High level executives with complicated compensation arrangements
generally have employment agreements that are more comprehensive than
most standard employment contracts. This is because high level employees
often want assurances that they will be compensated if the company
is sold or if it decides to terminate the executive's employment.
Comprehensive employment agreements lay out in detail
the terms and conditions of employment. In most cases, both the employer
and the employee are represented by legal counsel who draft and negotiate
the language of the contract. The employment agreement may provide
for at-will employment or provide for a specific term of employment.
If the contract is for a specific duration, the employment relationship
is no longer considered to be at will.
In addition to the language that should be included in
all employment contracts, contracts for highly placed employees or
executives usually include some or all of the following provisions:
• Job title, location, and description of the employee's
duties and reporting relationship
• Date on which employment begins or ends, if the contract
is for a specific duration
• Base salary
• Reimbursement of relocation costs, if applicable
• Signing bonus, if applicable
• Other bonus payments or incentive plans
• Benefits (if the employee will be covered under the employer's
group health plans in effect for other employees, this can simply
• Stock options or other deferred compensation (stock option
plans usually require separate stock option agreements as well)
• Change-in-control provisions
• Vacation, holidays, and sick time
• Automobile and/or travel allowances
• Termination provisions, which may include severance payments
if the employee is terminated without cause or resigns for good reason
• Restrictive covenants (e.g.,., noncompete, confidentiality,
and nonsolicitation agreements)
A restrictive covenant is designed to protect an employer's
interests by restricting the employee's conduct both during and after
employment. The most common types of restrictive covenants are noncompete
and confidentiality agreements. Employers also use nonsolicitation
agreements to try to prevent former employees from soliciting their
customers and other employees.
In order to improve the odds that the restrictive covenant
will be enforced, employers should limit them to only those employees
who are in a position to use confidential information or intellectual
property. In addition, restrictive covenants must be consistently
agreements prohibit former employees from engaging in a certain type
of work within a defined geographical area and period of time. Noncompete
agreements are regulated by state law and their enforceability will
vary depending on the state where the employee is located. For instance,
California has a law that makes noncompete agreements per se
unenforceable, as they are against public policy. Other states will
enforce noncompete agreements if they serve an employer's legitimate
interests and are not overly broad. Therefore, employers must comply
with the specific requirements in their states.
As a general rule, noncompete agreements are not favored
by the courts because they restrict an individual's ability to make
a living. Therefore, employers must pay careful attention to the drafting
of these agreements. In order to be enforceable, noncompete agreements
generally must be:
• Narrowly drafted so that they are limited to protecting
the employer's legitimate business interests;
• Reasonable in geographic scope; and
• Reasonable in duration.
The following paragraphs are a more detailed discussion
of these concepts.
Limited to the employer's legitimate business
interests. The employer's legitimate business interests
may include protecting client lists, trade secrets, and other confidential
information. An employee who had access to this type of information
and left the company to work for a direct competitor could use the
information to the detriment of his or her former employer. The definition
of "competitor" used in a noncompete agreement should be narrowly
tailored to protect only legitimate interests and not as a general
prohibition against working for any competitor in any capacity.
Limited in geographic scope. This
concept is best explained by an example. For instance, if an employee
was the sales manager for the Northeast and his or her customer contacts
were limited to that geographic region, a noncompete agreement should
not seek to prevent him or her from working for a competitor anywhere
in the country. An attempt to prohibit the employee from working for
a competitor on the West Coast, for example, would likely be viewed
Reasonable in duration. A noncompete
agreement that restricts an employee from working for a competitor
for more than a year will generally receive close scrutiny from the
courts. Courts vary, however, from state to state on what they consider
reasonable and enforceable.
To prepare a valid and enforceable noncompete agreement,
employers should consider the following factors:
• Individual state laws and changes in the law;
• The type of restriction necessary to protect what is
most important to the employer, e.g., customer relationships or reputation;
• That the agreement should be written and signed;
• How aggressively the agreement can be drafted in light
of individual state court approaches to modifying an otherwise unenforceable
agreement to make it enforceable; and
• The enforceability and value of an assignment provision,
which allows the noncompete to be transferred to a subsequent owner.
