Business owners spend years building their ideas into successful companies. They consider their business assets – their buildings, equipment, customers, copyrights and trademarks. But one of the greatest assets that sometimes goes unrecognized is the value that key employees bring to the workplace every day. When looking at long-term plans for a business transition, it is crucial to consider what can be done to make sure that key employees and trade secrets remain part of the business afterward.
This consideration is important because without all of the right agreements in place, a business could experience a situation where key employees learn of the business transition and decide to leave and open a competing business. Further, parties looking to purchase the business want to ensure that it retains employees who have key relationships with customers and a detailed understanding of the business operations.
A business’ employees are its hidden asset. Just as an owner would protect other assets, it is important for him or her to consider in advance what steps will be taken to ensure a successful transition with employees in place.
Utilizing one or all of several types of employment agreements can be a crucial first step in the thought process.
Employee retention bonus agreements
Employers that are concerned that their key employees will leave the business as it is sold should consider entering into specific employment agreements with them that will encourage them to stay through the business transition. Such an agreement can call for the employee to stay employed with bonus payouts over a period of time (employee retention bonus agreement), or it can call for a term of years with a specific severance clause.
Employee retention bonus agreements have their time and place. Many companies do not find this form effective, except in a situation where it wants to retain a key employee to stay on for a period of time during a business transition. There are many considerations about the timing of the bonus – whether it is paid on the front end or the back end. Of course, it is important to consult with an employment attorney who specializes in business transitions to evaluate the pros and cons of using this as opposed to another form of agreement.
A second option is to enter into an Employment Agreement for a term that provides financial incentive in the form of increase in salary for the crucial years during the business transition. This agreement might pay out a severance only if the employee stayed employed, and could include a noncompetition provision to prevent the employee from becoming employed with another employer in the industry.
Noncompetition agreements are either stand-alone agreements or a provision in an agreement that contractually restrains an employee from working for another employer in the same industry for a reasonable period of time, and in a reasonable geographic area. Oregon has a specific statute that governs noncompetition agreements, which requires that an employer notify an employee at least two weeks before the inception of employment that he or she will be required to sign such an agreement, or that is provided as part of a “bona fide advancement” of employment. A “bona fide advancement” requires not only a change in job title, and job description (i.e., a promotion), but also an increase in salary.
In addition, noncompetition agreements may be applied only to employees who are exempt under the Oregon wage and hour laws and who are paid at least $70,000 per year. Noncompetition agreements in Oregon currently can last for only two years; however, a new bill before the Oregon Legislature would further restrict the period for a noncompetition agreement to 18 months.
Noncompetition agreements that are part of an asset sale, as opposed to part of an employment agreement, do not have the same restrictions.
An alternative to a noncompetition agreement is a non-solicitation agreement. These restrict an employee from soliciting customers or employees of the business after he or she leaves for a period of time. A well-drafted non-solicitation provision can provide similar protection to a non-competition agreement and is a lot easier to enforce.
Non-disclosure/intellectual property agreements
Employers who have trade secrets – including processes, formulas, client lists and intellectual property – that they wish to protect will want to include a non-disclosure/intellectual property provision in their agreement. This provision has no restrictive time period and prevents an employee from disclosing confidential, trade secret information.
A companion provision is the intellectual property provision, which can prevent employees who develop a product or idea while working for the business from taking that idea with them when they leave. It is the property of the business because it was developed while the employee was being paid by the company.
Each of these provisions, either in combination or as separate agreements, is a tool that a business can use to protect its assets. Companies that have these agreements in place at the time of a business transition will realize increased interest and value. Consideration to these forms of agreements should be made no later than five years prior to a business transition to ensure that they can be properly in place prior to the sale.
As published Daily Journal of Commerce, June 26, 2015
Ideas & Insights
News and Insights delivered to your inbox