Employment Contract Negotiation: Why It Matters

Lori Costanzo speaks to Lawyer Monthly about negotiation and employment contracts.

Touching on what contracts should contain, she reveals the importance of the Equal Pay Act and how to fight the stigma behind contract negotiation.

What is an employment contract and what provisions should it contain?

First, I’d like to define what an employment contract is and then discuss why certain provisions are essential to include.  An employment contract/agreement is a document that should always be memorialized in a writing, signed by both an employer representative and the employee.  Emails and email threads are not sufficient; there should be one written document which identifies all the binding terms and conditions of an employment relationship between an employee and an employer. This is what constitutes a legally enforceable document.  Differences exist among private and public sector employment contracts because the goals of an employment contract are different in each sector.

As an employer, you also have the option of negotiating with the prospective employee if your first offer is not accepted or your prospective employee makes a counteroffer.

What does an employment contract cover?

An employment contract generally covers:

  • Job title and an overview of job responsibilities
  • Reporting relationships
  • Salary, including benefits, paid holidays, paid vacation, paid sick leave, paid time off (PTO)
  • Sales commissions (must be in writing and how calculated)
  • Bonus pay potential and how a bonus is determined
  • Profit sharing and how profit sharing is determined
  • Stock options and stock buy-back provisions
  • Employment contract signing bonus
  • Business Expenses, including phone allowance, company car and mileage
  • Moving and transition expenses
  • All other negotiated perks
  • Details of employment termination including potential causes, the severance package, and the termination notice.

In fact, it is illegal for employers to prohibit employees from discussing or inquiring about their co-workers’ wages.

What challenges do you and your clients face when trying to negotiate employment agreements?

Some of the challenges my clients face when negotiating employment agreements are not knowing what salary to ask.  Particularly women, who may have been working for a company which frowned upon co-workers sharing salary information.  Although the California Equal Pay Act has been around for decades to prohibit an employer from paying its employees less than employees of the opposite sex for equal work, it was not until 2015 when Governor Brown signed the California Fair Pay Act, the Equal Pay Act was strengthened in a number of ways and signalled California’s commitment to achieving real gender pay equity. Fortunately, with this amendment to the CA Fair Pay Act (which went into effect 1 Jan 2016), all employees are free to openly discuss salaries. In fact, it is illegal for employers to prohibit employees from discussing or inquiring about their co-workers’ wages.

The amended Equal Pay Act is powerful

Another obstacle has been being asked by the prospective employer what you are currently making.  This is a tricky question considering most prospective applicants would like to increase their income with each work-related move.  Although this question violates the Fair Pay Act employers still make the mistake of asking.  I suggest to clients to do their homework – ask around. If people are unwilling to share their information with you, look at industry standards or comparable positions in public employment positions.  Glassdoor is one potential source of salary information.  City and County salaries are posted on https://transparentcalifornia.com/.  Effective from 1 Jan 2018 the Equal Pay Act covers public employers.  Also, recently enacted was Labor Code §432.3 which prohibits employers from seeking applicants’ salary history information and requiring employers to supply pay scales upon the request of an applicated.

The amended Equal Pay Act is powerful; it prohibits an employer from paying any of its employees wage rates that are less than what it pays employees of the opposite sex, or of another race, or of another ethnicity for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.  Most employees are simply not aware of how far-reaching the Act truly is.

 Another area of negotiation occurs when an employee wants to separate from their position or is working under adverse conditions, yet they are not willing to file a lawsuit against their employer.

How do you approach these challenges to remove the stigma companies may have towards negotiation? 

Most companies expect their applicants and/or current employees to negotiate.  As long as it is done in a professional manner, you will likely be well received and respected – and if not, it’s a clear signal you may want to look or be elsewhere.  Asking for a raise is probably the single most difficult negotiation.

Another area of negotiation occurs when an employee wants to separate from their position or is working under adverse conditions, yet they are not willing to file a lawsuit against their employer.  We help many clients negotiate a separation agreement or severance package, sometimes an early retirement depending on the circumstances.  One thing is for certain, everything is negotiable.  Employees and/or employers who have an inclination that the other is not happy is usually right.  It is so much better to intervene early and be transparent about goals and expectations.  Hiring a lawyer does not have to escalate the situation and can be the best way to facilitate a negotiation.

 Basically, no-poaching agreements limit an employee’s opportunities for career and income growth.

In what ways do companies try to make agreements favour them? What signs should employees look out for?

Many employment agreements are written from the companies’ standpoint.  In other words, all of the terms and provisions favour the company and not the employee simply because they drafted provisions designed to protect the company from liability.  For instance, asking an employee to sign a non-disclosure agreement (NDA) is certainly understandable, particularly in Silicon Valley – and of course is legal.  Similarly, a provision or after their employment terminates is also commonly found in employment agreements.  However, non-compete clauses are generally unenforceable in California, which includes strict language which prevents an employee to start a business which competes with the employer’s business.   Telling employees not to ‘poach’ is another issue.  Commonly, the employees’ job demands a huge network of vendors, colleagues, co-workers, etc.  To ask that the employee not contact persons in their network is not only unreasonable but is not supported by law.   Again, it does not prevent companies from trying to obtain this agreement from the employee.  Basically, no-poaching agreements limit an employee’s opportunities for career and income growth.

 For instance, I encourage all clients to consider putting in a three-step process before a dispute can be filed in court.

When can companies terminate employees when a dispute over contractual agreements arise?

This question underlies the importance of having a strong employment contract from the inception of the employment.  If the job changes occur over the years, the contract should be updated to reflect those changes.  And, most importantly, the need for there to be a specific dispute resolution provisions in the contract.  This is not simply a choice of law provision but rather specific steps to be taken in the event a dispute arises.  For instance, I encourage all clients to consider putting in a three-step process before a dispute can be filed in court.  First a 30-day negotiation period is preferable to require either the company or the employee to provide written notice of their dispute and that good faith efforts are made during a face to face meeting to resolve the matter.  If that does not resolve the dispute, the parties agree to mediate before a neutral party.  I suggest putting in specifics on who the parties should use (i.e.. JAMS, ADR Srvcs., AAA or any other well-known group) and outline who is responsible for the costs of mediation.   If there is a binding arbitration provision which normally provides that the company pays, employers are normally amenable to paying for mediation in hopes of settling the matter early and saving in litigation costs.

Lori Costanzo

Founding Partner

408-741-9780

www.costanzo-law.com

My name is Lori Costanzo, I am the founding member of Costanzo Law Firm.  My firm specializes in employment litigation, primarily for the plaintiff/employee however, occasionally we do defend business owners.

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