Anatomy of an Employment
Every person who
any work for the company should sign an employment agreement before beginning work. Failure to do so may give rise to trouble
from ambiguity to litigation. The primary dangers of allowing
to work without signing an employment agreement are:
Absent a written agreement, an employee may claim that management made oral promises of employment for a certain duration. Furthermore, having an employee's
clearly enumerated in writing helps
against wrongful termination
(or the threats thereof).
Ownership of Intellectual Property.
provision in an employment agreement, which states
Many employers, particularly small com
panies, have a hard time
their employees going to the expense and
effort of taking them to
, and can
become lackadaisical about these agree
ments.What is more common is the
, where an ex-employee's attorney
(quite possibly working on
which the attorney is paid a percentage of
or other monies received)
threatens suit to extract a quick
ment from a company
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
(gives over) all intellectual property rights to any creations made while in the employer's
, the employee could lay claim to whatever work product he creates.
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.
Rainy Days and
Suits Always Get Me Down, or Why Buy Insurance
As mentioned in Chapter 2,"First Steps," you need to find a good insurance broker and figure out what kind of insurance you should carry.Your state probably
that you carry certain kinds of insurance, like worker's compensation and disability, which are already pretty pricey.There are several other kinds of insurance that you should consider, particularly if your business has 15 or more employees (which usually
you under more regulations), including, but by no means limited to:
Employment Practices Liability Insurance.
This will protect you from lawsuits filed by employees or ex-employees for things like harassment.
Liability for employee acts.
If your employees frequently travel around in
on business errands, you may want to consider some kind of insurance to protect your company in case of an
Intellectual property defense.
This insurance covers your costs of defense against infringement claims.
The key concept to understand about insurance is that it isn't just to cover the cost of any awards against you, it is to cover your costs of
against claims. Plenty of employees try to shake down their employers, and the cost of defending against such suits can be astronomical.
A solid employment agreement should include the following:
Title and reporting structure
, state the employee's title and the title(s) of the person(s) to whom the employee will report. See sidebar on "Organization
" for a primer on creating a
organization. Note: the exercise of analyzing and
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
the right to modify these duties and responsibilities in good faith as required."
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).
. This is important if the company has more than one office or if the employee will be
. 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.
. 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
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
employee. Consequences of termination for a term employee vary according to
the employee is
. 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
, 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:
A compensation package can have several
, the most common being salary, benefits, and incentive compensation (bonus, profit-sharing, royalty participation, and so forth).
Compensating employees is more complicated than writing a check.
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
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.
There are three major categories of 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
schedule. Otherwise, an employee who
before all of his or her equity interests have vested may argue that the equity was not subject to vesting and that he
the full amount of equity.
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.
like a car allowance, expense account, computer for home,
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,
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.
Let your benefit plan match your company's financial health.
The Quick and Dirty on Benefits
There are three things to know about benefits:
They're expensive, often adding between 20 and 30 percent to an employee's salary package.
They're expected. Employees get very emotional about benefits, seeing them as a direct index of how an employer values the health and welfare of its people.
They're complicated. Not only are the
themselves complex and difficult to administer, there are many laws
provision of benefits. Employers must be careful to have their benefit plans checked for compliance with discrimination laws. Many small businesses elect to outsource benefit administration to a broker. Shop around with different solution providers, and see what kinds of packages you can get (health and 401(k) administration, for instance).
With a bit of creativity, you can add a lot of value to your package without costing the company an arm and a leg.The two main value-adds you can leverage:
The company's increased purchasing power means you can offer your employees lower
rates for optional insurance such as life, disability, auto, vision, and dental, or negotiated rates with local
like a health club or even a massage therapist.
The company can use its administrative resources to help employees take advantage of somewhat confusing, paperwork-
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.
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.
You may be able to
help your employees
set up medical
which will allow
them to pay for any
ical expenses from
Since more people under 40 believe in
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:
Keeping administrative costs low.
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.
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
an employee in the retirement plan program, but this can lead to bitter feelings by the employee.
Take a look at the availability of a
(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),
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.
If the company awards bonuses, it will often be from a
, 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).
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
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.
