Review Employment Contract
Systematically review an employment agreement to identify legal risks, non-standard obligations, and negotiation opportunities.
Why This Is Best Practice
Adopted by: ABA Labor and Employment Law Section, employment attorneys, HR professionals at major employers
Impact: According to SHRM data, 70% of employees sign employment contracts without reading them fully; non-compete and IP assignment clauses in particular have significant long-term financial impact that is invisible at signing.
Employment contracts are rarely negotiated after starting — the leverage window is before signing. Key provisions (non-compete scope, IP assignment breadth, dispute resolution) are typically negotiable at the offer stage but extremely difficult to modify once employment has begun. A structured review prevents inadvertent waiver of rights.
Steps
- Confirm employment classification — Verify employee vs. independent contractor classification; misclassification by the employer creates IRS penalties but also affects: benefits eligibility, overtime rights, IP ownership, workers' compensation. Employees have significantly stronger legal protections.
- Review at-will vs. for-cause termination — Most US states are at-will (employer can terminate without cause); exceptions: Montana (just cause required after probation); union contracts; implied contracts from handbook language. Confirm what constitutes "cause" if the contract provides for-cause protection.
- Audit the non-compete clause — Assess: geographic scope (city vs. state vs. national vs. global); duration (6 months is more defensible than 2 years); activity restriction (specific role vs. entire industry). Enforceability: California, North Dakota, Oklahoma — non-competes are void. FTC Non-Compete Rule (2024) — check current legal status. Negotiate: narrow the scope and duration; add a carve-out for existing clients/employers; require payment during the restriction period.
- Review the IP assignment clause — Confirm scope: does it cover only work done during employment hours using company resources (appropriate), or does it extend to any invention in the company's industry regardless of when created (overbroad and potentially void in CA, WA, IL, MN)? Carve out: prior inventions schedule (list all prior IP before signing — protect existing side projects).
- Assess confidentiality obligations — Verify duration (perpetual for trade secrets is standard; perpetual for general confidential information is overbroad); confirm exclusions mirror standard NDA exclusions (see negotiate-nda skill).
- Review compensation terms — Confirm: base salary, bonus structure (discretionary vs. formulaic — discretionary = employer can pay zero), equity terms (cliff, vesting schedule, acceleration on change of control), expense reimbursement policy, benefits eligibility dates.
- Check dispute resolution clause — Arbitration clause waives right to jury trial and class action; review: arbitration organization (AAA, JAMS), fee allocation (employer should pay), confidentiality of proceedings, governing law. Note: class action waivers limit collective action rights.
- Review garden leave and non-solicitation — Garden leave: paid period where you cannot work elsewhere (more enforceable than unpaid non-compete); non-solicitation: prohibits recruiting former colleagues or contacting former customers; confirm scope and duration are reasonable.
Rules
- Always complete and sign the prior inventions schedule before your start date; do not rely on oral representations that your side projects are excluded.
- Never sign a contract with a non-compete covering an entire industry or with a duration exceeding 12 months without legal review.
- Request modification of any IP assignment clause that covers inventions created on personal time with personal resources outside your employment scope.
- Verify that equity grant terms are reflected in a separate grant agreement (offer letters referencing equity are unenforceable without a formal grant).
- If an arbitration clause is present, confirm the employer pays arbitration costs — EEOC v. Luce, Forward (9th Cir.) established that undue cost barriers can void arbitration agreements.
Examples
IP clause red flag: "Employee assigns to Company all inventions, ideas, and discoveries conceived during the term of employment that relate in any way to Company's business or actual or demonstrably anticipated research and development." Risk: the phrase "relate in any way" is overbroad and may cover unrelated side projects. Requested revision: add "using Company resources or arising from Employee's work for Company" to limit scope to employment-nexus inventions.
Common Mistakes
- Ignoring the prior inventions schedule — Failing to list pre-existing IP before signing can inadvertently assign it to the employer; courts have upheld assignment of prior inventions when the schedule was left blank.
- Assuming non-competes are unenforceable — Enforceability varies dramatically by state and industry; do not assume a non-compete is void without jurisdiction-specific legal advice.
- Not reading the equity plan documents — Offer letters mention equity in general terms; the actual rights (acceleration, repurchase rights, anti-dilution) are in the option plan documents, which must be separately requested and reviewed.
Law disclaimer: This skill encodes professional best practices for educational purposes. It is not legal advice. Consult a licensed attorney before making legal decisions.