Every new company should consider whether it needs certain agreements.
These include:
1. Shareholders’ Agreement
If you have more than one shareholder, you should have a shareholders’ agreement.
2. Employment agreement
If you are hiring employees, you should have a written employment agreement with each of your employees. If you don’t, you risk the following:
- A significant severance claim. In an employment agreement, it is typical for an employer to ask an employee to agree to accept severance only as provided by the Employment Standards Act, which is one week for every year of service to the company (after year one), to a maximum of eight weeks. Without an employment agreement, the employee is entitled to demand common law severance, and the old rule of thumb for common law severance was one month for every year of service. While the equation is now more complicated than that – a court will look at length of service, age of employee, character of employment, and the job market, among other things – the benchmark for common law severance remains significantly higher than the severance entitlement under the Employment Standards Act. An employee with ten years of service could still realistically expect ten months severance under the common law.
- Loss of intellectual property. You may think that whatever your employees invent or design or make while they work for you is automatically the property of your company. However, the law does not presume that an employer owns the intellectual property developed by its employees. To retain ownership rights over intellectual property generated by an employee, employers must have a written agreement from the employee that intellectual property developed while working at the company is the company’s property. Without such an agreement, if your company develops intellectual property, it may have difficulty selling it later or face unfair competition from a former employee.
- Solicitation of your employees and clients by ex-employees. A non-solicitation clause in an employment agreement creates a contractual obligation of an employee not to solicit your employees or clients for a given period of time after that employee leaves the company. This can help prevent not only the loss of those clients and employees, but also prevent unfair competition by former employees.
- Disclosure of your confidential information and trade secrets. A confidentiality clause in an employment agreement not only helps set expectations with employees, but also gives you a remedy if an employee leaks important company information.
3. Independent contractor agreement
Similar considerations apply for independent contractors, so it is important to have a written contract with your independent contractors as well. Another thing to keep in mind with contractors is, are you sure they are really contractors? It is not enough to call someone a contractor and pay them that way if the relationship is structured more as an employment relationship. For example, a person who puts in a regular shift at your office under your guidance is very likely an employee, even if you pay them as a contractor. The line between a contractor and an employee can be blurry – the important considerations are the level of control, the ownership of tools, the chance of profit for efficient work and risk of loss for inefficient work. However, every case is different and legal guidance is important. The penalties for getting it wrong can be stiff – CRA can assess for unpaid remittances (CPP, EI, income tax, etc.) while the person you thought was a contractor can sue for employment benefits (severance, vacation pay, etc.).
4. Non-disclosure agreement
If you plan on entering into major contracts or trying to attract investors, you should have a non-disclosure agreement ready to go. An “NDA” imposes confidentiality obligations on the other party, compels them to return information after the deal has been negotiated, delete all electronic data, destroy all copies, and obligate their advisors to observe the same conditions. Failure to do so results in significant liability. As a result, an NDA gives you some comfort that the other side will take precautions to protect your confidential information and use it only for the purpose of performing due diligence on your company.
Having these agreements in force creates value for your company, sets the right tone and gives you peace of mind, while preventing significant exposure and expense for your company down the road.
