Ten Legal Mistakes Made by Start-Ups: Employment Issues (#4)

For the 4th installment regarding the Ten Legal Mistakes Made By Start-Ups, the next important issue relates to hiring employees or engaging consultants.

Myth #4:  "I don't need any form of agreement with employees as they are be hired at will and can be terminated at any time."

You are correct that under New York law, absent an agreement to the contrary, an employee is deemed to be "at will" and therefore can be terminated at any time.  I am not suggesting an agreement is needed for a general officer worker; however, with respect to certain employees/consultants the reason for, at the least, a simple letter agreement is to protect your business assets.

1.   Intellectual Property Rights:  If the employee or consultant will be providing assistance with respect to, for instance, the development of your goods or services, contributing to marketing plans or development of marketing ideas, helping with website design or content, or contributing anything that could constitute intellectual property, then there should be a an invention assignment/work for hire clause giving the business the rights in intellectual property contributed by the employee/consutlant. 

2. Prior Employment/Existing Restrictive Obligations: 

    (a) Again, if the employee/consultant will be involved in the development of your goods/services or content, require a representation and warranty  that the person will not  use or incorporate any intellectual property rights owned or developed for third parties/prior employers in the course of their work for your company.

    (b) Ask if they have a non-compete or any other restrictive agreement to make sure they are not violating obligations to third parties, and include a representation and warranty that the employee is not in violation of any existing agreements.

3.  Indemnification:  include an indemnification clause giving you the right to assert a claim against the employee/consultant for losses arising from any intentional misconduct, omission or gross negligence or for violating any obligations they have to 3rd parties.

4. Confidentiality/Non-Solicitation provisions:  there should be a confidentiality clause preventing an employee/consultant from not only disclosing but also using your confidential/proprietary business information to solicit customers after separation -- and include a right to seek an injunction (in addition to monetary damages).

5. What about a Non-compete?:  Under New York law, a covenant not to compete must be reasonable in time and geographic area, meaning it (a) is not greater than is required for the protection of the legitimate interest of the employer, (b) does not impose undue hardship on the employee, and (3) is not injurious to the public. Courts weigh the employer's business interests against the employee's ability to make a living. The enforceability of a non-compete is a discussion for a separate post, but understand that, in the absence of use of confidential information/trade secrets of the former employer or significant compensation, courts are chary to enforce non-competes.  The decision whether to require a non-compete and then drafting the provision should be made in consulation with a lawyer.

6.  Miscellaneous provisions:

    (a) Use of Email/Technology:  in this day it is helpful to restrict the use of and access to company email  and other technology to business-related matters.

    (b) Return of Equipment:  require the return of all equipment at the conclusion of the employment.

    (c) Venue for Disputes/Service of Process:  I like to include a choice of venue (place) for any dispute so you don't end up in an inconvenient forum in the event of an issue; and it is helpful to allow for service by mail as an alternative form of service of process because it is easier and cheaper than trying to effect personal service.

Therefore, when hiring an employee or engaging a consultant, consider whether even a simple letter agreement should be executed to protect your business.