A. Confirm the Deal in Writing

Once the company and applicant have agreed to key terms, it is impor- tant to confirm the deal in writing. Legal disputes often arise because many companies hire people on a handshake. A handshake, or oral agreement, only indicates that the parties came to some form of agree- ment; it does not specify the details of the agreement. The failure to spell out important terms often leads to misunderstandings and disputes. Even when key terms are discussed, the same spoken words that are agreed upon can have different meanings from the employee's and company's perspectives. Written words limit this sort of misun- derstanding.

Companies can benefit from the use of written contracts for other reasons. One is the arbitration clause: you can compel the employee to resolve his/her dispute by arbitration rather than litigation, which may make the company's defense cheaper and less burdensome. In addition, since many attorneys believe that juries tend to favor individuals over companies, it may be advantageous for your case to be decided by an arbitrator (usually a successful business person or attorney), rather than a jury.

TIP: Arbitration provisions which specify the location of the hearing (i.e., "Any arbitration between the parties shall take place in the city of X where the company is located.") are highly advantageous, particularly when you are hiring an employee or sales representative who lives and works in a distant state. Selecting the locale for the proceeding ahead of time can save your company unnecessary travel, related costs and hardship and may force the litigant to think twice before commencing arbitration that requires travel to a distant site.

However, since the arbitration procedure is more streamlined than regular litigation and there is usually no right to appeal the decision, the agreement to arbitrate must be contained in a contract, typically an employment contract. Speak to counsel about the merits and pitfalls of arbitration if applicable.

Restrictive Covenants

Another advantage of a written contract arises from the use of a restrictive covenant when an employee leaves the company. Such a clause can:

1. Restrict an ex-employee from working for a competitor of the former employer;
2. Restrict an ex-employee from starting a business or forming a venture with others that competes against the former employer;
3. Restrict an ex-employee from contacting or soliciting former or current customers or employees of the former employer;
4. Restrict an ex-employee from using confidential knowledge, trade secrets, customer lists and other privileged information learned while working for the former employer
5. Restrict an ex-employee from any of the above both in geographic or time limitations.

Without a written contract containing a restrictive covenant (also called a covenant not to compete) you cannot stop a former employee from working for a competitor except in the rare instance where you can prove that the employee has stolen and is using trade secrets. However, by inserting in the contract a restrictive covenant of reasonable geographic scope and duration (i.e., six months), you can pursue such a tactic if someone goes over to a competitor. This is of particular significance to companies that train their own employees in a skill, only to lose them to a competitor.

For many reasons, it is best to require all new executives and sales employees whose duties involve access to company secrets to sign a written confidentiality agreement or employment contract containing restrictive covenants. This will put your company in a better position to undermine the defense of ex-employees who typically claim that the subject matter was not a trade secret, and increase the odds that you can obtain an immediate legal remedy known as an injunction. Even the "chilling effect" such clauses have, through the implied threat that the company may institute legal action after a person's resignation or termination, can effectively discourage employees from contacting prospective employers and customers in your industry or trade and/or establishing a competing business.

Counsel Comment #28: Companies that sue ex-employees to enforce a restrictive covenant often don't win. The enforce- ment of such measures varies on a state-by-state basis and depends on a number of factors. The primary focus of inquiry by a court is usually the reasonableness of the covenant in terms of geographic scope and time constraints. Therefore, it is wise to limit the covenant where practical. To enhance the chances of enforceability, it is best to keep the covenant short in terms of geographic location (i.e., never prohibit the employee from calling on customers located throughout the "entire United States") and not to draft covenants exceeding six months to one year.

Additionally, some courts respond favorably to situations where companies have paid the employee additional compensation, such as $1,000, an extra week's vacation or greater severance pay, in exchange for the employee's signing a contract containing a restrictive covenant. Better still, if the contract is drafted to state that the employee will receive $X per week (i.e., one-third of his/her regular salary) while the restriction is in effect after the termination of the contract, this may constitute adequate consideration to allow the covenant to continue undisturbed.

Confer with counsel as soon as a problem develops. Cases demonstrate that if your company fails to take action (like sending a strong cease-and-desist letter to the ex-employee and the company he/she is now working for, or filing an injunction) immediately after learning the covenant has been violated, you may weaken the case. You should also recognize there is a greater chance of losing the right to enforce a restrictive covenant when you require employees who are already on-the-job to sign employment contracts containing such clauses. The reason is that in many states such a request by an employer will not be viewed as conferring any additional consider- ation (benefit) upon the employee to make such a clause valid.

Counsel Comment #29: If you desire to impose such contracts on current employees, an offer of substantial addi- tional monetary benefits increases the odds that such arrangements may be enforceable. Speak to experienced labor counsel to inquire how this best may be done.