Consideration required for noncompete agreements. If employees are asked to sign a noncompete agreement after they
are already working for the employer and not as a condition of commencing
employment, the employer must take care to ensure that there is adequate
consideration for the agreement.
In some states, if an employee is at will, continued
employment is sufficient consideration. In other states, the agreement
will only be enforceable if the employee is given some consideration
beyond continued employment, e.g., a bonus or pay increase, to which he or she would not otherwise
Nonsolicitation agreements. Nonsolicitation
agreements are usually included as part of a comprehensive employment
agreement or noncompete agreement. This type of agreement prohibits
the solicitation of employees and/or customers by a former employee.
As with noncompete agreements, nonsolicitation agreements must be
reasonable and limited to protecting only the employer's legitimate
Confidentiality/nondisclosure agreements. These agreements are designed to protect the employer's proprietary
information and intellectual property. Generally, such agreements
identify the materials or types of information the employer considers
to be confidential and state the employer's expectations for how such
information will be used or disclosed.
The agreement also spells out the ownership rights of
the employer to any inventions, technology, machines, developments,
designs, processes, trade secrets, works of authorship, and related
work product conceived, created, or first reduced to practice by the
employee during the term of his or her employment with the employer.
Employers may also require employees to agree to execute any documents
necessary to protect the employer's ownership rights, such as a patent
agreement or application for a patent.
A confidentiality agreement should be designed to meet
an employer's specific needs. Since not all information or ideas require
the same level of protection, employers should consider to what extent
they would like to protect certain intellectual property. Specifically,
the following categories of information should be considered:
• Patentable inventions
• Works subject to copyright
• Trade secrets
After determining which assets need to be protected,
employers should consider the following steps when drafting and implementing
• Training employees on the policy
• Determining whether a confidentiality policy alone is
enough to protect the employer's interests under applicable state
law or if additional measures are necessary
• Expressly claiming ownership of intellectual property
and requiring that new hires disclose any prior patents or inventions
• Controlling outsider and visitor access to all facilities
• Limiting employee access to information and records on
a "need to know" basis
• Monitoring and limiting access to electronic data
• Protecting both electronic and physical information
• Establishing procedures to detect and respond to breaches
• Considering the need for confidentiality agreements with
third parties such as vendors and independent contractors
Drafting an effective and enforceable confidentiality
policy can be a complex undertaking. Individual state laws must be
considered in creating such an agreement. Therefore, it is advisable
to seek the assistance of an attorney.
Secrets Act (DTSA). Effective May 11, 2016, the federal
DTSA is intended to provide some uniformity and predictability to
businesses’ protection of their valuable trade secrets.
The DTSA now creates
a federal claim for misappropriation of trade secrets. These claims
have traditionally risen under the Uniform Trade Secrets
Act (UTSA), which has been adopted by (and remains effective
in) nearly all of the states. Yet, despite UTSA’s goal of providing
a uniform system of trade secret protection, the interplay of state
laws and judicial interpretation led to an inconsistent patchwork
of trade secret protection.
Under the DTSA, businesses
will now have an alternative and, arguably, more consistent path to
recover damages for trade secret violations. Meanwhile, note that
the DTSA does not preempt or overturn existing state laws or the UTSA,
so businesses will also still have access to those remedies in the
event that they are more favorable.
Companies that wish to
take full advantage of the law’s new protections have some policy
actions to take, first.
The DTSA provides immunity
to employees and individual contractors who disclose trade secret
information as part of whistleblowing activity. Specifically, the
Act protects disclosures made “in confidence to a federal, state,
or local government official or … attorney” when made “solely for
the purpose of reporting or investigating a suspected violation of
law.” The Act also protects sealed disclosures made in a complaint
or other document filed in a lawsuit or other proceeding.
