Independent contract hires can create tricky situations

There was a time when you joined a company for life. Times have changed. Now we are looking for guarantees. If you do not negotiate for your employment, you are lost.

There are basic terms and conditions for an employee or a contract hire. Among your considerations are the following:

• Salary/fee plus bonuses (compensation package)

• Time limits/renewals of the agreement

• Termination (for cause or for convenience)

• Confidentiality

• Scope of responsibility

• Covenant not to compete

• Reimbursable expenses

Memberships/licensing fees/continuing education

• Office demeanor

For design/build contractors, there are separate considerations, which will be covered in a future article.

Salary/fee plus bonuses

One of the larger costs to an employer is medical insurance. As a result, a prime motivation toward having a contract hire, rather than an employee, is avoiding this cost. In either instance, the agreement should be clear as to what, if any, coverages are provided.

If the salary or fee will be augmented by new work generated, the agreement should spell out that the bonus will be based, not on income earned, but on net income received. How you define “net” is up to you.

Time limits/renewals

You locate someone who is perfect for your planned expansion of your business. Your company is in Kansas; the person is in Chicago. There are obviously expenses for moving this person to your area and training him in your business. To be sure you obtain a fair return on that investment, it just makes sense to commit this new person to a term, be it for one year, six months, or a different period.

You can put into the employment/contract agreement that if the person leaves before a certain time, the costs of the person’s transfer to your location can be deducted from final payment.

Where there is a renewal option, make certain that it is confirmed in writing.

Termination

This issue is sticky. Some states declare that all employment contracts are “at will.” In other words, the employer is free to terminate at any time and for any—or no—reason.

In any event, if you do terminate the employment, there is no harm in specifying the grounds (lack of work ethic, insubordination, thievery, etc.)

Confidentiality

This clause is a must. As an employer, you do not want to spend thousands of dollars in training on your unique (although maybe not patentable) processes, marketing plans, etc., only to have your employee/contract hire absorb the information and use it to start a competing business.

A typical confidentiality agreement does not involve monetary damages. It does permit the employer to seek an injunction to bar the use of “confidential” information, including customer lists.

Scope of responsibility

More for a contract hire than an employee, a scope of responsibility clause can help shield the employer. Such a clause will outline the extent of the person’s authority to bind your company. Even more important than the clause, however, is a regular review of the person’s activities on your behalf.

Covenant not to compete

Essentially, this clause is unjustified, but is enforceable under very limited restrictions.

You retain someone, either as an employee or contract hire because of his/her experience, background, education, contacts, etc. However, you are concerned that he/she will form a competing entity, or join a competitor.

Covenants (promises) not to compete have had a checkered history.

“One of the most common terms in an employment agreement is a covenant not to compete. The employee agrees that after he leaves the employer’s business ... he will not compete with the employer in a certain area, or with respect to a certain product, service, or business, or for a certain period of time ... the covenant not to compete simply tries to extend the employee’s duty beyond the termination date of the employment agreement.”

Modern Law of Contracts,

H. O. Hunter, 1986.

As an employer, the concept may seem reasonable, but it is wrong. Its premise is to deny the use of the talents of the person that made him/her appealing in the first place after he/she quits or is fired.

If you use such a covenant, it must be defensible. The “competition” must be limited in space and time. For example, an Arizona contractor who mostly works in his home state has also ventured into New Mexico and Texas. A covenant not to compete anywhere in the United States will probably fail.

If the contractor then adds to the covenant that it is good for 10 years, he will likely be outside the bounds of what the courts will enforce.

“Restrictive covenants usually cover the identity of competitive activity, the geographic area of restricted employment, and the length of time competition is restricted ... [C]ourts’ hostility to restrictive covenants is so great that it is unlikely that any covenant will survive if it extends for more than a short time.”

Modern Law of Contracts

Expenses

In any employment/contract hire agreement, you should specify what expenses are reimbursable, including memberships in associations. All expenses should be approved. For sales agents, this issue is extremely important.

Office demeanor

We live in an age where what used to be treated as just offensive office behavior now can lead to litigation. You need a firm manual.

This document should state what is, and what is not, acceptable in the office. My law firm has one and so should your company. Review it regularly to assure yourself that the program is working.

Although it may be hard to believe, statistics have shown that most people lie on their résumés. The lies may be minor in some cases, but they usually concern the person’s experience and education.

When that happens, you may find out that the person is not as qualified for the employment as you were led to believe. Or, the person’s lack of integrity on his résumé will show through later in his performance on the job.

Regardless of the cause, you will surely find that some employment circumstances just do not work out as hoped for or planned. Employees and employers both benefit from being able to refer to a solid employment manual that fits the company and its culture and a well-written and comprehensive employment agreement. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.