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Most employee-employer relationships are contractual. Depending on the relationship, some agreements can be long and complex, while others are short and sweet. As a start-up, hiring an employee marks an exciting milestone in your business journey. You're at the point where you may be growing quickly or have enough business that you simply can't do on your own.
In this blog post, we will be examining common provisions contained in a “typical” employment agreement. We'll break down what each section stands for and why it’s generally included. A lot of the language contained within this post will be "couched" and speak in generalities - it’s almost impossible to give broad, sweeping statements that will apply to every entrepreneur looking to hire employees, but we’ll try to keep it as relevant as possible.
In most provinces, there is an Employment Standards Code that governs many aspects of employment relationships, and in Alberta, the Employment Standards Code controls such classifications.
These codes are extremely important and deserve their own blog post to dive into the nuances, but we just wouldn’t be able to fit all of the content into a single post.
Simply put, this part of the Employment Agreement is like the title or cover page of any essay you read. It's important and provides context for the remainder of the Agreement.
Before The Actual Terms
Most legal documents will have an introductory piece that sets the stage for the parties that the agreement applies to and why the document exists in the first place. At the top, Employment Agreements usually set out the party names, whether they are companies or individuals, and the “Effective Date” of the agreement.
Pretty self-explanatory stuff so far!
Preamble
After the parties are listed, you’ll often see provisions that begin like:
“WHEREAS, the Parties wish to…”, or
“THEREFORE, for good and valuable consideration…”
These parts are referred to as the Preamble, which is used to knock out the basic check marks that are required in most legal documents. The Preamble is uncontested and is generally a given for most Employment Agreements.
These sections provide the core of the relationship between the two contracting parties. Why are we even here in the first place? To layout an employment agreement - which is accomplished in these sections:
Employment Position
The first substantive section sets out the actual agreed-upon position the employee will take. As we’ll see with a lot of the terms in Employment Agreements, and indeed, many legal documents as a whole, it almost seems too obvious to include. That’s the important part though – it wouldn’t be a valid Employment Agreement if you don’t have a section stating that explicitly.
This term will lay out when the employee will begin employment with the employer, an optional end date if the employment period is limited and not fixed, as well as the title of the employee and their reporting structure within the company.
Employment Duties
The next material section in Employment Agreements sets out the scope of responsibilities and duties that the employee has agreed to perform. Often, the “Scope of Services” will be set out in an attached Schedule to make readability easier in the Agreement itself. A provision will generally lay out the employee’s acknowledgment that they will perform those responsibilities to the best of their ability, with further provisions outlining the working hours (e.g., 40 hours? Part-time?) and extraneous duties that may not normally be in the course of day-to-day operations.
For start-ups, a key question to ask is how strict you want the responsibilities of your hired help to be.
That question ultimately comes down to the reason you hired the individual. Are they in a sales capacity and you only want to carve out a very niche undertaking? On the other hand, many first hires for start-ups eventually go on to take senior roles in the organization, as they have been there from the very start. If your Employment Agreement is narrow and constrained to what your employee was doing the day they got hired, you may have to revise the existing Employment Agreement to reflect the change in the employee’s duties.
As a note, rules are surrounding such revisions – make sure you get a lawyer to give you the green light before unilaterally making the changes yourself!
After laying out the extent of the employment relationship, there are additional matters to take care of!
Compensation, Benefits, And Expenses
This section is pretty straightforward: how much and how often is the employee getting paid – minus any standard payroll taxes, appropriate expenses to take in the course of employment, and other applicable statutory or other agreed-upon deductions. This is where the Employment Standards Codes come into effect. The law in various provinces sets out the kinds of taxes that, as an employer, you will be legally obligated to pay.
Another consideration for start-ups is that cash isn’t the only way you can adequately compensate an employee.
Often, emerging companies do not have the bankroll to pay competitive salaries, particularly if they’re looking for senior engineers, professionals, or specialized technical ability to fill employment spots.
That’s why many start-ups decide to pay most, if not all, of their employees in stock options. The logic being that the employee believes in the company and themselves enough to forgo a stable salary to receive a higher upside if the company ends up a big success. In Employment Agreements, terms can be inserted to indicate that the compensation that an employee will receive will be in the form of stock options plans. As these are generally separate legal documents, we recommend getting advice from a lawyer who has experience drafting them!
Vacation
Another provision that has its roots in the Employment Standards Codes depending on the province you are hiring an employee in. Our lawmakers have set out the minimum amount of days that employees are legally entitled to go on vacation. However, avid readers of the Goodlawyer Blog may recognize that skating by on the bare minimum set out in the various Codes may not be the best practice.
Further clauses in this section will set out the specific company protocol for when vacations can be taken and the process an employee has to go through to get the vacation approved.
Beyond the administrative requirements for employees to get paid, and what their duties are, these sections lay out other requirements that a business can mandate. These sections will protect your business!
Company Policies
Many businesses have company policies they want their employees to abide by. Codes of conduct, protocol to dictate dispute resolution, and to otherwise put forward a unified front that your business wants to have are all contained within those documents. The policies themselves will not be listed in the Employment Agreement itself, but you can include a term that states the future employee has read, agreed to, and will follow what is set out in them.
