Know the Legal Issues Related to These Three Employment-Related Documents Whether you’re getting ready to hire your first employee or you’ve had hundreds of people on your payroll for years, it’s essential that your employment documents work for you rather than against you. That means they need to be clearly written, comprehensive, and compliant with all applicable laws and regulations. There is a long list of documents you’ll use as you recruit, hire, manage, and terminate workers, and they will vary based on your specific industry and needs. But three important employment-related documents apply to virtually every operation: Employee handbook Work-for-hire agreements Restrictive covenants agreements Employee Handbook The employee handbook (sometimes called an employee manual or policy and procedure manual) is the document that establishes the ground rules for how you want people to conduct themselves within their capacity as your employees. Employee handbooks typically cover policies on such issues as: Paid and unpaid time off policies, including holidays, vacation, sick leave, family medical leave and other types of leave. Employee behavior, including attendance, dress code, meal and rest breaks, as well as bans on harassment and discrimination and your general expectations of employee conduct. Social media policy, including whether employees can access social media at work, the use of company information and trademarks on the social media accounts of employees and their family and friends, and how employees should respond to offensive or negative posts about the company made online by others. Compensation, including when and how employees are paid, overtime policies, and pay grade structures. Benefits, including health and other insurance coverage, other benefits you may offer, and eligibility criteria. In addition, there are likely other issues specific to your operation or industry that you may want to cover in your employee handbook. A well-crafted employee handbook eliminates misunderstandings and ambiguity regarding what is acceptable workplace conduct and what is not. It also provides the employer with a legal foundation should disciplinary action, up to and including termination, be necessary. Work-for-Hire Agreements A work-for-hire or work-made-for-hire agreement specifies that whatever materials your employees produce during the course of their work belong to the company. While this most commonly applies to intellectual property and creative endeavors such as writing, design, and photography, it’s a good idea to have every employee sign a work-for-hire agreement stipulating that whatever they produce in their capacity as your employee becomes the company’s property. Restrictive Covenants Agreements It’s important to take appropriate steps to protect your proprietary business information as well as your customer interests and relationships through the use of restrictive covenants agreements. These documents include things that could have a negative impact on your company that employees agree not to do, such as non-compete, non-disclosure, non-solicitation, and non-disparagement. It may not be necessary or appropriate for every employee to sign an agreement covering one or more of these restrictive covenants; that’s a judgment call you must make based on your specific circumstances. Two Most Common Mistakes While the complexities of employment law make creating effective documents a challenge, the two most common mistakes employers make in this area are: Not having employees sign relevant documents. If you go to the effort and expense to create various agreements and other documents, be sure every employee signs the ones appropriate to their job and status. Not understanding what the documents say. Before you ask an employee to sign your documents, take the time to understand exactly what they mean and be sure the terms are enforceable. Get a Document Checkup How long as it been since an attorney has reviewed your employment-related documents? If you don’t remember and if you’re not sure they’ll protect your company in the event of a dispute, take advantage of our Legal Sleep Aid service. I will review up to five of your documents and let you know where the red flags are and what you can do about them. Go here for complete details.
Buy-Sell Agreements go by different names (Shareholders Agreement, Operating Agreement, Partnership Agreement, for example), but they all have a common goal: provide a clear roadmap for the company and owners to deal with changes in ownership, with minimal impact on the operation and value of the business. Bad Buy-Sell Agreements—those that do not minimize the impact of a change in ownership—share one or more of the following three mistakes. Mistake #1: Cookie-cutter terms that just don’t work. It’s a mistake to think that a generic Buy-Sell Agreement is just fine for every company. The terms of a Buy-Sell Agreement must fit the unique characteristics of the company. These unique characteristics may include unequal ownership interests, differing roles in the company, particular family relationships among owners, and industry-specific requirements. Unless the Buy-Sell Agreement takes into account all of the particular aspects of the company and its business, it’s likely that the Buy-Sell Agreement will fail when it is most needed. The Solution: Every Buy-Sell Agreement must be carefully prepared to reflect the unique characteristics of the company and its owners, and it should be regularly reviewed and updated. Mistake #2: Determination of the buy-out price is unreliable. Because Buy-Sell Agreements are about the buying and selling of the company’s ownership interests (stock, membership units, partnership interests, etc.), price matters. If a fixed price set in the Buy-Sell Agreement is too low, then the selling owner (or his or her family) suffers. If a fixed price set in the Buy-Sell Agreement is too high, then the buying owners or the company suffers. For this reason, it’s a mistake for the Buy-Sell Agreement to state a fixed price for the company’s ownership interest, unless the parties are required to update the price regularly. It may be better for the Buy-Sell Agreement to contain a formula to determine the appropriate