Employment Contracts Can Protect Valuable Company Assets and Information

By Ken Bloom, J.D., LLM
In today's competitive business environment, protecting company assets is often key to success for the small business owner. One area that is often overlooked is the importance of employment contracts for current and future employees to help safeguard the business. Most small businesses consider employees, confidential information and client lists as their most important assets. Having contracts that cover both these areas can help protect your business. Typical contracts cover the following areas:

Compensation
One of the biggest problems small businesses face in employee relations is a misunderstanding about how and when an employee is compensated. Today, while some small businesses have hourly workers, many have administrative, sales or management employees who are salaried, or are paid on commission, or have bonuses tied to performance. By establishing the compensation criteria in a written contract, the business and the employee eliminate confusion and misunderstanding regarding all aspects of compensation, thereby letting the employee concentrate on performing their duties.

At Will Employees
In most instances, an employment contract should clearly state that employment is "at will" unless it is intended to offer employment for a specific length of time (for example, one year). An "at will" employee's employment can be terminated at any time, with or without cause. Obviously, employers still should have a good reason for terminatingÊan employee; otherwise the company mightÊobtain a bad reputation and have a difficult time finding new employees.
Since termination of employment can have a significant consequence to an employee, employment agreements sometimes provide for severance payments in the event termination is without cause. A severance provision also protects the employer from litigation resulting from termination without cause. If the agreement can only be terminated for cause, it is very important to list what grounds constitute "cause" for termination otherwise an employer may incur damages in the event employment is terminated for reasons other than for "cause."

Restrictive Covenants
Although most small businesses consider employees an important asset, preserving the company's confidential information and trade secrets are vital to the success of any business. In most cases, confidential information, trade secrets and other proprietary information have been developed over years, and the loss of this information is difficult, if not impossible, to replace. If an employee decides to leave and start a business that competes directly with you in the same geographic area, and takes some of your clients with him or her, that could severely damage a small business. Without an agreement by the employee not to compete, there is no restriction or limitation on a former employee competing with your business.

A covenant not to compete must specify the length of time and geographic area that an ex-employee is prohibited from competing once they leave the business. This clause can also be specific to a particular profession or industry, to add further protection for the business.

A non-compete covenant must be reasonable with respect to both the time limit of the restriction and the geographical area. If either of these limitations is unreasonable, a court will not enforce the terms of the restrictive covenant. For example, a covenant that would not allow the former employee to compete throughout the entire state of Michigan for 10 years might be looked upon as excessive, while not allowing an ex-employee to compete in the Metro-Detroit area for three years more be viewed more reasonable. The facts and circumstances of each case will be reviewed on its own merits to determine reasonableness.

If the covenant is properly drafted, an employer (in addition to being able to seek monetary damages for the breach) can also obtain an injunction to enforce the former employee to cease from violating the covenant not to compete. In some cases, the court will require the ex-employee to reimburse the employer for attorney fees.

Another type of restrictive covenant is a prohibition of the former employee from aiding or encouraging other employees from leaving their employment and going to work for a former employee. In many situations, losing employees can have a significant detrimental impact on a business and unless the agreement contains a restrictive covenant of this type an employer will not be able to prevent an ex-employee from soliciting employees to leave their employment to work elsewhere.

Confidentiality
In many businesses, employees often have access to confidential information and trade secrets that are pertinent to the success of your business. If this information was provided or "sold" to your competitors, it could be extremely damaging. That's why it's important to have employees sign confidentiality agreements to discourage them from sharing this information, and to protect your business if they do. This is true during the term of employment as well as after termination of employment. Confidentiality information includes customer lists and other customer information that is not generally known to the public or even to competitors.

Work Product
This is a clause in an employment which states that the employer retains the ownership rights to any inventions (and patents) and other proprietary information developed by during their employment.

In today's competitive business environment, business owners need to do everything possible to protect their company assets. By using employment contracts designed specifically for your employee and business needs, you can make sure that your confidential information will remain a competitive advantage for your company.

If you are not sure what type of employment contracts you may need for your business, please contact Ken Bloom or Jonathan Goldberg via email or at 248-932-5200.