Sharing the Wealth: Four Methods of Performance-Based Compensation
Performance-based compensation is almost a given in technology-based companies.While equity has
somewhat out of favor ("so much paperwork, so little return," as one CEO put it), consider the four main varieties of "thanks, good job," in order of administrative complexity (
Bonuses. Bonuses are the most common salary supplement. Rather than wait until the end of the year, when employees can easily compare bonuses, you may want to give them out at the time of a particular achievement.The pros are that this method can be dramatically different from year to year and employee to employee, and it reflects achievement most closely. On the other hand, bonuses can cause strife among employees and can create an emphasis on
Royalty Pools. Royalty pools set aside a certain percentage of royalties from a given game (or from all royalties, as preferred) for distribution among employees.This is another very flexible plan.Administrative hassles are low; employees are compensated for the projects they work on; there can be a "vesting" effect if employees must still be employed to draw from the royalty pool.Then again, not many projects actually return royalties, so you may end up paying cash bonuses to reward employees.
Profit-sharing plans. Profit-sharing plans include both immediate cash payout plans and deferral plans.A
plan pays cash to eligible employees at the end of a stated period of time, typically at the end of the company's fiscal year.A deferral plan can take many forms.The company could make deposits on
of employees into their IRA or 401(k) plans. Deferral plans can have tax advantages for employees. Profit-sharing plans are more like retirement plans, have high administrative costs, and don't really reflect performance since the percentage is set as a percentage of salary and all employees generally receive the same percentage.
Ownership. Some employers grant employees actual ownership in the form of stock options or shares.This is low cost, and it allows employees to participate in the company upside. However, there are high administrative costs, and additional shareholders can create legal
Where the term of employment is
, 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:
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
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:
Did the employer direct and supervise the creation of the work?
Who initiated the creation of the work?
Did the employee receive compensation of an amount and kind commensurate with creating such a work?
How much time was spent on the work?
Did the employer own or pay for the tools, including location and support personnel, used to create the work?
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.
Treat your employees
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
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.
Every employee should have a confidential fileelectronic is nice, but since it will have several original signed documents, hard copy is wise. What goes in there:
Resume and application
Original and updated job description
Performance evaluations (signed by employee). See form at the end of this chapter.
Signed receipt for employee handbook
W-4 (IRS form for payroll withholding and taxes)
Form I-9 (
that the employee may work in the U.S.)
All benefit paperwork, i.e. 401(k) documents
Documentation of any disciplinary action
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.
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:
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
; actions being taken.
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
information or using such proprietary information. The NDA will not extend to use of any information publicly available or
known. The restrictions can last
from four years to indefinitely. Highlights include:
Definition of proprietary information.
Usually defined as all trade secrets and other information
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 is a kind of non-
legal compensation, generally forcing the losing party to do (
or refrain from doing (
certain things. Most NDAs include language stating that
, 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.
employers in an industry as IP-intensive as game development is that employees walk out the door every night with the company's most
assets. Fortunately, they usually come back the
day, but employers are powerless to "take back" a departing employee's knowledge. What employers
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
the employee leaves. Other states allow enforcement of reasonable (for example, time-limited or
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
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
some additional period of
Your company's most
valuable asset goes
home every night.
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
.A further complication,
however, is the legal enforceability of such restrictions; some states and
courts will not allow what they see as excessively
time. Because game development is highly virtual and pays little attention to geographic boundaries, a world-wide restriction is reasonable.
to the non-compete clause, a non-solicit provision prohibits a departing employee from recruiting,
, or inciting the
of any other employees for a period of time, usually one year.
clause protects both parties from later claims that the document does not reflect oral or other promises made by the opposing side. This clause states that the written document reflects the entire agreement between the parties, in other words, there are no promises or conditions influencing the relationship that are not reflected in the written document.
Arbitration is an alternative to litigation (where the parties go to trial). Arbitration may be much quicker and cheaper, taking place in front of one to three people, usually
, who review the evidence and rule on the case. An arbitration clause may be to the benefit of both the employer and employee, since exorbitant legal expenses will not
a party from seeking redress; some feel that employees gain leverage from the threat of costly litigation and the exposure of a court trial, not to mention the natural sympathy between jurors and another working person. In some states, however, there are no rules of evidence to protect a party; furthermore, parties may lose the right to
's decision. See the Arbitration section in Chapter 6 for further discussion of this clause.