Offer Letters and Employment Agreements in California

When a job offer is made, both parties are usually eager to start working together.  However, it is important to make sure both parties understand the new employee’s job duties, compensation, benefits and other factors of the new job.  An offer letter and employment agreement put such terms into writing, to minimize misunderstandings and future problems.  Because these agreements are very important, both sides should have an attorney assist in drafting, negotiating and/or reviewing these documents.

Offer letters and employment agreements should be drafted for the specific position and parties involved.  Form contracts are not advisable, particularly for managers, professionals or anyone who will have access to company information or property.  However, there are certain types of provisions that are common to both agreements.

An offer letter focuses on the key details of employment.  It will often include the job title and description, compensation and benefits package, bonus structure, vacation, holidays, leave policy and start date.  Generally, it will also state that employment is at-will and may provide a mechanism for resolving employment disputes, such as arbitration.  There may also be restrictive covenants depending on the nature of the position.

Typically, employment agreements include additional details regarding job duties and performance obligations because compensation may be linked to performance incentives.  Since these agreements tend to be given to key employees, provisions for compensation may discuss discretionary bonuses, stock options, deferred compensation and fringe benefits.  The agreement also may be for a specified time, only permit termination for cause, and provide for an exit or severance package.  Restrictive covenants will be included, along with provisions for dispute resolution.

Restrictive covenants are contract clauses which limit the activities of an employee during and after employment has ended.  They are intended to prevent former employees from using the employer’s confidential business information after they have left the job.  The most common types of restrictive covenants include:

• Non-competition.  The employee agrees to not work for a competitor or start a competitive business for some set period of time and within a certain geographic area after employment ceases.  While a reasonable non-compete may be found valid in many states, these clauses are unenforceable in California, as California law disfavors agreements that discourage workers from seeking new opportunities. 
• Non-solicitation.  This provision prevents an employee from soliciting customers, suppliers or employees of the former employer.  The purpose is to limit the employee from using information garnered during employment to lure customers or employees away and unfairly compete with the former employer.  Like a non-compete, a non-solicitation clause is generally void under California law with few exceptions.  California employees should consult with an attorney when presented an agreement that has such restriction.
• Nondisclosure or confidentiality.  Commonly known as an “NDA” (non-disclosure agreement), this restriction ensures that employees cannot use or disclose proprietary information, such as trade secrets and client lists.  The provision often applies for several years after employment ends unless the information becomes public through other means.  This type of clause is often found valid under California law so long as the scope is not too vague or abstract.

California law is strict about these types of restrictive covenants.  An attorney can ensure they are properly drafted to reasonably protect employers, without overly burdening the employee so they cannot find new employment.

If an employer breaches the employment agreement, the employee may seek damages.  However, many agreements specify how disputes will be handled.  Often, they require arbitration and will set forth which state’s laws will apply to the dispute and where the dispute will be heard.  Notably, before including a mandatory arbitration clause, California employers should stay current on such arbitration agreement as its enforceability under California law is still contested.  On the other hand, in the event the agreement does not require arbitration, then the employee can sue in state or federal court as appropriate.

Damages for breach generally include lost wages.  Where the agreement provides that termination must be for cause and the employer terminates otherwise, the employer may be liable for the employee’s total earnings owed under the contract, including benefits.  However, the employee has a duty to mitigate those damages by seeking alternative employment.  In such event, the employee would be limited to damages in the amount of the difference in pay between the terminated position and the new position.

Employers may also seek damages for breach of the agreement.  This typically arises where a restrictive covenant has been breached.  An employer who wishes to enforce a restrictive covenant can file a lawsuit in court and obtain an injunction requiring the employee to follow its terms and/or receive damages for the breach if there have been monetary losses.  Again, as noted above, not all restrictive covenants are valid under California law.  California employers should speak with an attorney to consider the enforceability of such restrictive clauses before bringing an action in court.

Conclusion

For the best protection in an employment relationship, both parties should consult an attorney.  California employers should understand what is reasonable to include in offer letters and employment agreements to protect their rights and minimize liability.  Prospective employees in California should seek guidance on the appropriateness of the provisions and the potential to negotiate more advantageous terms that apply during and after employment.

Romano Law can provide guidance on offer letter and employment agreements in New York, California and Florida.

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