Employees and individual
contractors must be given notice of this whistleblower protection
in any contracts or policy documents related to trade secret protection
that are entered into or updated after May 11, 2016.
Businesses that fail
to provide this notice will not be actively penalized and will still
be able to file claims under the DTSA; however, those businesses’
recovery under the Act will not include attorneys’ fees or punitive
(up to double) damages from any employee or contractor to whom the
notice was not provided.
For many businesses,
it may be simpler to add the above-referenced notice to any newly
drafted or revised employee agreements or policies related to trade
secret protection, as this at least offers the chance for full recovery,
including attorneys’ fees and punitive damages, under either the federal
or state acts.
Computer Fraud and Abuse Act (CFAA). The federal CFAA is primarily a criminal statute that was originally
enacted to prevent unauthorized access to government computers and
to deter hackers (18 U.S.C. Sec. 1130).
In recent years, and with mixed success, employers have
taken advantage of a provision in the CFAA that allows a private right
of action when someone "knowingly and with the intent to defraud,
accesses a protected computer without authorization or exceeds authorized
access, and by means of such conduct furthers the intended fraud or
obtains anything of value."
The CFAA has been used in suits against employees for,
among other things, breach of noncompete agreements and misappropriation
of trade secrets. However, courts are split on whether the CFAA applies
under these circumstances. Their analyses have hinged on the meaning
of the phrase, "without authorization" as used in the statute.
The CFAA can be a
valuable tool for employers when employees misuse company-owned computers
in violation of a noncompete or other employment agreement. However,
employers considering a CFAA claim should consult with local employment
counsel to determine whether such a claim is viable in their jurisdiction.
Please see the
Potential employees and restrictive covenants. While hiring
employees away from the competition may seem attractive, there are
a number of risks employers take when recruiting and hiring such individuals.
Before hiring, employers should determine whether the employee is
bound by a restrictive covenant, the terms of the covenant, the likelihood
of the covenant being enforced, and the costs and risks of hiring
If the decision is made to hire the employee, employers
should confirm that the employee has terminated his or her employment
with the former employer, obtain a copy of any applicable restrictive
covenant to determine what the employee can and cannot do, prohibit
the employee from using any confidential information obtained from
his or her former employer, and refuse to accept any such information.
Employers may also want to consider including language in an offer
letter stating that these steps have been taken.
Providing a separation or termination agreement can be
an effective way to prevent litigation. The amount of compensation
offered in a separation agreement is often significantly less than
the employer would spend on legal fees alone to defend itself against
a claim by a former employee. Separation agreements are also useful
in the context of layoffs or reductions in force, which can result
in claims by multiple employees.
Whether an organization decides to offer an employee
a separation agreement usually comes down to employer policy, practice,
and philosophy. It is important, however, to draft an enforceable
separation agreement in order to realize these benefits.
Provisions to include in a separation agreement. In addition
to clearly laying out the elements of the separation package and what
the employee will receive, employers also generally include the following
• Date of termination
• Nonadmission of liability clause
• Statement of noncoercion
• No-rehire clause, if applicable
• Confidentiality clause that covers both the terms of
the agreement and proprietary information such as trade secrets or
• Noncompete agreement
• Nondisparagement agreement
• Nonsolicitation agreement
• Requirement that the employee return all company property
• A statement that the contract constitutes the entire
agreement between the parties
Separation agreements should be drafted by an attorney.
State law requirements also must be taken into account when drafting
a separation agreement. Additional information is available.
Releases/covenants not to sue. When
an employer offers severance pay to a discharged employee, it should
require the employee to sign a general release of claims. Releases
should detail the types of claims the employee is waiving to show
that the employee understands that he or she has certain rights and
is voluntarily waiving them. An employee cannot, however, waive prospective
claims or ones that arise after the release is signed or effective.
