Are Employment Agreements Necessary for U.S. Employees?
When hiring U.S. employees, Israel-based companies are generally careful to have their employees sign a Proprietary Information Agreement, whereby the employee agrees not to disclose confidential and/or proprietary information learned during the employee’s period of employment. Many companies assume there is no need for any additional written employment agreement setting forth the terms of the employee’s employment, based on the common perception that employers of U.S. employees may simply rely on the default “employment at-will” standard, pursuant to which, in the absence of a formal employment agreement, a company may terminate an employee’s employment at any time for any reason with no notice.
Although it is correct that U.S. law does not require employers to provide their employees with a formal offer letter or written employment agreement (and only a handful of states even require any kind of written notification to an employee regarding terms of employment), a company’s failure to provide an employee with a written document outlining the terms of an employee’s employment misses some fundamental opportunities.
Consider the following:
- Employment At-Will: Not all U.S. states have accepted the employment at-will doctrine, and many of the states that have accepted the standard, have modified the doctrine substantially, implementing various exceptions to the rule. Before assuming that the at-will employment doctrine will govern the relationship between a company and its employee, the company should verify whether the rule does, in fact, apply to a particular employee, and/or whether such rule has been modified for the state in which the employee plans to work.
In addition, although the company may welcome the right to terminate the employee at any time with no notice under the default at-will employment doctrine, consider the flip side: the employee will have the right to simply fail to show up to work one day, send an email of resignation, and have no responsibility to transition any outstanding business matters. Does the company truly prefer this scenario to one in which the employee would be required to give even a few days’ notice?Note that U.S. law generally does not require the employee and the company to have identical notice periods, and so a written employment agreement can establish that the company will not be required to give the employee advance notice of termination, but the employee will be required to do so- thereby preserving the company’s employment at-will rights in writing, while simultaneously requiring the employee to give advance notice of resignation.
- Implied Contracts: In the absence of a written agreement, most at-will jurisdictions recognize implied contracts. An implied contract can come in the form of something as simple as an email from an employee’s manager stating, “Don’t worry- we’d never terminate your employment without giving you at least two weeks’ notice.” A company has very little control over the creation and/or substance of such implied contracts, which have been held by U.S. courts to create binding obligations on the part of the company. If written properly, a written employment agreement will override any implied contract, and thereby protect the company from the potential implications of stray manager emails and/or statements.
- Undefined Terms: The lack of written employment terms leaves the employee and the company with undefined terms that have the potential to create points of disagreement and misunderstandings during the employment period. Particularly in the case of Israeli companies hiring employees in the U.S., where the company’s founders are generally located in Israel, cultural gaps and geographical distance inherent in the relationship between the parties can be bridged via a well-written agreement that documents mutually agreed upon terms. Why not focus on what the company should communicate in writing to an employee for purposes of facilitating the success of the employment relationship, rather than on the company’s right to terminate the employee immediately in the event that the relationship fails?
- Dispute Resolution: U.S. employees have the right to sue their employers in a court of law based on numerous claims- the most common being wrongful termination, discrimination and breach of contract (including an implied contract as referenced above). A recent study found that by the time an employee’s frivolous lawsuit is dismissed even at an early stage, the average U.S. company has spent $100,000 in legal fees and court expenses; going to trial and winning (meaning no fees owed to the employee) costs an average of $500,000 in fees and expenses. To top it off, discrimination trials in the State of New York, for example, take an average of 32 months. Imagine spending 32 months and $500,000 to win a frivolous case against a former employee. Moreover, as soon as an employee files a claim in court, with few exceptions, the allegations are public record and are easily accessible to third parties (including but not limited to journalists). In the wake of #metoo allegations publicized against one company’s CEO, the company’s stock fell by 20% in a matter of days.
In contrast to litigation in a court of law, consider the process of arbitration – which has been shown to be faster, simpler, less expensive and private. For these reasons, plaintiff’s lawyers are reluctant to take cases to arbitration in the first place. Arbitration has been such a successful means of thwarting plaintiff disputes, that some states have passed laws limiting the types of claims for which arbitration may be required. The enforceability of most of these laws has yet to be determined, but arbitration is certainly enforceable with respect to the majority of employee claims in most states. It is therefore generally worthwhile for a company to consider making mandatory binding arbitration a condition of employment- resulting in: no lawsuit, minimal (to no) wasted time and/or money, no public exposure and perhaps no arbitration in the first place.
In light of the above, Israeli companies hiring U.S. employees should think carefully before passing up the opportunity to issue a written document that confirms:
- the employee must give some sort of notice of resignation;
- the terms of the employee’s employment are limited to those set forth in such written document, to the exclusion of any other statements, whether oral or written, formal or informal; and
- unless otherwise prohibited by applicable law, any dispute between the parties will be adjudicated via arbitration.
As to whether the document should be a formal “whereas” type of employment agreement or an informal letter agreement countersigned by the employee- this is a purely stylistic, rather than legal consideration, depending on the nature of an employee’s position and the employee’s location. For example, it would be appropriate to send a formal employment agreement to a CEO in New York City, but a more informal letter agreement to a Sales Development Representative located in Silicon Valley. In either case, as long as the document is signed by both the employee and an authorized representative of the company, the terms will be contractually binding on both parties, and present an opportunity to provide the company with enhanced protections, as well as a higher likelihood of success, when hiring U.S. employees.
For further information regarding U.S. employee agreements, and other matters related to U.S. employees, please contact Meira Ferziger, Esq. at firstname.lastname@example.org. This article is not meant to provide legal advice with respect to a specific matter, nor is it meant to be a solicitation for legal services.