing with their former employer for a set time and within a set distance, both of which must be reasonable under the circumstances. The agreement is meant to keep someone from learning everything about a business and then opening a competing one across the street. Check state law because some states restrict or bar the use of a non-compete agreement, at least for low-wage workers. For example, Virginia’s law which went into effect in 2020 prohibits enforcing non-compete agreements against low-wage workers—those who earn less than about $62,000. Washington has a similar law that also took effect in 2020, but the wage threshold is higher. D.C.’s law, which became effective last year, is very restrictive on the ability of an employer to enforce a non-compete agreement.
How to manage the agreement with your employee?
Don’t assume that if you have certain terms and conditions in your employee handbook they become binding on your workers. This is so even if they sign a statement that they’ve read the handbook and accept the terms. For example, one recent case involved a company’s employee handbook mandating that worker disputes be handled by arbitration. The handbook said: “the employer has the right, from time to time, to make and enforce new policies or procedures and to enforce, change, abolish or modify existing policies, procedures or benefits applicable to employees as it may deem necessary with or without notice.”
A federal appellate court said this clause in the handbook effectively rendered all terms to be an “illusory promise,” so that arbitration couldn’t be compelled.
Better way: Use separate agreements signed by the employee and the employer for specific purposes (e.g., a nondisclosure agreement). You can use templates to craft desired contracts for employees to sign. If you DIY, it’s advisable to have an attorney review them and ensure they meet specific state law requirements.
The relationship between employers and employees is changing…legally and otherwise. Be sure any agreements you enter into reflect company values and needs as well as the new paradigm in the workplace.
As Warren Buffet said: “It is impossible to unsign a contract, so do all your thinking before you sign.”