Marc Rodrigue, Partner, Fasken, explains what your startup needs to know about enforceable employment agreements. He covers areas such as timing, IP and equity. Key tips? Make sure everything is written down, make the length of employment clear and include a termination clause.
Three things that founders need to think about making sure they have in terms of employment agreements are: number one, making sure it’s written down. You can have an employment agreement without it being written down — but having it written down means everyone knows what we’re talking about.
Number two, we have to know what the length of employment is meant to be. So for many of us, it’s indeterminate. We get hired on; the expectation is we’re going to stay on until there’s a termination or retirement or resignation, people move on. But if we’re looking for something less than that, say we’re looking for one year, say we’re looking for a project-based agreement, maybe it’s six months. That’s our chance in a written employment agreement to make that clear from the start.
Third, and probably the most important part of a written employment agreement that founders should look to have, is a termination clause. Everything usually goes well when you start employment, everyone is very happy to be working together. But we know relationships in employment and elsewhere can go sour from time to time, and you don’t think about it at the start. But if you do put the time into having a good termination clause, which can be difficult to do, and oftentimes, you know, having a good lawyer or legal advice, making sure you have one that actually works, can save you a lot of pain at the end of the relationship when you’re deciding to move on from each other. It sets it clear what a company owes and what an employee is entitled to if the relationship ends.
Timing’s important in terms of when you sign your employment contract, because we don’t like in Ontario retroactive agreements. We don’t like to sign something, you know, one year, six months, even one day, after we’ve already started the job. So if you want to have a good employment agreement in place, you have to have the employee sign it, look at it and sign it either before they start, or at the very latest on day 1. They sit down and before they do anything else, before they go through training, they sign your employment agreement.
If you don’t do that, if you have someone sign an employment agreement, agreement after the fact, it’s no longer enforceable. It doesn’t count, you’re not going to get what you’re looking for out of that employment agreement. If you ever have to go back and rely on it.
Intellectual property [02:16]
Intellectual property, particularly when you’re starting up and you’re creating new products, or you’re innovating, is very important, obviously, to a founder, to the business and to growing the business.
The one thing that comes with every employee is that there are some general legal requirements of protecting employers’ interests and some legal ownership requirements about who owns the work product of employees, and that belonging to employers. But to say that they are comprehensive or to say that they’re entirely clear 100% of the time is too far of a statement.
So we want to take the opportunity in an employment agreement to set that out: to set out expectations, to set out the legal rights and to make sure that we’re not surprised by anything. One issue, you know, I’ve heard people talk about it, is moral rights, which is a common law entitlement. And it’s one of those things that, unless we get an employee to specifically waive moral rights in a written employment agreement, we can have the conversation, we can say, “everything you do is mine” — but if I don’t get it in writing, and I don’t write it out, they could legitimately turn around and say that they still own moral rights to any copyrightable material that they’ve created for you.
Bonuses are such a key part of employees’ compensation, often. And employees work hard to reach metrics that we set for them in terms of getting to a bonus entitlement and annual bonus entitlements. A great way also to incentivize the work being done. The issue that we often see, though, in employment contracts, is some ambiguity around what happens when the bonus is payable. Is it clear how it’s payable, who gets to decide how much, and what happens when there’s a termination of employment?
Make sure in your employment contracts that you work with your legal counsel, you work with your advisors to get as airtight as you can a bonus structure that makes sense for your business. There may well be some cases where you’re okay with bonuses being paid out after someone stops working. Others, like a termination for cause, you may want to be able to say, “you get nothing.” If we don’t have it properly in the contract, that could be a problem.
Like all aspects of managing a relationship and managing your employees, being clear, or as clear as you can, is often the most helpful.
So if you’re going to offer equity arrangements or options, future options, and you already know what that looks like and you’ve dealt with the employee or the people you’re onboarding, then you’ve got an opportunity in the employment agreement to set out the terms — and why wouldn’t you? Either put them directly in or if you’ve got a plan, a separate document, make reference to it, add it in as an addendum so that the employee can read it everything they’re signing up for. When you do that, though, it’s very important that you make sure that all the language around termination, and what happens to equity rights and potential option rights on termination, are entirely clear.
