Employment Agreements Not Required for Employees

One of our new clients is a software company that develops trading programs for financial services firms. We were helping them negotiate a 7-figure investment from one of its clients, a major investment bank.

In becoming familiar with our new client, it seemed odd to us that every employee had an employment contract, including the receptionist. When we inquired with our client, the CEO asked, “aren’t we required to have employment agreements with all employees?”

In every job the CEO prior to founding the company, had he always employed pursuant to an employment contract. He just assumed that this was the way business was done.

While it may be advantageous to enter into employment contracts with certain executive level employees or staff with very special skills, in most cases a contract is not necessary and is probably disadvantageous to management.

New York State is an “at will” employment state. This means that employees can be hired and terminated for any reason or for no reason, and at any time, without liability to the company.

Employment contacts alter this “at will” policy, which may give employees more rights than
what was available under the “at will” doctrine. This may expose the employer to liability if the employee was terminated in breach of his or her agreement.

Even though an employment agreement is not required, in businesses where employees are creating any form of intellectual property for the company, it is imperative that the company have the employee enter into an “assignment of inventions” agreement. This is not an employment agreement, but an agreement where the employee irrevocably assigns his or her right to any intellectual property they create for the company while employed there. Without is, in most cases, the employee (not the company) owns any inventions or IP it creates while on the job.

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Steps to Take if an Employee Violates a Non-Compete Agreement

If you think a former employee has been or is about to violate the terms of an agreement not to compete, contact your company's attorney right away. Your business could suffer irreparable harm of immediate action is not taken.

Your lawyer will likely take the following measures.

1. Assess Your Goals. What are you trying to protect and what are the risks of attempting to enforce the restrictive agreement versus doing nothing. Ultimately, what are you trying to achieve and how much are you willing to spend on legal fees to accomplish your goals.

2. Send Warning Letters. Warning letters will go out to the former employee reminding them of the terms of the agreement, and to their new employer advising them of the terms of the agreement.

3. Temporary Restraining Order. Your lawyer will file an "order to show cause", and expedited court proceeding, potentially without the other party being present, seeking a temporary court order (TRO) preventing the employee and new employer from violating the terms of the agreement.

4. Preliminary Injunction. Your lawyer will file for a preliminary injunction with your local state court, which is the next step after the TRO. The employee and his or her employer will likely attend and argue on their behalf. If you win, the employee is ordered by the court to discontinue the activity that is violating the restrictive agreement until such time as you can obtain a permanent injunction.

5. Permanent Injunction/Damages. After the preliminary injunction, your lawyer can seek a permanent injunction, and seek monetary damages for violating the terms of the agreement through a trial. If you prevail, the employee and the new employer is permanently restricted from engaging in the activities that violate the non-compete, and you may be entitled to monetary damages if you seek them.

6. Settlement. During all these stages, your attorney should be trying to work out a settlement between your company, the former employee and their new employer to achieve the fastest resolution to your issue. The outcome of these disputes are uncertain and the fight is expensive. Often times, these cases are resolved prior to filing for the TRO, and almost always resolved, either by settlement or the employee quitting their new position if you can obtain a preliminary injunction.

For more information about enforcing non-compete agreements, see the September2008 issue of Furnari Scher’s e-zine, the Business Law Update at: http://www.furnarischer.com/newsletter0908.html .