Anatomy of an EmploymentAgreementIncluding StockCompensation

Anatomy of an Employment AgreementIncluding Stock Compensation

Every person who performs any work for the company should sign an employment agreement before beginning work. Failure to do so may give rise to trouble ranging from ambiguity to litigation. The primary dangers of allowing employees to work without signing an employment agreement are:

• Termination. Absent a written agreement, an employee may claim that management made oral promises of employment for a certain duration. Furthermore, having an employee's duties clearly enumerated in writing helps employers defend themselves against wrongful termination suits (or the threats thereof).

• Ownership of Intellectual Property. Without the assignment provision in an employment agreement, which states

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  Many employers, particularly small com panies, have a hard time imagining any of their employees going to the expense and effort of taking them to court , and can become lackadaisical about these agree ments.What is more common is the strike suit , where an ex-employee's attorney (quite possibly working on contingency , in which the attorney is paid a percentage of any settlement or other monies received) threatens suit to extract a quick settle ment from a company eager to avoid the expense and hassle of litigation, regardless of the merits of the claim. The tighter your HR agreements, the fewer potential grounds for suit, the lower the probability that an attorney will put time into the case on contingency.

  that the employee assigns (gives over) all intellectual property rights to any creations made while in the employer's employ , the employee could lay claim to whatever work product he creates.

• Adherence to non-disclosure and non- compete agreements. Without a signed NDA or non-compete agreement, an employer will have a hard time preventing an ex-employee from sharing inside information or setting up a competing shop using information learned while at the company.

A solid employment agreement should include the following:

• Commencement date .

• Title and reporting structure . If applicable , state the employee's title and the title(s) of the person(s) to whom the employee will report. See sidebar on "Organization Charts " for a primer on creating a coherent organization. Note: the exercise of analyzing and elucidating the employee's duties and reporting structure carries the additional benefit of promoting logical organization charts and forcing management to take a somewhat global look at the company structure.

• Duties and Responsibilities . Lay out the employee's duties and responsibilities with enough specificity that you can terminate someone for failing to meet the enumerated duties, but with enough flexibility that you can add to and/or modify the description as the employee grows within the company. Always include language to the effect that "Company reserves the right to modify these duties and responsibilities in good faith as required."

• Schedule . To comply with federal and state wage and labor laws, hourly employees should have a regular schedule (see the Fair Labor Standards Act section in this chapter).

• Location . This is important if the company has more than one office or if the employee will be telecommuting . It may not be in the employer's interest to specify location because it may give the employee grounds for wrongful termination if the employer requires the employee to move to a different location to continue employment.

• Term and termination . Every contract should be clearly stated to be "at-will," meaning that either party may terminate for any reason and without a required notice period. The employer will still need to observe termination protocols and take care to follow the laws of its state (see the Avoiding Lawsuits section later in this chapter). To preserve its ability to terminate at any time, with or without cause, an employer should take care not to make any statements in e-mail or person that could be interpreted as promises of employment for a given duration. As long as the employment agreement carries an inte gration clause ( stating that the written agreement contains the entirety of the agreement between the parties and can only be modified in writing signed by both parties), the employer should be protected against any claims arising from casual statements, but caution is always the better part of valor in such matters.

If the employee successfully negotiates for a term of employment, he becomes a term employee. Consequences of termination for a term employee vary according to why the employee is terminated , whether for cause or without cause . In other words, a term employee has a guarantee of employment so long as he does not give the employer causewhich will be defined in the contract (usually theft, gross incompetence , or something of equal gravity). If the employer terminates him for any reason other than the contractually defined causes, the employee will receive certain compensation defined in the contract (ranging from a few months' salary to the rest of the contract). This right is often subject to the ex-employee's duty to mitigate , which means that the employee must look for comparable employment, which, if attained, would terminate the ex-employer's duties to pay out the balance of the contract.

Other terms that need to go in the employment agreement include:

Compensation

A compensation package can have several components , the most common being salary, benefits, and incentive compensation (bonus, profit-sharing, royalty participation, and so forth).

Salary

State explicitly the employee's annual salary, how it shall be paid (for example, in accordance with the company's payroll practices), and that it will be subject to all income and withholding taxes. The company will prefer not to specify raises or compensation review periods, but an employee will want some language regarding pay review periods (every six months, for example) and a clear articulation of benchmarks by which compensation decisions are made.

Benefits

There are three major categories of benefits:

Plan benefits like health, dental, retirement, stock options/profit participation. The agreement should not provide details of coverage under the plans, but should state that the employee will participate on the same basis as other employees in x, y, and z plans, according to the terms and conditions contained in the plan documents, and that such documents are subject to modification.

