Employment Lawyer on Employment Contracts:
What you need to know as a business owner.
Summary of this article:
A) An employment lawyer in New Jersey can draft whatever employment contracts are best for your business. (You don’t have to use my firm, but PLEASE get an employment lawyer to help you!)
B) As a business owner, you want to have all of your workers classified as independent contractors (and not employees) because you can save $ on payroll taxes, benefits and other costs associated with having employees. (The state of New Jersey prefers business owners have employees and can fine you for mischaracterizing your workers as independent contractors.)
C) Is your worker an independent contractor? The more control the business owner has over the worker, the more the worker looks like an employee.
D) If your worker is an independent contractor then you need an employment lawyer to draft an independent contractor agreement, if you have an employee you may need an employment contract OR an employee manual/employee handbook. An employment agreement (or employment contract) is used for specialized higher ranking employees, whereas a handbook outlines the employment relationship for all general employees. (Therefore, if you have a few specialized employees you will need separate employment contracts for each one, if you have multiple general employees, then you should have an employee handbook.)
E) At Will Employment: Traditionally, all employees are ‘at will’ employees, meaning that an employee can be fired (or quit) at any time. An employment agreement changes the ‘at will’ relationship so that the employment agreement terms will govern the relationship.
F) Employment Contracts: If your employment lawyer properly drafts this, it will contain the specific terms of employment such as; employee duties, responsibilities and rights, income tax issues, stock options, benefits, intellectual property considerations, immigration issues, compensation, termination, and possibly restrictive covenants such as confidentiality, non-solicitation, non-compete, and others.
G) Employee handbooks: A manual of policies that apply to all employees. Good for companies with multiple non-specialized employees. Will include most elements of employee contract in addition to other policies such as anti-discrimination, FMLA, sexual harassment.
H) Miscellaneous employment contracts: The elements of employee agreements can be split into separate employment contracts by your employment lawyer. For example, an employee contract may have confidentiality, non-solicitation and (possibly) non-competition sections. For a business owner just concerned with confidentiality, a confidentiality agreement only covering that issue can be drafted by an employment lawyer. (Similarly, the following can be separate agreements; non-solicitation agreement, non-competition agreement, non-disclosure agreement (NDA) or non-disparagement agreements).
Is the worker an employee (requiring an employment contract) or an independent contractor (independent contractor agreement)?
As an employment lawyer, one of the most important factors that my clients need to understand about employment contracts is whether or not the worker should be classified as an employee or an independent contractor. (If a business owner can classify the worker as an independent contractor an employment agreement is not required, but instead an independent contractor agreement will be required.)
There is an important difference between employees and independent contractors. Why is this difference so important? Tax reasons… Employers are required to pay payroll taxes, benefits and other costs for every employee that they have. (You may have noticed this on your personal pay stub, such as FICA, income withholding, unemployment tax.)
Independent contractors are different than employees… an independent contractor is a person or company who is contracted to do a specific piece of work, and thus are not technically employees. The point here is that employers do not have to pay payroll taxes and other expenses for independent contractors. Therefore, whenever possible business owners would prefer to have a worker classified as an independent contractor, and for a business owner to be properly protected (from both the state of New Jersey and the worker), an independent contractor agreement must be drafted.
In its simplest form, an independent contractor is someone who has their own company, pays for their own supplies, and enters into a written agreement with their customers. Compared to an employee who is provided with all materials by the employer, and is directly CONTROLLED by the employer.
If the business owner does not have an independent contractor agreement in place, the employer may be subject to litigation with the state tax department. The end result can be that the employer must pay back payroll taxes, penalties, and fees. (At that point you will need to pay an employment lawyer a significant fee to defend you vs a much smaller fee to hire an employment lawyer to draft a simple independent contractor agreement.
An employment lawyer will ensure that the independent contractor agreement is clear on all of these elements so that your business is protected from the state stepping in, classifying the independent contractor as an employee and fining you for back payroll taxes and other costs.
At Will Employment vs. the Employment Agreement.
The most basic concept of employment law in the United States is the concept of “at will employment”. At will employment means that an employee is free to leave the employment relationship at any time, and likewise, the employer may terminate the employee at any time, with or without cause (so long as the reason for termination is not discrimination or other illegal acts).
The exception to the “at will” rule is when the parties enter into an employment agreement. Thus, the employee/employer relationship is no longer “at will” but is now governed by the terms of the employment agreement.
Do you need an Employment Agreement?
So you’ve determined that your worker cannot be classified as an independent contractor and must be an employee. Does this mean that you need an employment contract? Maybe not… Employment lawyers primarily draft employment contracts for businesses that are looking to hire a specialist or higher-ranking employee.
For example, you are hiring a CFO to step in and run your operations, or perhaps you are hiring a specialist in artificial intelligence software development.