In addition, the following legal issues must be considered
when drafting a valid and enforceable release:
• Releases may not prohibit an employee from filing charges
with administrative agencies such as the Equal Employment Opportunity
Commission (EEOC). Releases also should not suggest or state that
the employee cannot cooperate with a federal or state agency in connection
with an investigation. As such, releases should clearly provide that
the employee is giving up the right to sue in court for monetary damages,
but not waiving his or her right to file an administrative charge
or to participate in an agency investigation.
• Employees cannot waive minimum wage or overtime claims
under the Fair Labor Standards Act (FLSA) unless
the release is supervised by the U.S. Department of Labor.
• Employees cannot waive their
prospective rights under the federal Family and Medical
Leave Act (FMLA). The settlement or release of FMLA claims
based on past employer conduct is permissible (29 CFR 825.220(d)).
• Releases may not limit employees’ exercise of rights
under the NLRA. For example, a release may not require employees to
promise not to engage in any union activity relating to the employer.
As noted above, releases also may not interfere with a worker’s right
to cooperate with NLRB proceedings.
• Specific requirements apply to releases of age claims
under the Older Workers Benefit Protection Act (OWBPA).
The release must specifically state that the employee is waiving
his or her claims under the federal Age Discrimination in
Employment Act (ADEA)
and be written in plain language.
In addition, the release must provide a 21-day consideration period,
a 7-day revocation period, and advice to consult with an attorney
before signing the agreement. Additional requirements apply if the
agreement covers multiple employees under a group layoff or exit incentive plan. There
is more information available.
Please see the
national Age Discrimination, national Severance Pay
• State laws may also impose additional limitations on
releases. For example, some states prohibit waivers of unpaid wage
Consideration. As with any contract,
for a separation agreement and release to be enforceable, there must
be adequate consideration for the agreement. This means that the employee
must be provided with monetary compensation or something else of value
to which the employee would not otherwise be entitled under the law
or employer policy—for instance, accrued salary, commissions, or payments
due under the employer's established severance plan would not be adequate
Examples of adequate consideration include continuation
of health benefits or fringe benefits at the employer's expense, unearned
vacation pay, outplacement services, continued use of a company car,
vesting of unvested stock options, salary continuation, or a letter
of reference. The separation agreement should explicitly state that
the receipt of any severance is conditioned on the employee signing
Internal Revenue Code (IRC) Sec. 409A sets
out rules for nonqualified deferred compensation (NQDC). Under Sec.
409A, with few exceptions, a deferral of compensation exists if an
employee obtains a legally binding right to compensation in one year
that is paid in a later year. A legally binding right to such compensation
is created even if the compensation is conditioned on the future performance
of services or other conditions established by the employer and, therefore,
may be paid in a later year. There is no deferral, however, if an
employer has unrestricted right to reduce or eliminate the compensation.
Deferred compensation can therefore be granted in a variety of ways,
including by supplemental retirement plans, individual employment
contracts, severance agreements, and settlement agreements.
Tax penalties. If deferred compensation
covered by Sec. 409A meets the specified requirements, there is no
effect on the employee’s taxes. The compensation is taxed in the same
manner as it would be taxed if it were not covered by Sec. 409A. If
the arrangement does not meet the requirements, the compensation is
subject to certain additional taxes.
What does the law require? Sec.
409A imposes several requirements on nonqualified deferred compensation
plans related to documentation, elections, funding, distributions,
withholding, and reporting. Relevant to employment agreements, the
law requires that such plans be in writing and specify the amount
and timing of distributions.
Distributions are permitted only upon separation from
employment, disability, death, at a specified time before the deferral
period ends in the event of an unforeseen emergency, or upon a change
in control. Plans must also delay distributions for 6 months to key
employees of publicly traded companies upon separation from employment.
In addition, if the plan provides for elective deferrals, Sec. 409A
specifies how and when those elections may be made.
Section 409A is a complex
law, so employers should consult with legal counsel when drafting
employment agreements with deferred compensation provisions. More information is also available at http://www.irs.gov.