Employment Agreement Checklist

Employment Agreement Checklist

This checklist is used to negotiate employment agreements between employer and employee.

1. Job description and specification

• What is the title of the employee’s job?
• Is employee guaranteed a seat on the board of directors while an employee?
• Where is the place of employment? What are the regular working hours?
• Can employee be relocated unilaterally to another city, or only with the employee’s consent?
• Is the employee allowed to be involved in other activities (e.g., a directorship on other boards, involvement in community activities)?
• What are the employee’s responsibilities?
• Can the employee be demoted? Can employee’s responsibilities be substantially modified, decreased, or increased?

2. Wage and Salary

• What is the base salary? What about overtime? What about commissions?
• Does the salary go up each year by a designated amount or by cost of living increases?
• Are there designated times for performance reviews?
• When is it payable?

3. Benefits

• Will the employee participate in all benefit plans of the company?
• Which of these plans should be in place for the employee? Are all of the payments for the benefits the responsibility of the company? such as:

– Health and medical (including spouse and dependent coverage)
– Educational reimbursement
– executive financial counseling
– Disability
– 401(k)
– Pension
– Cafeteria plan
– Life insurance
– Stock option/stock grant
– Dental, vision
– Professional liability insurance

• Any special loans or forgiveness arrangements?
• Are some of the benefits taxable to the employee? Should employee be reimbursed for the tax?
• How much vacation per year is employee entitled? Does unused vacation continue to accrue for the benefit of employee and payable on termination of employment?
•Is there a designated sick pay policy?

4. Bonus

• Are there bonuses to be tied to objective performance standards?
• Are target bonus levels or minimum bonuses to be established?
• Does employee get a signing bonus?
• Is employee entitled to a guaranteed bonus?

5. Reimbursement of expenses

• Are moving expenses to be reimbursed?
• Is there a relocation package available for employee (e.g., the company purchasing employee’s house on a move?)
• Will the employee’s business expenses be reimbursed promptly?
• Is there a car or car allowance, cellular phone provided, or other such amenities?

6. Stock option grants

• Does the option exercise period terminate 90 days after termination of employment or can it be longer?
• Are the shares obtained upon exercise of an option subject to repurchase on termination of employment? If so, at what price? (from the employee’s perspective, repurchase rights should not be included or should be limited.)
• Are the shares obtained upon exercise of an option subject to a right of first refusal? If so, on what terms?
• Is the option a tax advantaged incentive stock option?
• Does vesting of options accelerate on a change of control of the company? Or, on other events such as termination of employment by the company without cause?
• Will employee get stock options?
• What percent of the company do the options represent? (note: in venture capital backed privately held companies, the usual price for common stock options is 1/10 of the price for the latest round of preferred stock issuance.)
• What is the exercise price for the options?
• Are any options deemed automatically vested upon grant?
• How long will unvested options vest? Monthly? Yearly cliff vesting?
• How long is the option exercisable?

7. Stock grants

• Does vesting accelerate on a change of control of the company? Or, other event such as termination of employment by the company without cause?
• Does employee have to pay anything for the grant?
• What tax will the employee have to pay for the grant? Will the company also pay employee an amount to cover the tax?
• Does employee have a right of first refusal for future company stock issuances to avoid dilution?
• Will the employee be granted stock?
• Is this stock subject to vesting? What is the vesting period?
• Is this stock subject to repurchase rights or rights of first refusal?
• Should employee file a § 83(b) irc election?

8. Confidentiality restrictions

• If there are confidentiality restrictions on the employee, are the following excluded from the definition of “confidential information”?:
• How long do the confidentiality restrictions last? Indefinitely? A set number of years after disclosure to the employee?
• What restrictions have been imposed on the employee by the prior employer?
• The employee must be careful not to use or divulge confidential information of a prior employer – the new employer will often want a covenant from the employee prohibiting such use or disclosure.

9. Invention assignment issues

• What is the scope of the company’s rights to the employee’s development of new inventions, trade secrets, and ideas? Are these the company’s only if they specifically relate to company business and developed during company time?
• Do the invention assignment provisions comply with the california labor code or other applicable law?

10. Term and termination

• How long is the employment term?
• What are the circumstances that the employee can be fired “for cause”, such as: Conviction of a felony or any act involving moral turpitude; Commission of any act of theft, fraud, dishonesty or falsification of an employment record; Material uncured breach of the employment agreement; Failure to perform reasonable assigned duties; and/or Improper disclosure of the company’s confidential information; Lost of licenses; Disability
• Avoid “for cause” definitions that give the company too much latitude for termination.
• Is employee entitled to severance pay on termination? How much?
• If the employee is terminated without cause, is it clear that employee will get all salary and benefits that employee would otherwise have been entitled to for the remaining term of the agreement?
• If terminated without cause, is the company required to continue paying for benefits or cobra benefits for some period of time?
• Is employee given the right to terminate at the employee’s discretion prior to the end of the term?
• Does the agreement get renewed automatically on a year-to-year basis unless the company gives the employee notice of non-renewal at least 90 days in advance of the end of the term?
• Is the employment “at will”?
• What are the grounds, if any, on which employers can terminate?
• What are the terms, if any, for compensation in the event of early termination?

11. Liability protection for the employee

• Does the company’s articles of incorporation limit the liability of officers and directors to the maximum extent permitted by law?
• Is there an indemnification agreement that protects the employee, covering: Indemnification protection for claims; automatic advancement of legal expenses; Protection even if the employee is no longer employed by the company? (note statutory limitations on indemnification.)
• Does the company have directors’ & officers’ (“d&o”) insurance coverage? Is the company required to maintain a minimum amount of such coverage?
• Do the company bylaws provide for indemnification protection for officers and employees?

12. Breach of agreement

• Is the company required to give notice to the employee of any alleged breaches of the agreement and an opportunity to cure?

13. Disability and death

• What is a disability event?
• What happens on death? Can medical and other benefits continue for some period for the spouse and children?
• What happens on disability? Does the employee continue to receive salary and benefits?

14. Golden parachute

• What are the tax implications of the golden parachute payment? Will the company also gross up the parachute payment to cover the tax?
• Will the company reimburse the employee’s expenses in connection with an irs audit claiming additional tax?
• In the event of a change of control of the company, is employee entitled to terminate employment and receive a “golden parachute” payment (e.g., two or three times the yearly salary)?

15. Representations and warranties of the company

• Are there specific representations and warranties of the company that should be set forth (e.g., financial resources, venture capital backing)?
• Has employee been promised something orally that should be reflected in the employment agreement?

16. Post-employment limitations

• Are there limitations on the employee soliciting company employees? For what period?
• Is there a covenant not to compete after termination of employment?

17. Dispute resolution

• How are disputes to be resolved?
• Should arbitration be considered?
• In what city must disputes be brought if litigated or arbitrated?

18. Miscellaneous provisions

• Choice of law
• Integration clause
• Is the company prohibited from assigning the agreement?
• Is there an attorneys’ fees clause where the prevailing party in a dispute would be entitled to recoup its attorneys’ fees incurred?

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