Confidential Information
This provision is particularly important for start-ups and doubly so for those start-ups who are entering into any industry where technology is created or much research and development occur. This section will outline what the employer wants to classify as confidential information, how much of it will be given to an employee, how that employee will have to handle and use it, as well as an agreement from the employee that they will not divulge said information to any unwarranted parties.
Often, you will want to have the confidentiality obligation extend past the employment period for a reasonable time, as you would not want to have ex-employees directly competing off the information you provided to them.
Check out the “Post-Employment Clauses” below.
IP Assignment / Ownership Of Work Product
Another important section for start-ups and established companies alike, and again doubly important for those that are operating in the realm of intellectual property. There are presumptions in place that when individuals gainfully employed by an organization create intellectual property, it automatically belongs to the company. To really protect this point, employers will expressly include a provision along the lines of that presumption.
Often, the Employment Agreement will go further, assigning any rights that generally may coincide with the creator of the work (i.e., the employee) to the Company as well. Further moral rights and other physical documents that were integral to the creation of said work can also be subject to company ownership.
The law is all about certainty and making sure your business is protected. In the event the employment relationship doesn't work out, you still want to have applicability after the fact.
Termination (Employee And Employer)
There are a couple of ways that an Employment Agreement can end. If the term of the employment period is set out in the contract, upon the agreed-upon end date the contract will automatically conclude. However, in the case of an indefinite term, either the employee or employer may terminate the Agreement.
For employers, the Employment Agreement will generally contain a provision instigating a probationary period. After setting out how long (usually 90 days), the Agreement will typically state that within this feeling-out period, the Employer reserves the right to terminate the Employee’s employment for any reason and without providing any sort of advance notice.
Following the probationary period, the Employer must adhere to the requirements and restrictions set out in the applicable Employment Standards Codes. While jurisdictions may vary, there are usually two options. If the employee consistently fails to meet the responsibilities set out in the Employment Agreement or habitually fails to show up to work on time, the employer has just cause to terminate the employee.
If just cause cannot be evidenced, an employer may nonetheless terminate an employee following the Code. Usually, this requires setting out a reasonable notice period of termination, or pay instead of reasonable notice. How much notice period you are required to give depends on various factors, which refers to the soon-to-be-added termination content above will go into more detail.
Non-Solicitation & Non-Competition Clauses
Non-solicitation and non-competition clauses are typical in many Employment Agreements, but their enforceability and validity will vary. The general usage of these terms is for the protection of the employer. When an employee leaves an organization with the know-how and information to set up a directly competing business to the one they just left, it can greatly damage the initial company’s business. Employers will include these terms to prevent ex-employees from directly setting up shop “across the street” and from poaching the initial company’s clients, other employees, and other relevant third parties (e.g., suppliers, vendors).
The enforceability of these clauses have been debated in various Employment Agreements across various provinces.
The balance lies in wanting to let the ex-employee continue to make a livelihood in their area of choice, particularly if it is a niche, specialized one and preventing the employee from subsequently taking advantage of the knowledge and training gained on the job at their place of work to the disadvantage of their past employer.
Many factors are examined, and the enforceability is context-specific – but the two main ones that Courts look to are time (length of the prohibition) and the geographical distance between the first company and any subsequent work the employee gets into. It takes really extenuating circumstances to forbid an employee from working in their industry for over a year and within the city of initial employment.
As always, if you’re looking to protect your business with these clauses, make sure you get a lawyer’s advice! If the courts find unenforceability as a result of unfair terms, the courts will not hesitate to throw the entire clause out.
While many other clauses can be put into Employment Agreements, some are more substantive than others, and some necessary due to the complexity of certain employment relationships.
In most Agreements, however, many will feature a list of typical "boilerplate" clauses that are commonplace:
Monetary Amount: This term indicates whatever currency denomination you would like your employee’s salary to be paid in.
Notice: In regards to termination by employee and employer – what medium (e.g., email, fax, telephone) would constitute sufficient notice for the Agreement.
Confidentiality of Employment Agreement: Similar to the Confidential Information clause above, this term would apply to the Employment Agreement itself.
Governing Law: If any disputes end up going to the courts, which jurisdiction or province will hear the issue?
Severability: To be fair, this one is pretty important. If one clause of the Employment Agreement is found to be unenforceable, this clause allows that single clause to be separated from the rest – allowing the enforceability of all other terms agreed upon.
Survival: Remember when you wanted confidential information to be protected outside the term of employment? What about company ownership of work that an employee created? The enforceability of these terms usually occurs after the fact, so you want specific clauses to stay “alive” after the period of employment is over.
Independent Legal Advice: It is good practice to have the Employee agree to have had the chance or actually consulting an independent lawyer about everything contained in the Employment Agreement – it would be difficult to plead ignorance after having gone through the contract with a lawyer.
Read more about Starting a Business topics that may be helpful to you and your small business.