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Is your employment contract limiting your future opportunities?

It’s a pretty standard thing: take a new job, sign a new employment contract. The contract usually pretty boilerplate – no creation of a partnership, no guarantee of future employment, the employment is at-will, your salary is $X, etc.

But there are often provisions hidden in these long, multi-page documents that can create limitations on your future opportunities, whether you plan to go to another company or you plan to start your own firm. What are these provisions and how can they affect you? Let’s take a deeper look…

Unsexy Lawyer Note

Employment law is extremely complex. It varies by country, by state, and even by city or town. This post is based on my experience, and is NOT legal advice. If you are contemplating a new employment contract, you would be wise to consult a real attorney in your locale that can assist you.

I’m a programmer, not a lawyer. If you take my advice as though I were a lawyer, I’ll feel bad for you, but I won’t be responsible.

The Moonlighting Clause

Most companies have some kind of clause pertaining to what’s known as a “conflict of interest.” The goal for the company is to ensure that your outside interests don’t damage the company’s interests. But many contracts also include a provision about your outside, professional activities, like this:

While employed by the Company, you agree to devote your full time, attention, and energy to the business of the Company and will not engage in any other business or professional activity, whether or not such activity is pursued for gain, profit, or other pecuniary advantage.

Allow me to translate: “I promise I won’t do any work for anyone who isn’t the company while I work for the company.”

While you might think this is all well and fine, this dramatically limits the scope of your professional opportunities. Moonlighting is something that many developers do to supplement their income but is not allowed by this clause. You can’t write a book, speak at a conference, or do anything that earns you money outside the company. These clauses are broad, and as far as I know, enforceable.

Developers could run into trouble when they go to start their own firm or leave to freelance. If a company is angry about their departure they could claim injury under this provision.

The “All Your Base” Clause

When you work for someone else, it is assumed that the work you have performed is something known as a “work for hire.” This means that the employer owns all rights to the work produced, unless your contract specifies otherwise.

Many employment contracts also contain langauge that asserts ownership of essentially every idea you’ve ever had while working for them (the “All Your Base Are Belong To Us” clause). For example:

The employee shall disclose to the corporation all ideas, suggestions, discoveries, inventions and improvements…which she may make solely, jointly or in common with other employees during her employment with the Corporation…whether or not conceived or made during regular working hours,…shall be for the benefit of the Corporation and shall be considered to have been made by virtue of this agreement and shall immediately become exclusive property of the Corporation.

There’s a big glaring problem with this language: the company owns everything you ever say, do or think from the day you start to the day you leave, so long as they can argue it would have benefited the company.

This means every thought you have potentially belongs to your employer. Have a great idea for starting a business? The company owns it. Great idea for a new product? The company owns that, too. Everything you do, say, think, write or invent while you work for the company belongs to the company and some clauses are even broader than this one.

These clauses are dangerous. Avoid them like the plague.

The No Competition Clause

Companies are understandably worried about their competitors stealing talent, trade secrets, or other information from them. And some try to limit this by including a “non-compete” clause in their employment contracts. For example:

The Employee hereby agrees that they shall not (without the prior written consent of the Board) during the Restricted Period within the Prohibited Area, whether on the Employees’s own account or in conjunction with or on behalf of any other person, and whether as an employee, director, principal, agent, consultant or in any other capacity whatsoever, in competition with the Corporation be directly or indirectly, employed by, engaged in, performing services in respect of or concerned with:

(a) The research into, development, supply or marketing of any product which is of the same or similar type to any product researched, or developed, or supplied, or marketed by the Corporation; or
(b) The development or provision of any services (including but not limited to technical and product support, consultancy or customer services) which are of the same type to any services provided by the Corporation.

This particular contract defines the “Prohibited Area” as “the United States and any country in the world where…the Corporation develops, sells, supplies or researches its products or services.”

