Contracts and agreements are SOP (standard operating procedure) for businesses. This is so regardless of the amount of revenue, the number of employees, or any other factors. You can use an attorney or DIY with templates readily available online to help you. The following are some types of contracts and agreements you might consider having employees sign, and restrictions or limitations to consider.
Contracts and agreements to consider
Employment contracts
Because most employees are “at will,” employment contracts aren’t used when hiring rank-and-file employees. However, they may be useful when hiring “talent,” meaning an employee with unique skills and abilities. For example, baseball players have employment contracts. Typically, they run for a limited number of years, but can be renewed.
Nondisclosure of company’s proprietary information
This type of agreement bars an employee from disclosing company secrets. These may be customer names, price lists, and trade secrets. The most famous trade secrets—the knowledge of which is highly restricted—is the formulas for Coca Cola and WD-40 and the recipes for Kentucky Fried Chicken and McDonald’s Big Mac special sauce. This type of agreement is permissible. Typically, it’s included in an employee manual; the employee must sign an agreement stating that he or she has read the manual and agrees to abide by its terms, including the nondisclosure provision.
Noncompete agreements
Noncompete agreements are legal contracts between a business and another person—typically an employee or independent contractor—to bar a worker to compete with the business. Noncompete agreements may also be used by a business to bar a person who sold his or her interest in it to go into a new business in competition with the former one.
At present, there’s no federal law barring the use of noncompete agreements. There is, however, an executive order titled Promoting Competition in the American Economy. This directs the Federal Trade Commission (FTC) to address agreements that unduly limit a worker’s ability to change jobs. When a particular case arose, the FTC took the opportunity to include a statement and indicated it would “scrutinize contract terms in merger agreements that impede fair competition.” But, a growing number of states have banned or limited the use of non-compete agreements in the workplace.
Even where there’s no specific law on noncompete agreements, common law limitations—court decisions on the matter—may put restrictions on them. You may only be able to bar competition for a limited time and in a limited area.
Whether you should or shouldn’t use a noncompete agreement where you’re permitted to is discussed in a previous blog.
Agreements related to sexual assault and sexual harassment
Employers can’t protect the business from liability before a claim arises. Two new federal bills enacted in 2022 make this clear:
- Arbitration of claims. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act makes invalid mandatory arbitration clauses signed before a claim arises. This applies to any claim arising after March 3, 2022.
- Pre-dispute nondisclosure and non-disparage agreements involving sexual assault and sexual harassment. The Speak Out Act, which was signed into law on December 7, 2022, bars courts from enforcing non-disclosure agreements or clauses in contracts that are signed before disputes involving sexual assault or sexual harassment arise. This law is effective for claims filed under federal, state, or Tribal law on or after December 7th.
Final thought
The start of the year is a good time to review your legal agreements with an attorney. Determine whether existing agreements need to be redone. Also discuss whether there are any agreements you should have in place that you don’t. Legal fees may seem pricey, but they’re lower than the time and cost of handling lawsuits. Even if you DIY, be sure to have an attorney review the paperwork so you know it conforms to the law and meets your business needs.
And remember the words of Warren Buffett: “It is impossible to unsign a contract, so do all your thinking before you sign.”
