The Pros and Cons of Employee Agreements, and When to Use Them

I recently started working with a client who has been using employment agreements with the entire employee population.  I raised the question as to why they were using employment agreements instead of the traditional offer letter, which has led to discussions about why organizations use employment agreements and when it is appropriate to use them.

Consider if your State is At-Will

First, consider if your state is an at-will state – most are.  In at will-states, an employer can let an employee go at any time for any reason, except for some illegal reasons such as, but not limited to, discrimination against covered classes and retaliation.  Employment agreements often remove at-will status by spelling out the reasons why an employer can terminate an employee and cannot let an employee go for any other reason than what is listed in the agreement.  Often, the agreement may grant the employee rights to severance, if he/she is let go during the term of the agreement.  In this regard, an employment agreement will give the employee a sense of job security, which you may want for key employees who, if left, would hurt the organization’s operations.  On the other hand, you do not want to take away all of your flexibility as business needs change.

Investments in Hiring and Training Employees

Employers spend a lot of money on hiring and training employees.  An employment agreement may help you as an employer protect your investment by placing penalties on the employee for leaving before the end of the agreement. You can also require the employee to provide you a certain amount of notice when resigning and require him/her to train his/her replacement.  I reached out to an employment attorney who also indicated a judge may look for you to give your employee the same courtesy, depending on where your business is located. In general though, having these provisions in your agreements may protect you and help ensure a smooth transition.

Protecting the Business and Clients

Another reason, employers use employment agreements is to protect their business and their clients.  Employment agreements often have clauses about confidentiality, non-competition, and intellectual property.  Such clauses may limit the employee’s ability to disclose company proprietary information, such as client lists and pricing methods, and work for current and former clients or for competitors.  They may also grant the employer exclusive rights to all intellectual property and limit the employee’s rights to his/her own creations.  I think it is obvious why having these protections in place would be beneficial to an employer.

Customization and Tracking per Employee

Other considerations are how administratively burdensome employment agreements can be on your Human Resources and legal departments.  The employee usually negotiates the terms of his/her own agreement, including salary and benefits.  So each agreement is customized for the particular employee and would need to be tracked to ensure they are all kept current and ensure that any action you take as an organization does not breach any of your agreements.  For example, you may not be able to change your company’s benefits packages or total rewards programs to help save costs or increase general employee engagement if there are active agreements in place that state specific benefit terms – those agreements would have to be renegotiated.

Alternatives to Employee Agreements

Before entering into an employment agreement with and of your employees, ask yourself what are you trying to protect and are there other ways to accomplish this goal without using an employment agreement?  Many of the considerations above can be addressed in other ways such as the following:

• You can implement a training and education reimbursement policy that would require employees to reimburse you for any payments you made for their personal and professional development.
• You can have separate Non-Disclosure Agreements, Non-Competes, and agreements safeguarding Intellectual Property that you could require either all or a just select group of employees to sign.

In fact, having a separate Non-Compete Agreement may be beneficial.  Our employment attorney advised non-competes are often litigated and having a separate agreement in place will prevent you from having to present your entire Employment Agreement to the court.  There are many things to consider before issuing employment agreements to any of your employees and I think the best piece of advice I can give you is to have your legal counsel review your employment agreements to ensure they will actually hold up in court in the event that an employee breaches the agreement.

My client has not yet decided whether they want to continue using employment agreements or not, but the question has definitely prompted some good discussions and required them to reevaluate their current practices.  There is no question of right or wrong when it comes to utilizing employment agreements – each organization should evaluate the pros and cons of using them.  Only you can determine whether employment agreements are right for you and your organization.