For stock option plans, the agreement must state that any option grants are made subject to the rules of the company's option plan and that any stock or options are subject to a vesting schedule. Otherwise, an employee who leaves before all of his or her equity interests have vested may argue that the equity was not subject to vesting and that he deserves the full amount of equity.

Time benefits like vacation, personal days, sick leave. These benefits should be stated explicitly, perhaps four personal days per year, ten vacation days, and so forth, as well as policies for extended absences.

"Other" benefits like a car allowance, expense account, computer for home, cell phone, and other such "perks." An employer will want to provide enough specificity here to prevent exorbitant spending (set a ceiling on monthly car expenses) and give guidelines where needed, especially regarding expense account spending and entertaining, as well as providing that the company is the actual owner of any items and may require their return at any time at the company's sole discretion. The employer will also want some flexibility to modify, so that if a benefit becomes unnecessary, or another is needed, it may change the package.

Health Insurance

This is a must. Variables that can increase or decrease the cost: HMO (health maintenance organization) vs. PPO (preferred provider organization); dental; vision; employer covering all of premium or only a portion; employer paying for all, part, or none of employee's family premium.

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Your organization will likely have to offer con tinuation of health cov erage to departing employees for 18 months under COBRA laws, but you may bill the employee for 102% of the cost of his coverage.

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You may be able to help your employees set up medical spending accounts, which will allow them to pay for any unreimbursed med ical expenses from pre-tax dollars.

Retirement Plans

Since more people under 40 believe in aliens than that social security will be around for them to collect, retirement plans are a hot button. The small employer's three big concerns are:

1. Keeping administrative costs low.

2. Maintaining flexibility about how much and whether to match or contribute to the employee's plan. There are several types of tax-advantaged plans to help your employees contribute pre-tax dollars to a retirement account, summarized in the table at the end of this chapter.

3. Availability of vesting. Unfortunately, the more flexible plans designed for small businesses do not allow for vesting of retirement plans, so when an employee leaves, he takes everything with him. Some businesses respond to this problem by waiting a certain amount of time (one or two years ) before enrolling an employee in the retirement plan program, but this can lead to bitter feelings by the employee.

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Take a look at the availability of a cafeteria (Section 125) plan for your business. Cafeteria plans help you maximize your benefit dollars by allowing employees to choose their own benefits (like you choose your food in a cafeteria), funded with some mix of your money and withheld salary.While they can be difficult to administer and must meet legal hur dles, the result is tax-advantaged for you (no FICA) and for them, since they pay with pre-tax dollars.

Performance-Based Compensation

If the company awards bonuses, it will often be from a bonus pool , a fundusually taken from royaltiesset aside in accounting for division among the employees. The company should state whether the bonus is entirely at the employer's discretion or whether it is calculated by a standard metric (for example, 2 percent of the bonus pool). Generally speaking, an employer will want to be as nonspecific as possible so as to avoid committing itself to a plan that it later wishes to modify. The employee may wish for a set of guidelines to know how performance correlates to bonus.

Other Key Terms of the Employment Agreement

Verification of Immigration Status

Federal laws strictly regulate the employment of immigrants; all employees need to fill out an I-9 form attesting to and providing adequate documentation (U.S. passport, work visa, or "green card") of legal U.S. work status.

Termination

Where the term of employment is at will , meaning that either party can terminate the relationship at any time for any reason by providing notice to the other, an employer generally has only to notify the employee and to be within the basic principles outlined in the Avoiding Lawsuits section of this chapter.

Ownership of Intellectual Property

A development house's main product is intellectual property ("IP"). Every day, employees come to work to create new IP in the form of copyrights, trademarks, and trade secrets (and rarely, patents). See Chapter 5, a Primer on "Intellectual Property," for more discussion of these. Unlike most other forms of property, however, Congress has legislated a set of rights that accompany that work of creation, even if someone else is paying you to do it. A company's intellectual property maintenance program has two major functions:

• Laying the legal paper trail to make sure that it actually owns IP created by its employees.

• Making sure that the company controls and receives all benefits deriving from that IP.

Works Made for Hire

Copyright law generally accords "authorship" of a copyrightable work to the employer where the creation is the work product of an employee acting within the scope of employment, hence the term work made for hire. However, disputes can arise surrounding the definitions of "employee" and "scope of employment" that may lead to the intellectual property creation failing the work for hire test and ownership being granted to the person who "created" it.