If you don’t have an equity plan yet, or you haven’t worked at the details, but as part of your arrangement with the employee, you’ve agreed that you are going to provide something, you do have the option of making it known in the agreement that, “yes, it’s our intention in the future, to provide some form of equity or option arrangement with you.” And make it clear, you know, “we’ll provide further details, it’s all you know, at the discretion of the company,” in your employment agreement. That’ll give the employee some comfort, that will put it on record that you’re intending to do it. I would always advise if you put that out there, and you’re intending to do it, always a good idea to follow through and don’t wait too long.
When you’ve had a situation where there’s been a termination of employment, and under your agreement with that individual, you’ve either given them shares, or they’ve purchased shares, or they have vested rights, which they’ve exercised, and they now are a shareholder equity holder in your business — what do you do when they’re no longer with you? And particularly, it gets difficult, when there’s been a real breakdown at the end of the relationship. This is when an ounce of prevention will save you from a lot of pain down the road. When you’re designing your equity plans, when you’re designing your offerings, you want to cover this stuff about what happens in the event of a relationship breakdown, or what rights the company might have to recall that equity and what they’ll pay for it.
Otherwise, you’re stuck now in a new relationship with somebody who’s no longer an employee who’s holding equity in your company and you’ve got to figure out what deal you can make with them now to buy it back. And that’s a brand-new set of negotiations and a whole new dynamic in the leverage that you would have had control of at the start end if you’d properly dealt with it in your plan or in your employment agreement, what happens in this scenario.
Restrictive covenants [07:05]
There are three classic restrictive covenants, we’ll call them, among lawyers, that we often find in employment agreements. Two are more easily enforced, one is very difficult. The two that are easy to enforce are around confidentiality, and solicitation of employees, of suppliers, of contractors, and like.
Any lawyer will tell you if you’re looking at having a non-competition agreement in your agreements, that they are notoriously difficult to uphold. Why? The courts don’t like to tell someone they can’t earn a living, right? And a non-competition agreement, essentially, is that. It is barring somebody from being in competition, from being or from working in the industry or in the area that they probably know the best.
There are some cases where they might work, particularly the more senior employees you have, particularly if they’re very limited in scope or time. So regionally, you know, we want to make sure we we only ask for the protection or draft them with protection for the area we need them. And we only have them for as long as we need them. I think it’s it’s safe to say, you know, the shorter, the smaller, the scope of restriction, the more likely you might be able to argue it’s enforceable.
When we look at all three, you could have all three in your employment agreement. But if you were to focus on what you really need, that’s, that’s where you should drive your focus — when you know, confidentiality, non-solicitation if we really need it, and in very limited circumstances, you may look at having a non-competition clause that you really put your money in on being enforceable.
Fresh consideration of an employee agreement [08:43]
If you are looking at your employment agreements that you have now, or you look and say, “you know, they’re deficient, they’re missing some big pieces that we want to make sure we have.” Termination clauses, dealing with equity, restrictive covenants, whatever it may be, you still have the opportunity to introduce those into the relationship.
So you can draft up a new agreement, you can go to the employee and you can try to enter into a new agreement. But, the one thing you have to have with you and come with, is something new for the employee. You’re asking them, in a new agreement, if you’re drafting these new pieces in, to give up something, whether it’s common law, termination rights or rights to a certain work product. And in return, you have to give them something new, something they don’t have.
We often see signing bonuses. Maybe we do this at the time of a promotion, where somebody is getting a new job with new responsibilities and this is built in: here’s a new agreement for this role. That’s something new that they weren’t entitled to, it wasn’t a promotion as a matter of course. That will all count. And that, you know, we always look at what that consideration or bonus looks like and we want to make sure it’s reasonable. There’s no magic wand, no magic formula, what that looks like. But again, keeping in mind what they’re giving up and what they’re getting.