Otherwise, you have the option of having an employment agreement for each employee or having an employee handbook that all employees must sign. (More on the employee handbook later, for now let’s focus on employment contracts.)
An employment agreement or employment contract is a written document that specifies all terms of that employees’ employment.
An employment lawyer will include the following important sections in an employment agreement:
- Employee duties;
- Responsibilities and rights, including but not limited to professional licensing (if required);
- Income tax issues;
- Stock options;
- Benefits;
- Intellectual property considerations;
- Possible immigration issues;
- Compensation; and
- How either the employer or employee is allowed to terminate the agreement (which will usually require some kind of prior notice by the terminating party).
Most importantly an employment agreement can lock the employee into working for the business for a set period of time and for a set amount of money. What this means is that once executed, the employment contract prevents the employee from just leaving if they feel like it, but the employer also cannot fire that employee (unless the terms of the agreement are properly followed). There can be significant consequences for breaking the employment contract, and the terms can only be changed if both sides agree to the changes.
Non-Competes & Restrictive Covenants in Employment Contracts.
Employment lawyers will usually include in employment contracts language concerning restrictive covenants. (A restrictive covenant is a promise not to do something.) This is one of the most important elements of the employment contract (and one which can often result in litigation if poorly drafted by your employment lawyer).
Business owners looking for only specific solutions (and not a full employment contract), may ask their employment lawyer to break these restrictive covenants down into smaller agreements, but the following are examples of restrictive covenants:
i) Non-competition: The worker is agreeing in writing that he/she will not work for a competitor of the business during the term of the relationship. Often these types of employment agreements will also have a tail period which states that the worker agrees not to work for competitors of the business for a period of years (usually 1-2) and within a geographic area (25 miles of the business’s home office). (The specifics of these terms will usually be negotiated between the employment lawyers for each side.)
Side note: As a New Jersey lawyer I have drafted many non competition agreements, (and they are legal in New Jersey), however New Jersey Courts really do not like them. Often instead of non-competition contracts, non-solicitation language is used.
ii) Non-Solicitation: With a non-solicitation agreement the worker agrees that they will not solicit any clients, business, or other opportunities from the business owner. Similar to the non-competition agreement, the non-solicitation contract may have a tail period (non-solicitation continues for a period of years (1-2). The non-solicitation agreement is much more favored, and will more likely be upheld by New Jersey courts.
iii) Confidentiality: The parties agree to keep all information received from each other confidential. Side note: Confidentiality agreements can be used in a multitude of other situations non related to employment, for example such agreements are often used in business transactions where one party is selling a business (or stock) to another party.
iv) Non-Disclosure (NDA): Similar in many ways to the Confidentiality agreement, a non disclosure language (or Non-Disclosure Agreement) is used to keep information disclosed secret. The difference between the NDA and the confidentiality agreement is that an NDA is more often used when only one side is disclosing information, vs a confidentiality agreement where both parties are disclosing information to each other.
Also similar to the confidentiality agreement, the NDA can be utilized in other non-employment law areas. For example, NDAs are often used by entrepreneurs pitching startup ideas to investors.
v) Non-Disparagement: With this type of employment contract, the employee agrees that he/she will not make any disparaging statements about the company during employment and after employment is terminated.
Employee Manuals/Employee Handbooks.
An Employee Handbook is a handbook/manual outlining the terms of employment and the policies that all employees are required to follow. A good employment handbook should outline the basic rules for conduct in the work environment.
This ensures that the employees know what is expected of them, and thus the employees are less likely to succeed in litigation against the employer regarding termination and discipline. Issues addressed in the handbook include but not limited to:
- How and when employees are paid;
- Overtime;
- Benefits;
- Pensions;
- 401(k) plans;
- Health insurance;
- Life insurance;
- Workers compensation insurance;
- Disability insurance;
- Vacations;
- Holidays;
- Personal days;
- Sick days;
- Jury duty;
- Medical leave;
- Military leave;
- Performance evaluations;
- Employee discipline procedures;
- Sexual harassment policy;
- Work rules and responsibilities;
- Computer rights (email usage, internet access);
- Drug policy;
- Privacy expectations;
- Grievance procedures.
If an employee handbook or manual is poorly drafted a seasoned employment lawyer representing a disgruntled employee can severely harm an employer in court because the employer will be bound by the handbook’s terms, and the employer’s track record of how that employer generally enforces policy.
As a more practical guideline, an employer should never make promises in the handbook which cannot be kept such as, “fair treatment” and “permanent employment”… two items which can never be guaranteed by an employer. Additionally, make sure the employee handbook has the right to amend the handbook. That way the handbook cannot be used as a sword against the employer in court.
I hope this article and the associated video were helpful… If you have any questions or need a lawyer for employment contracts please feel free to contact me at the below telephone number!