The legal test of whether a work qualifies as a work made for hire will look to:

• Control. Did the employer direct and supervise the creation of the work?

• Initiative. Who initiated the creation of the work?

• Pay. Did the employee receive compensation of an amount and kind commensurate with creating such a work?

• Time. How much time was spent on the work?

• Resources. Did the employer own or pay for the tools, including location and support personnel, used to create the work?

Assignment of Inventions

An employer will want language in the employment agreement clearly stating that all works of authorship and any intellectual property created during employment are works made for hire and that to the extent the employee retains any rights in any such works, the employee irrevocably assigns such rights to the company with no further consideration (compensation). This language acts as a catch-all for any rights an employee may have in any work created during employment that may not qualify for treatment as a work made for hire. The language consists of a present assignment ( "I hereby assign," not "I agree that I will assign") of all intellectual property rights to any results of employee's work during employment. See Exhibit B in the appendices to this chapter.

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Some states allow a company to claim all of an employee's work, whether or not created during work hours, using the employer's equipment or proprietary informa tion, or relating to employer's busi ness. Other states, California and Washington included, prohibit employer's from laying claim to work created on the employee's own time, without use of the employer's materials or propri etary data, and unrelated to the employer's business.

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To prevent claims of prior invention and to ensure compliance with the assignment provision, employers will want to require that the employee identify any pre-existing inventions at the time the agreement is signed and to agree to disclose any and all inventions during the term of employment as well as for a certain amount of time post- employment (six months to one year is rea- sonable). This obligation allows the employ er to "vet" any inventions, in other words, to review them to see if the company believes it has any valid ownership claims.

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Personnel files contain sensitive data and must be kept under lock and key (physical and/or electronic) and shown only on a "need-to-see" basis. Particularly sensitive documentssuch as those having to do with health or harassment issuesshould be kept separately. Many states regulate the maintenance of personnel files, so check with your local counsel for every office to be sure you are compliant.

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Standardize your forms.At the very least, create simple templates for performance reviews (see example at the end of this chapter) and disciplinary actions. Disciplinary actions should note: name of employee; date of incident and date of document; name of all par ties to whom the issue has been communicated and other co-work ers involved in the action; what happened ; actions being taken.

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Employees are entitled to a copy of all documents that they sign.

Non-Disclosure Agreement, AKA the NDA

This is sometimes a separate agreement, attached as an appendix to the employment agreement. This language protects the company from any employee leaking proprietary information or using such proprietary information. The NDA will not extend to use of any information publicly available or publicly known. The restrictions can last anywhere from four years to indefinitely. Highlights include:

• Definition of proprietary information. Usually defined as all trade secrets and other information gained during employment and not generally known in the employer's industry, including any information about the business, employees, product, customers, business practices, or potential customers.

• Equitable Relief. Equitable relief is a kind of non- monetary legal compensation, generally forcing the losing party to do ( specific performance) or refrain from doing ( injunctive relief) certain things. Most NDAs include language stating that damages , money, may not be sufficient and that equitable relief may be sought by the employer. Example: An employee leaves an employer and uses the employer's confidential marketing list to contact potential customers. In addition to suing the former employee for money lost due to the employee's actions, the company will sue for an injunction prohibiting the employee from conducting any business resulting from the offending use of the company's confidential information.

Non-Compete

One challenge facing employers in an industry as IP-intensive as game development is that employees walk out the door every night with the company's most valuable assets. Fortunately, they usually come back the next day, but employers are powerless to "take back" a departing employee's knowledge. What employers can do is put a temporary restriction on a departing employee's ability to use that knowledge in a manner competitive with the original employer.

An employer can restrict an employee from competing with the company during the term of employment. Some states, most notably California, restrict a company's ability to enforce a non-compete clause after the employee leaves. Other states allow enforcement of reasonable (for example, time-limited or geographically relevant) post-employment restrictions on competition. Generally, an employer will want to prevent the employee from taking any employment with or providing services for a competitor, owning an interest in, operating, or preparing to operate a competing venture for at least one year, more if this was a key employee. If the employee is not an at-will employee and is leaving before the expiration of the employment term, the non-compete will often be in force for the duration of the original term plus some additional period of

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There is a gray area concerning the definition of "operating." If an employee leaves the company, takes a job as a barista for two years and spends his nights coding a project that he sells the first day his restric tion is lifted, has he been "competing" during those two years? If your employment agreement restricts that employee's ability to prepare to compete, then such activities are prohibited .A further complication, however, is the legal enforceability of such restrictions; some states and courts will not allow what they see as excessively restrictive post- employment covenants.

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