Business & Corporate

The Business & Corporate Law Section's monthly article.

Employment Agreement Drafting Dos and Don’ts

As a relatively recent law school graduate, learning what not to do is often as important as learning what to do. Employment agreements are wrought with potential for costly mistakes. The following dos and don’ts provide a handful of basic, but important, principles and common areas of confusion.

Do consider whether an offer letter alone will do the trick
One of the first questions a drafting attorney should consider when asked to prepare an employment agreement is whether or not a detailed employment agreement is needed at all.

In California, employment-at-will (“EAW”) is one of the most important doctrines which impacts employee-employer relationships.  Under Labor Code Section 2922: “[a]n employment, having no specified term, may be terminated at the will of either party on notice to the other.”  This statute creates a presumption the employment is at will and either the employee or employer may terminate the employment at any time, for any reason or without a reason.  Thus, an employer may terminate an employee without any bad act or misbehavior on behalf of the employee, so long as the termination is not otherwise a violation of law; e.g., based on age, race, sex, religion, disability, whistleblowing, filing workers compensation claim, etc.

Because EAW is the default in California, serious thought should be put into whether or not an employment agreement is necessary at all.  Often, a basic offer letter which the employee signs and returns can suffice (perhaps coupled with a nondisclosure agreement as discussed below).  Key previsions to include in an offer letter are: the at-will nature of the employment, the start date, job title, salary, supervisor, location or travel information if unique, contingencies, and confirmation the employee read and understands the employee handbook. 

An employment agreement with the nitty gritty details about the employment relationship may unnecessarily bind a company to certain benefits, dispute resolution methods, or even modify the at-will nature of the employment.  Many of these details can be laid out in the employee handbook or company procedures which provides the employer with additional flexibility to change policies and procedures in the best interest of the company. 

Obviously, an offer letter alone will not work where detailed compensation packages come into play—as in executive compensation—but for most employees, a good offer letter may do the trick.

Do NOT let an employee begin work until all contingencies have been satisfied
Offer letters often contain contingencies which must be satisfied as a condition of employment.  Although it may seem obvious, employers should be advised that if an employee’s position is subject to a contingency such as a background check, obtaining a certification, or medical exam, the employee should not be permitted to begin work until all the contingencies have been satisfied to the employer’s satisfaction. 

An offer may be rescinded prior to employment commencing if a contingency is not met; however, rescission is not an option after the employee has started his or her employment.  At that point, termination in accordance with the employer’s termination policy would be required.

Do use a nondisclosure agreement to protect confidential information and trade secrets
Once an employee has started employment he or she is likely to be exposed to the company’s confidential information or trade secrets.  To prevent such information from being exposed to third parties, competitors, or the public, employers should consider asking their employees to enter into a nondisclosure agreement (“NDA”), also known as a confidentiality agreement.  Under the NDA, the employee agrees not to disclose the employer’s confidential information or trade secrets.

Although more than NDAs are needed to protect confidential and trade secret information, they are a good starting place, especially where a company’s value is largely tied to such information.  Unfair competition laws provide some protection in the absence of an NDA, but at that point the proverbial cat is often already out of the bag.  Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 275.

Do NOT include unlawful noncompetition and nonsolicitation clauses
Another tool companies often attempt to use to protect disclosure of confidential information by employees is a noncompetition clause or agreement.  Generally, such agreements are unenforceable and unlawful in California.  

An agreement for an employee not to engage in competition with his or her employer after employment has terminated is void as a restraint on the employee’s ability to engage in a lawful business, trade, or profession.  Bus. & Prof. Code § 16600.  There are a handful of statutory exceptions and possibly one common law exception.  See Bus. & Prof. Code §§ 16601–16602.5 (excepting noncompetition agreements in the sale of a business); Edwards v. Andersen (2008) 44 Cal. 4th 937, 944 (leaving the door open on whether noncompetition and nonsolicitation clauses narrowly tailored and designed to protect trade secrets are enforceable).

For the same public policy reasons that noncompetition agreements are prohibited—i.e., open competition and employee mobility—nonsolicitation clauses preventing a former employee from soliciting customers after employment has been terminated are generally unenforceable.  Thompson v. Impaxx (2003) 113 Cal.App.4th 1425, 1429.

Employers tempted to include such provisions in an employment agreement should beware.  Labor Code Section 432.5 provides an employer cannot lawfully require an employee to sign an agreement containing a provision it knows to be illegal as a condition of employment.  The risk is a potential wrongful termination action.  D’sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 932.

But note:

  • You CAN restrict an employee’s ability to use the company’s confidential and trade secret information to compete with the company under the law of unfair competition.
  • You CAN restrict an employee’s ability to solicit other employees to leave the company and join him or her; although you cannot restrict the former employee from hiring another former employee if they leave of their own free will.  Loral Corp., 174 Cal.App.3d at 280.

April 12th CLE on Employment Contract Negotiations & Pitfalls to Avoid
To learn more about employment agreement negotiations and pitfalls to avoid, join the Business & Corporate Law and Labor & Employment Law Sections for their CLE on April 12, 2013, from 12 – 1:15 p.m. at the SDCBA Conference Center at 401 West A Street, Suite 120, San Diego, CA 92101.  Please click here to register online.

-- Abigail G. Stephenson, attorney at Blanchard, Krasner & French

**This article is intended for informational purposes only and does not constitute legal advice. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**