Half of job seekers in a recent Gartner, Inc. survey reported that they backed out on an accepted job offer prior to starting. I remain stunned by this statistic, which suggests to me that employers have some issues with their hiring processes, but more recently I have been reflecting on how much of the problem lies in employers’ heavy-handed drafting of offer letters and employment agreements.
I provide legal advice to individuals who are negotiating new employment agreements, and my clients also include a range of organizations that issue offer letters or employment agreements to job candidates, which I have helped them draft. I therefore have the luxury of seeing this particular issue from both perspectives. Some of what I have seen coming from other organizations (who are not my clients) has been astonishing. One recent employment agreement that I was advising an individual on was so offensively over-reaching that I suggested my client think really hard about whether this type of place worth was worth leaving the client’s current job. The people may have seemed nice, the work may have seemed interesting, the pay may have sounded good, but the employment agreement suggested the organization was looking to lock my client in to something just shy of involuntary servitude with a decent paycheck.
Was the job really worth all that? Does the organization realize, I wonder, that it lost out on a ready, willing and eager candidate, who had verbally accepted the organization’s offer, simply because the organization or its lawyers went too far in their drafting? There are various ways in which these agreements can go badly, and here I want to highlight my top four.
Unduly Restricting Employees’ Opportunities When Leaving
Employers have a legitimate interest in protecting their confidential and proprietary information. Employees have a legitimate interest in being able to earn a living in their chosen field, for which they have training and experience. The trend in too many employment agreements these days has been for employers to impose extensive restrictions on employees’ opportunities when they leave, in the name of protecting the employers’ interests in confidentiality. There has been a legislative and regulatory response to that, restricting employers’ use of noncompete clauses, and while those restrictions do not yet apply in New York, it is not for lack of legislative activity. Changes in the law are likely coming. Soon.
Where employers do not help their case, and may lose out on talented job candidates, is by imposing overly lengthy, geographically extensive, and topically overbroad noncompete restrictions. It is hard to make a compelling case that it is truly necessary for the employer to impose restrictions in excess of one year (I have seen some employers extend a noncompete clause for as long as five years!). Similarly, just because the employer may aspire to do business across the globe, and may even have some global clients, does not mean that a global noncompete restriction is appropriate. And are you precluding the employee from working in any capacity remotely related to what the employee was doing at your organization? If so, if the practical effect is that the employee has little or no opportunity to earn a living for the duration of the noncompete, then pay the employee at least base pay during the time that you are effectively pulling the employee out of the workforce.
Note that I am referring generally to restrictions on employees’ opportunities when they leave. Just because an employer uses some term other than “non-compete” in the employment agreement does not make the clause reasonable and appropriate (or lawful in jurisdictions like California that do preclude such restrictions). A wolf in sheep’s clothing is still a wolf, and a non-compete clause dressed up as a limitation on solicitation is still a non-compete clause.
Shifting Liability When Things Go Wrong
In New York, California, and various states in between, employers cannot hold employees financially responsible for the employee’s negligence or malfeasance. That means that if an employee breaks or loses something, the employer bears the cost of repair or replacement. And if an employee provides bad advice or incorrect information, the employer has to resolve it.
The employer cannot look to shift that responsibility contractually with an indemnification clause in its offer letter or employment agreement. That’s what business insurance is for. And if an employee is costing the organization too much money through carelessness, then the employer’s remedy is to discipline or terminate that individual’s employment – not fines, penalties, docking pay, or indemnification.
Being Vague on Compensation
New York law requires employers to tell employees, in writing, how much they are being paid and whether they are classified as exempt or non-exempt. The law similarly requires that employees being paid fully or partly on a commission basis receive in advance a written statement outlining the basic terms of the commission plan. These laws are about transparency, not terms (provided minimum wage and applicable overtime pay requirements are met), and employers still have a great deal of flexibility in structuring their approach to compensation.
Where employers can go wrong is by not clearly stating the parameters of their compensation arrangements. If a bonus is meant to be entirely discretionary or is contingent on remaining with the organization until a specified time, then the offer letter or employment agreement should say that. If there are performance targets or other metrics for the individual, the team, the organization, or any combination thereof, that will affect the bonus amount, then they should be specified in writing. If commissions are calculated based on income net certain categories of expenses, or only after payment is received from the customer, or only after the period for the customer to request a refund of payment has passed, then those contingent factors need to be specified in writing – upfront, before the employee begins working on deals to earn those commissions.
Claiming All the Employee’s Thoughts
Employers can legitimately assert that ideas, developments, inventions, creations, and similar work product that is developed by an employee in the ordinary course of the employee’s job are “works for hire” and the property of the employer. While this is a longstanding legal principle, New York recently joined a preponderance of states that restrict it by protecting an employee’s ownership interest in inventions that are made on an employee’s own time and do not use the employer’s equipment, supplies, facilities or trade secret information.
Applying these strictures gets murky when employees work from remote locations and at varying times that may fall well outside regular business hours. Notwithstanding that challenge, employment agreements should start from the premise of recognizing the protections of New York (and other states’) laws with regard to work invented outside the scope of an individual’s employment.
Other offensive clauses may relate to dispute resolution procedures – mediation, arbitration, waiver of trial by jury, limitations of damages, attorney-fee awards, jurisdictional limitations – and how far they depart from the individual’s rights under the law. Or they may include purporting to hold employees to various restrictive covenants even if the employee fails to clear a background check and never actually starts work for the organization. The list of troublesome language can continue almost infinitely, but the takeaways from this review are two-fold:
- If you are an employee, unless you understand everything in your offer letter or employment agreement, it may be wise for you to get legal advice before signing. Operating under the assumption that certain clauses are not enforceable or that you will not be held to them is a bad premise and can cause many headaches down the road.
- If you are an employer, reread your offer letter/employment agreement from the perspective of a new hire, particularly one who is newer to the workforce. How wordy is it? What tone does it set? How extensively does it seek to alter or limit an employee’s legal rights? Is there a strong business reason for those limitations for a role of this type and level? Has legal counsel reviewed it and confirmed it complies with federal, state and local laws? Do not make your offer letter so onerous that it drives good people away.
By Tracey I. Levy