Appeared as part of the sponsored section, 2018 Law Journal, in the September issue.
Matthew Marcellino
Marcellino & Tyson,PLLC
For most business owners, your workforce is one of your largest assets and one of the most significant areas of potential liability. In the same way that you wouldn’t start doing business with a new vendor or customer without a written contract defining the relationship, you should approach all new employee relationships with care and diligence. By setting up a written understanding of the terms of your relationship, you can start the relationship with clarity and transparency about your expectations for the employee and provide crucial evidence about the relationship if it sours. The reputation of your business is directly related to the employees you hire. Things don’t always work out, but efficiently negotiating these relationships on the front end can prevent a lot of headaches on the back end.
An employment contract can include basic terms of the employment: itemization of salary/wages, hours of operation, type of employment (whether part-time, full time, term, or seasonal), general responsibilities and duties, communications, benefits, etc. The terms of the contract can be amended, with consideration (typically pay raises) from time to time throughout the employment as the role changes or the employee progresses.
All too often employers avoid entering into formal employment contracts because they are concerned it will void the employee’s status as at-will, or that it will be used against them if the relationship doesn’t work out. In North Carolina, employees are “at-will” unless their contract explicitly provides a defined term (time period) of employment and states that the employee can only be terminated for cause. At-will employees can (and often should) have employment contracts. The contract should clearly state that the employment is at-will. A written contract clearly defines the job, responsibilities, benefits and — if done correctly — prevents confusion and promotes efficiency.
The Restrictive Covenants You Should Know.
It is likely that the most important provisions to be included in an employment contract address confidentiality, non-solicitation, non-interference, and non- competition. These provisions are often referred to as restrictive covenants. These provisions are integral to protect the company’s assets and reputation but can create legal landmines. Even capitalism has its boundaries. The North Carolina Supreme Court has explained that contracts (particularly employment contracts) should not be used to unfairly restrict trade and competition in the marketplace. Restrictive covenants are meant to protect your business, but they must be properly drafted to be enforceable. If they aren’t enforceable, all you have is something to toss into your waste basket, possibly with your business.
Confidentiality clauses are vital to most businesses and should be used in almost all employment contracts. Confidentiality provisions can be used to protect your trade secrets, customer and prospect information, intellectual property and business plans. Pretty much everything you’re business rests upon. As such, make sure to protect what’s yours. Don’t let them walk away with your hard work.
A Non-Solicitation provision restricts former employees from soliciting your business’ employees or clients for a period of time after their termination or resignation. Non-solicitation provisions are common in sales and service industries but can be useful in many others. If an employee is poached by a competitor, you’ll want to make sure your former employee doesn’t take your other employees with them. And it could be worse, your former employee may take your client lists with them with the intent to draw them away from your business. A non-solicitation provision can prevent these detrimental scenarios from occurring for a period time to allow you to fill the void or shore up your client relationships.
Be careful, there are two types of solicitation — direct and indirect. Your employment contract should prohibit both. Direct solicitation occurs when former employees directly contact customers and current employees to recruit business — either VIA phone, direct mail, social media, email, pony express, etc. Indirect solicitation occurs through a third party and often sounds like, “call Jane and ask them if they want to come with me to the new company.” It can also mean sending out letters informing customers of the new business or advertising your new position in a location where you know prior customers can see it. Indirect solicitation can be difficult to prove, but a well-crafted non-solicitation agreement can disincentivize the employee. (Side note, your client list is considered confidential information so long as you include a confidential information provision in your agreement. See above!)
Employment contracts can also include what are called Non-Interference provisions. Non-interference provisions are similar to non-solicits, but they apply to third-party contractual relationships the employer has, such as with a distributor. With this provision, the employee agrees not to interfere with those existing contractual relationships. This can be very useful in certain industries, as it is much broader than the non-solicitation agreement but needs to be carefully drafted to avoid antitrust problems.
For example, if you have an exclusivity contract with a vendor that an employee was an integral part in securing, you want to make sure that the employee would not interfere or attempt to undermine that contract after they separate from your company. While the vendor might be liable to you for breaching their contract, a non-interference provision in the employment contract could allow you to seek recovery directly from the separated employee too.
The popular Non-Compete clause is all too often a source of dispute. The intent of this provision is to prevent former employees from going to work for a competitor in a role that is substantially similar to the role they played for your business. To prevent this from happening, you need a well-crafted non-compete agreement in place. A non-compete is an agreement between the employee and employer, stating the employee will not compete with the employer after their resignation or termination. Courts only uphold non-compete restrictions on future employment when the contract is
1. in writing
2. reasonable as to time and territory
3. a part of the employment contract
4. based on valuable consideration (i.e., money)
5. designed to protect a legitimate business interest(s)
6. not against public policy
Typically, the dispute boils down to #2, time and/or territory. Both the time and the territory must be reasonable and not overly restrictive. For example, if your business only operates in North Carolina, with not present intent to move outside of North Carolina, don’t draft a non-compete to define the territory as the entire Southeast. Further, although it depends upon your business, the rule of thumb is that with a larger territory, the time would need to be shorter, and vice versa. It is important to work with an experienced attorney who can draft a non-compete that will aggressively protect your interest while being legally enforceable.
I’ll end with my own question and answer session.
Question: So why is the employment contract, with restrictive covenants, so important?
Answer: Let’s say you hire an employee. Sometime down the road, that employee leaves. We wish that employee all the best. However, that employee might not just leave with their personal effects. Without a contract saying otherwise, he or she might walk-out with your employees, your clients, your lists of potential clients, your vendors, your playbook, and then open a new office right next door.
Matt provides businesses and their owners with honest assessments of their legal needs. Marcellino & Tyson handles all areas of business and employment law, including, entity formations, shareholder disputes, buy-sell agreements, employment contracts, operating agreements, all forms of litigation, and all matters of ERISA. You can reach him at matt@yourncattorney.com
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