Non-competition agreements are some of the worst agreements you can ever be asked to sign. They directly affect your livelihood for a period of time, and depending on the company, they can be impossible to avoid violating unless you leave your industry. For example, if you were to sign an agreement of this nature for a consulting company that does web design and development, you could potentially be barred from working for any creative agency anywhere in the world for a period of time. That would substantially hurt your livelihood.

Of course, many states place restrictions on these agreements, ranging from holding them unenforceable (like California) to permitting their enforcement entirely (like Maryland). Still, it is better, and critical, that you as a developer carefully consider (and consider hiring an attorney in this area of law) any non-compete you’re asked to sign.

The No Solicitation Clause

Many companies are also worried that you’ll steal their employees to form your own company, or when you leave to go work for someone new. And so, many companies add a clause to their employment agreements known as a “non-solicitation clause”. This clause prohibits you from hiring or encouraging their employees to quit for a period of time. For example:

The Employee hereby agrees that they shall not during the 24 months following their employment, enter on their own or in conjunction with or on behalf of any other Person, directly or indirectly, induce, solicit or entice any Corporation Employee to leave such employment where that Corporation Employee is a Corporation Employee on the commencement of the Restricted Period, or has been a Corporation Employee during any part of the three (3) months immediately preceding the commencement of the Restricted Period.

This can severely limit your professional options. If your colleagues are jumping ship, this clause in the contract prohibits them from hiring you on at their new companies; in fact, anywhere your colleagues have gone is pretty much off limits, since there’s no way to prove or disprove that you weren’t hired thanks to your prior association with an individual. In addition, if a company goes bankrupt or conducts a mass layoff, you’re prohibited from hiring or being hired by anyone you knew or worked with before the layoff. This can be damaging to your career, and the careers of your coworkers.

Instead of contractually requiring people not to hire their former coworkers, companies should encourage employees to stay by offering great benefits, even better work environments, and opportunities for growth. These will make poaching virtually impossible.

The Choice of Law Clause

The last clause is one that most overlooked in employment agreements. It goes something like this:

Any disputes relating to this Agreement or the breach thereof shall be adjudicated solely in the courts of the State of Maryland, including the Federal District Courts located therein. Furthermore, you agree to be subject to the personal jurisdiction of such courts…

Most people gloss over this for a few reasons: they assume they’ll never need to file a suit or be sued, and they don’t really care about the venue of the court or the laws. After all, the laws of Delaware are the same as California, right?

Wrong.

Choice of law is one of the the most important clauses in your employment contract!

This becomes an issue when you’re working with larger companies that have multiple offices in different states. For example, a multi-national corporation might have offices in Detroit, while your office is in Texas. But if you agree to litigate disputes in Michigan, or you end up getting sued by the company, you may find yourself hiring a lawyer that lives thousands of miles away and spending hundreds if not thousands of dollars traveling to the jurisdiction of the litigation.

To make matters worse, choice of law clauses let a company select the venue that they prefer for resolving disputes. Work in California? A competent lawyer knows that California ignores non-compete agreements, but many states don’t. Yet a judgement from a Federal court in Kansas will carry the full weight as if it were decided in a California court. You could find yourself subject to very unfriendly employee relations laws as a result of the “choice of law” provision. It’s a form of legalized forum shopping.

Make sure you know what jurisdiction your contract is enforced in, and if you hire an attorney, hire one from that jurisdiction. Otherwise, the advice you get may not be worthwhile, since the lawyer giving it may be unfamiliar with the laws of that specific state.

What are your worst employment contract examples?

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cordoval (@cordoval) wrote at 4/29/2014 5:07 pm:

would be good to hear from your personal experiences and how to navigate things

Fernando Basso (@FernandoBassobr) wrote at 4/30/2014 6:57 am:

“whether or not conceived or made during regular working hours” <– This is infuriating! Well, all clauses shown are preposterous indeed.

This article is very insightful. Thanks a lot.

Here in Brazil things are very similar. I'll watch out these type of clauses in the future.

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