In recent years the use of employment contracts has come under scrutiny in many states, including New York. But an employment contract may be necessary in order to prevent disclosure of trade secrets, unnecessary competition, or solicitation of clients or other employees. When creating an employment contract, it is important to ensure the contract is legally binding for both parties. Here in New York employment contracts must be supported by consideration, protect a legitimate business interest, and be reasonable in duration and geographic scope. Accordingly, there are three primary factors for employers in New York to consider when determining if an employment contract is appropriate: 1) is the other party a potential new hire or a current employee; 2) what is the employee’s role within the business; 3) what is the employee’s geographic reach?
First, is the employee a new hire or a current employee? All employment contracts must be supported by consideration. (This means there must be something of value exchanged for the employee’s promise to uphold the contract.) For new employees conditioning their employment on entering into the employment contract is sufficient consideration, because the employee is being offered something of value (a job) in exchange for entering into the contract. For current employees, however, consideration must include something more than just continued employment, such as a raise or promotion.
Second, consider the employee’s role within the business. In New York there is a growing trend amongst courts to not enforce employment contracts, especially contracts where an employee agrees not to work for a competitor, between employers and low-level employees. In other words, protecting the labor of low-level employees is generally not considered a legitimate business interest. On the other hand, preventing the disclosure of trade secrets, client lists, or other confidential information, are all considered legitimate business interests. Unfortunately, New York Law does not directly define low-level employee. However, New York courts will examine all the facts when determining if the contract is enforceable; such facts might include the amount an employee earns, the employee’s duties, and the employee’s access to sensitive company information. Further, legislation was recently introduced in New York to limit the enforcement of employment contracts to employees earning greater than $75,000.00 per year. Accordingly, employers should consider the employee’s role within the company and the impact on the company in the event an employee leaves when deciding if an employment contract is necessary.
Finally, consider the employee’s geographic reach. In order to be reasonable in geographic scope the employment contract should be limited to the geographic region where the employee works and/or interacts with clients. For example, an international corporation with an employee who has clients around the globe may request that employee enter a contract that is global in scale. Generally, however, the scope of any employment contract should be limited to the area where the employee does business. Further, the contract should be limited in duration. In New York courts have generally found that six months is a reasonable time frame, but courts have also upheld contracts that require employees not to compete for up to three years after they leave the company.
Regardless of whether you are an employee or an employer, you should seek legal advice before entering into an employment contract. This will help ensure that the contract is legally binding for both parties and can save the time and frustration of litigating the enforceability of the contract down the road.