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When should employers require employment agreements?

BY MARY M. BEARDEN and ALLISON L. DAVIS, Brown & Fortunato, P.C.

Many employers, including hospitals and clinics, use employment agreements for their executive teams. But, many times the remaining staff is employed at-will, and the terms of their employment are memorialized in short, one-page offer letters. Generally, highlycompensated, hard-to-replace employees are bound by employment agreements. But, under what other circumstances should an employer consider utilizing employment agreements?

Employees who receive specialized training. If an employee is hired with all the knowledge and experience necessary to begin working right away, there is generally no need for protection in excess of an atwill employment relationship. However, if an employer either provides specialized training in-house or pays for the employee’s attendance at specialized training seminars (e.g., training a pharmacy technician to compound prescription medications), the employer should consider requiring the employee to sign a non-competition agreement.

However, stand-alone non-competition agreements are not enforceable in Texas. The non-competition covenant must generally be part of another agreement to be enforceable, and an employment agreement is the perfect vehicle for a non-competition covenant.

In Texas, reasonable non-competition covenants included in employment agreements are enforceable against employees to the extent necessary to protect the employer’s legitimate business interests. Texas courts have held time and again that unique, specialized training is a legitimate business interest worthy of protection by a non-competition covenant. Therefore, if an employer provides or pays for an employee’s specialized training, and desires to prevent the employee from utilizing such specialized training to compete with the employer post-termination, the employer should consider presenting the employee with an employment and non-competition agreement upon hire.

Like those employees who receive specialized training, employees who receive legitimately confidential and proprietary information (e.g., profit margins, cost models, referral sources, and proprietary formulations) can cause damage to an employer upon termination, unless adequate precautions are taken. More specifically, unless the employee is required not to disclose such confidential or proprietary information, the employee may be hired by a competitor and utilize all such information to the detriment of his former employer.

Employees who receive confidential or proprietary information.

Employees should be placed on notice that they will receive confidential information necessary for the performance of their duties and are prohibited from using or disclosing such information for any purpose other than as necessary to perform their assigned duties. Employers should not expect employees to recognize the receipt of such sensitive information on their own; these restrictions should be outlined clearly in writing. A well-written employment agreement can include provisions identifying in detail the types of confidential information received and prohibiting the employee from using or disclosing the employer’s confidential information. In addition, if necessary to protect the employer’s interests, the employment agreement can include a non-competition covenant restricting the employee from engaging in competitive activities post-employment in exchange for his receipt of the confidential information.

Employees who engage in sales or marketing activities.

Sales representatives and other marketing employees are employed in order to establish and maintain relationships with customers, patients, and referral sources. These employees are oftentimes provided confidential information and introduced to the employer’s referral sources in order to maximize business. If, upon termination, marketing employees are not prohibited from utilizing such relationships to benefit subsequent employers, they may transfer the business received from those referral sources to a new employer. These employees, like those who have been specially trained or provided unique and confidential information, should be presented with noncompetition, non-solicitation, and nondisclosure covenants upon hire. Again, an employment agreement is the perfect document in which to memorialize these restrictions; they should be part of an agreement that sets forth all terms of their employment.

Employees who are paid variable rates or commissions.

Some employees, like nurses, are paid at different rates for working various shifts; others receive commissions on certain types of sales. Calculating varying rates of pay and the applicable overtime pay rates can be confusing, especially if such information is not clearly communicated in advance. Similarly, unless commission schedules, including how and when commissions are earned, are clearly outlined, the employee and employer may have different expectations for payment.

Employers should not take a chance on miscommunicating this information; put it in writing. In a comprehensive employment agreement, include information detailing the various rates of payment and when they apply. Detail when commissions are earned, when they are paid, and what happens if an employee is no longer employed at the time commissions are paid. Whatever the rules for payment, spell them out clearly in advance.

Employees with unique employment terms. Employers should consider utilizing employment agreements any time they offer employment on unique terms. If an employee must maintain specific levels of production to remain employed or is eligible for a bonus upon attaining a specific goal, put it in writing. The possibilities are endless. But, the general rule is that unique or negotiated employment terms should be memorialized in an employment agreement to ensure both the employer and employee understand those terms and the implications thereof.

Employment agreements can be as simple or as complicated as necessary to document the parties’ relationship. Lengthy, detailed employment agreements are not appropriate for every employee, but many employment relationships could benefit from clearly communicated, written expectations and payment terms.