Although a written contract cannot guarantee that you will be satisfied with the performance of your employee, it can provide the company with additional remedies in the event of a worker's non- performance. That is why the mood is changing in most industries from hiring on a handshake to hiring by a written agreement. Most employers are learning that they can still fire an employee without notice (which was the main reason why companies previously hired on a handshake), but can better protect themselves by including favorable clauses in clearly drafted contracts. For example, by specifying in writing that an individual waives the right to a trial by jury, identifying the remedies associated with a breach of the agreement, or stating that the company is not obligated to honor prior commitments in the event of a merger or sale to a successor, your company can reduce the chances of eventually losing large damages in the event of a lawsuit.

Written contracts can also eliminate potential misunderstandings arising from representations given to the employee by outside job recruiters. Often, the job recruiter or employment agency makes promises which the company has no desire to live up to, for example, promised bonuses after a certain period of employment, and additional benefits.

To avoid liability, companies can protect themselves through the use of written contracts which specifically state that the employee does not rely on any representations not pointedly included in the contract, and that the contract supersedes and replaces all prior agreements and understandings. By using written contracts in this fashion, your company need not exercise direct control over statements made by outside job recruiters because the employment contract with an employee can specifically disaffirm any such representations or promises.

Contract Execution

When employment contracts are issued, be sure that all changes, strikeouts and erasures are initialed by a company officer and the employee. If your company uses a standard employment contract, be sure all blanks are filled in. If additions are necessary, include them in a space provided or attach them to the contract itself. Then, note on the contract that addenda have been accepted by both parties. This prevents questions from arising if addenda are lost or separated; it's often difficult to prove their existence without mention in the body of the contract.

A standard "formal" contract is not required to satisfy the strategy of putting key points of the deal in writing. The author recommends that companies issue simple letters which state the terms of employment and end with the following in the last paragraph:

"If any of the terms of this letter are ambiguous or incorrect please advise us immediately before signing this agreement. Otherwise, it is agreed that this letter will serve as an accurate reflection of our intentions but may be modified at any time by us with or without notice. If accepted, please sign in the space below where indicated and return it to us; you may keep a copy for your records."

Clearly drafted letters can serve as a contract in most situations; thus, don't forget to use them when appropriate.

Counsel Comment #30: Always review any comments or proposed amendments to the contract you may have received from the potential employee. Sales managers, supervisors and others sometimes shove letters of protest or modification in a drawer without responding. The failure to respond to such a writing may prejudice the company, so always respond immedi- ately in writing to any document received from a potential employee or employee.

Be sure that your agreement is signed by the employee. One company made the mistake of failing to check whether its contract had been signed and was forced to defend itself in a breach of contract claim as a result.

TIP: To avoid problems in this area, it is essential to prepare clearly drafted written contracts which specify that they must be signed by the employee in order to be valid. Had such a requirement been imposed in the above case, the court might have decided the case in the company's favor.

It is also important to understand the effect of the statute of frauds on written employment agreements. The statute of frauds is a legal principle requiring certain agreements (such as any sale of land exceeding $500.00, or promises to pay another's debt) to be in writing. In most states, employment agreements exceeding one year must be in writing and signed by both parties to be enforceable under this principle. Thus, if you desire to hire an employee for more than one year, be sure to prepare a written employment agreement evidencing this intent or your oral promise will probably not be legally valid.

Counsel Comment #31: If you confirm arrangements with newly hired employees by letter and do not wish to prepare and send a formal employment agreement, be certain to specify all salary and bonus payments, benefit plan participation including health and insurance coverage, vacations, etc. together with a statement enunciating your right to discharge the employee at-will with or without cause. If you fail to state the at-will reservation in such a memo or letter, your ability to fire the employee suddenly could become the focus of a lawsuit. Always include a description of the job, incentives (i.e., raises), and other important concerns such as that the agreement will cease if the employee works for a competitor, discloses company secrets, etc. Always tailor such letters, memos or agreements to each particular hiring and get them reviewed by counsel before they are sent to avoid potential problems.

Understand the kinds of points to negotiate and include these in a written contract to protect the company. During negotiations with the applicant, experienced managers, supervisors and personnel execu- tives in charge of hiring must discuss all important employment terms in advance and include these in a written contract for the company's protection. Staff in charge of hiring have a duty to discuss carefully all the terms and responsibilities of the job with the applicant, no matter what type of position is being offered. This is essential to maintaining positive relations with your workforce and minimizing breach-of- contract and wrongful termination lawsuits.

Counsel Comment #32: The employer holds most of the cards at the interviewing-negotiation stage and can insist on almost any term it desires prior to the hiring. The worst that happens is that the applicant will attempt to modify or negotiate a particular point to his/her benefit. Thus, understand the company's position with respect to all employment terms, do not deviate from them. Try to offer the same deal to different applicants and confirm all the terms of employment in writing before the individual begins working.