Employment Agreements: Yes, All that Paperwork is Necessary

Contracts, non-disclosure agreements and trade secrets

Back Web Only Oct 18, 2016 By Frank  Radoslovich

You’ve put your blood, sweat and tears into building a successful company — not necessarily in that order, and the amount depends on the day. If you’re anything like me, much of your success can be attributed to the awesome staff you’ve brought on along the way. It’s important to recognize that business success isn’t a stroke of good luck; rather, it is a testament to your drive and ability to lead. You can go ahead and pat yourself on the back for that, but then listen up, because hiring good people isn’t where the story ends. In fact, it’s just the beginning.

There’s no doubt that each time you bring on a new employee, you may worry a little because you never truly know the person you’ve hired until well after they’re already on your payroll (unless you’ve done a background check, which is a column for another day). Someone who seemed like the perfect fit during an interview could turn out to be a disaster — it happens all the time. Great resume, great interview … total loser. But this is exactly why you planned ahead and drafted policies that your new employees must sign before they officially become a member of your team, right? That way, when it comes time to can that person for not living up to their end of the hiring agreement, you’re covered. Of course, in most cases, at-will employment lets you can them anyway, but that, too, is a column for another day.

If you’re thinking, “Oh crap, what employment policies?” don’t panic yet. Educate yourself about and seriously consider implementing employee contracts, non-disclosure agreements and trade secret policies during your hiring process. While any or all of those may not seem necessary for your type of business, you’re potentially putting yourself at risk by investing too much faith in others, so be sure before you scoff. Remember: It’s your name, your reputation and your livelihood on the line, so why not protect your business? If you don’t, no one else will either. Well except for me, when you hire me to help you sue that former employee of yours. But again, another column, another day. So here goes.

Employment Contracts

Employment contracts outline the rights, responsibilities and duties of an employer and employee. Basically, if everyone behaves themselves and does their job, everyone will be OK.  Think of it kind of like a prenuptial agreement between your business and employees: The goal is to protect your assets from those potentially looking to take advantage of loopholes. Employment contracts generally cover:

  • Compensation and benefits
  • Term of employment
  • Grounds for termination
  • Confidentiality agreement
  • Ownership of work product
  • Dispute resolution
  • Non-compete clause

Remember when drafting employment contracts, they are binding for both parties. Therefore, if you add a surplus of incentives in your contract to entice a candidate that blew you away during the interview process to come aboard, you better be prepared to follow through with actually doling them out. It’s a safe assumption that exceptional candidates practice the rule of never signing on the dotted line without reading a contract thoroughly, so don’t assume you’ll be able to sneak things past them later, either. It’s important that potential employees understand what is expected of them but, at the same time, make sure your policies are fair and reasonable. Employment contracts will ensure a level playing field. Nobody likes a dictator (except, of course, the dictator) but nobody respects a pushover, either.

Non-Disclosure Agreements

Non-disclosure agreements are contracts in which all parties agree to protect the confidentiality of secret or proprietary information disclosed during employment or during another type of business transaction (say, for instance, in a business negotiation). You might think this goes without saying, but you need this kind of thing in writing if you have to battle with a rogue employee later who decides your competitor’s job offer looks more desirable than his current one. There are five key components to NDAs:

  • Definitions of confidential information included in the NDA
  • Exclusions from confidential information
  • Obligations of the party receiving confidential information
  • Duration that the NDA will be valid and enforceable
  • Miscellaneous provisions, such as possible consequences and penalties for violating the NDA

Penalties for a breaking an NDA include fines, restitution of the value stolen, termination of employment, loss of future job prospects, jail and/or court probation. Any employer (at least, any employer worth working for) will consider hiring a stray dog before they’d ever take a second look at someone who’s been terminated for violating an NDA. Utilizing non-disclosure agreements is an excellent, if not the best, way to protect your company’s intellectual property and trade secrets.

Trade Secrets

Trade secrets are confidential business information which provide a company with a competitive edge, ranging from industrial to commercial secrets. Trade secrets are the “secret ingredients” to your recipe for success, and are typically the reason employers ask their employees to sign NDAs. It seems pretty obvious that you wouldn’t share secret company information with anyone outside your inner circle, but these kinds of shenanigans happen often. Businesses will try to discover another’s trade secrets legally, using methods such as reverse engineering or employee poaching.

  • Reverse engineering: Deconstructing a rival company’s product in hopes of learning to replicate it for one’s own gain.
  • Employee poaching: Hiring employees who have access to desirable information away from a competitor.

It is illegal for a business to obtain trade secrets using the method of industrial espionage. You may be laughing and thinking this all sounds a little bit too much like a Jason Bourne movie, but I assure you, this isn’t something that only happens in Hollywood. Industrial espionage means to spy on a manufacturer or business with the intent of discovering its trade secrets and penalties for committing industrial espionage can be harsh. So what can be protected under trade secrets? Well, it must meet the following criteria:

  • The information must be secret
  • The information must have commercial value because it is a secret
  • The information must have been subject to reasonable steps by the rightful holder of the information to keep it secret

The unauthorized use of trade secrets by someone other than the holder — that’s your company — is regarded as a violation. You definitely want to be a business that protects its trade secrets by utilizing non-disclosure agreements or non-compete clauses. The penalties for violating trade secrets range depending on each state’s legal system. As a general rule, you can assume it’s not going to be pleasant. Trust me on that one.  

Building a successful business is something of which to be extremely proud. While most of the time your employees will give you their best, there’s always the risk of hiring someone who will be the kryptonite to your Superman. You have enough on your plate to deal with on a daily basis already. Don’t lose sleep at night worrying about a disgruntled employee stealing your trade secrets: Start utilizing employee contracts and NDAs today.