price, but even a formula can lead to problems if it depends on wrong or outdated presumptions. Because of the problems associated with stating a fixed price or a formula, many Buy-Sell Agreements require an appraisal at the time of a transfer of ownership interests. An appraisal approach might be better, but it too can suffer from problems, such as failure to specify what facts the appraisal should take into account or gaps in the procedure for determining the price by appraisal. The Solution: Whether a fixed price, formula, or appraisal, the price provision of every Buy-Sell Agreement must accurately reflect the specific nature of the company and it must be flexible and subject to periodic update. Mistake #3: No assurance that cash will be available to pay the buy-out price. Even if a buy-out price is determine appropriately, the buyer—the other owners or the company—must have the ability to pay it. Unless the Buy-Sell Agreement provides specific terms for the timing and source of paying the buy-out price, the buying owners or the company may be legally obligated to pay the whole amount immediately from operating funds. This debt obligation could cripple the company or the remaining owners. The Solution: Every Buy-Sell Agreement should specify the intended source of funds for paying the buy-out price—often including life insurance and disability insurance policies—and a reasonable time period for payment of any unreserved amount. Common Elements of a Good Buy-Sell Agreement Buy-Sell Agreements should be unique documents, reflecting the particular characteristics of the company and its owners, but good Buy-Sell Agreements share most of the following common elements. Good Buy-Sell Agreements: Prohibit transfer of ownership interests except as specifically provided; Deal with the transfer of ownership interests in the following scenarios: voluntary transfer by an owner; involuntary transfer by an owner (caused by divorce, bankruptcy, or creditor action, etc.); death of an owner; disability of an owner; termination of employment of an owner; and irreconcilable deadlock among owners; Spell out the procedure by which buy-out may occur in each scenario; Describe the method of determining the appropriate buy-out price; Describe the source of funds for payment of the buy-out price (e.g., insurance); Describe payment terms; and Describe what should happen pending buy-out. Most important of all, no Buy-Sell Agreement is a good Buy-Sell Agreement unless it is signed by all of the owners, including persons who become owners after the Buy-Sell Agreement is originally signed. Do you have a good Buy-Sell Agreement? If you’re not absolutely sure, contact BrewerLong to have your Buy-Sell Agreement reviewed by an experienced small business attorney.
Unless you’re a sole proprietor, you need an Owners Agreement to guide your company through daily operations and special situations. Unless You’re Microsoft, You Need an Owners Agreement. Having an Owners Agreement is important for every non-public company with more than one owner. Owners Agreements go by different names—Shareholders Agreement or Buy-Sell Agreement for a corporation, Operating Agreement for an LLC, Partnership Agreement for a partnership. Whatever it’s called, it’s essential. “We Already Have Bylaws.” Great, but they are not the same thing. Bylaws deal with the internal management of a corporation and the relationship between shareholders, directors, and officers. Owners Agreements have a different focus: the relationship among shareholders. The Owners Agreement is much more important for a non-public corporation. LLCs and partnerships don’t even have bylaws. Protection From Unknown Unknowns. What happens to the business when personal tragedy strikes one of its owners? Personal liability, bankruptcy, divorce, disability, death—any one of these events in the life of an actively involved owner can cripple the business unless precautions are taken in advance. Those precautions belong in an Owners Agreement. Know Your Partners. You trust your business partners, but how about their creditors or ex-spouses? An Owners Agreement is needed to ensure that the ownership interests (stock, membership units, partnership interests, whatever they’re called) do not wind up in the wrong hands. Deadlock! You and your business partners are reasonable people, but sooner or later even reasonable people disagree. This isn’t a problem for the U.S. government or large corporations where the voting process (usually) ensures a winner, but what if there are only two owners of the company (or four, six or eight, etc.)? The Owners Agreement can include more creative solutions to deal with deadlocks. Competition—Good for the Market, Bad for your Business. Having put time and resources into building the business, the last thing you want is for your business partner to compete against the business. On the other hand, you might not care if your business partner has a side business. What’s allowed and what’s not in the way of extracurricular business activities should be addressed in the Owners Agreement. Like Old Fish. If an employee-owner quits or is fired, the last thing anyone needs is for her to hang around. If she keeps her ownership interest in the company, that’s exactly what can happen. The Owners Agreement should require a buy-out. Not the Time for Haggling. The Owners Agreement should address the purchase price and payment terms for the buy-out of an owner’s interest, whatever the triggering event. Unless you keep loads of cash lying around—“just in case”—you or your business might suffer from an unexpected obligation (or opportunity) to cash out an owner. By the way, how much is that ownership interest worth anyway? Bells and Whistles. Sometimes the cookie-cutter, default rules of a corporation are just fine, but often you and your business partners want things your way. LLCs or partnerships are especially flexible and allow customization. All this customization must be provided in the Owners Agreement. They Grow Up So Fast. As your company grows, your Owners Agreement may not fit so well (like my children’s clothes). Every few years, it’s important to review and update the Owners Agreement to make sure that it continues to fit your company.