Hiring and retaining top talent is vital to the growth and success of an RIA. Yet, for various reasons, the relationship with certain employees or independent contractors does not always work out. Unfortunately, as we’ve seen in numerous circumstances over the years, relationships that go awry can present financial and reputational harm for an RIA– which is why it’s vital for RIAs to have properly-prepared employment agreements to mitigate the likelihood of harm to the firm if the relationship with any given employee goes sour. In this article, we highlight seven common mistakes we have observed in employment agreements and how these mistakes can be remedied to better protect the RIA. For an article discussing how to avoid making mistakes when recruiting new employees, please click here.


  1. Failing to Clearly Describe the Employee’s Roles and Responsibilities

It’s vital that employment agreements not only list the title of the person being hired, but also the specific functions to be performed by the employer. Delineating these roles and responsibilities is vital to ensure that the employee clearly understands the expectations prior to joining the RIA and to prevent disagreements down the road should employees later claim that certain functions were beyond the scope of their role at the firm. It’s also vital for RIAs to build in the right to modify the employee’s responsibilities as a firm’s business and operations may change over time, which can lead to a need to modify the responsibilities of certain employees. Along with the delineation of the roles and responsibilities, it’s important for employment agreements to reflect the time commitment of the employee (e.g., full-time or part-time) and the expected level of performance expected of the employee.


  1. Failing to Include Properly-Drafted Restrictions Governing Confidentiality, Non-Competition, and Non-Solicitation of Clients and Employees

A second mistake we commonly see in employment agreements is the failure to include properly-drafted provisions designed to protect the assets of the firm from misuse by employees. RIAs often give employees access to a significant amount of confidential information and trade secrets, client and business relationships, and other valuable firm assets when they join the firm, and once that access is granted, employees have the opportunity to misappropriate those assets for their own benefit unless there are employment agreement restrictions in place to prohibit misuse of such assets.

Restrictions can take many forms, but most notably, they come in three flavors: restrictions on the use and disclosure of confidential information, restrictions on competing with the RIA’s business, and restrictions on solicitation of the RIA’s clients or employees. First, restrictions on the use and disclosure of the RIA’s confidential information are designed to protect not only the RIA’s proprietary documents and trade secrets, but also information of clients and other third parties that may be required to be protected by law or as a result of contractual obligations with such third parties. Second, a non-competition covenant, also known as a non-compete clause or agreement, is a legal contract provision in which one party agrees not to engage in competing activities against another party, typically for a specified duration and within a defined geographical area after their business relationship ends. Non-competition agreements are designed to prevent an employee from using valuable information learned while working for an RIA to compete against that same RIA following departure from the firm. Third, non-solicitation covenants prohibit employees from directly or indirectly soliciting clients and/or employees to terminate their relationship with the employer with an eye towards developing a business relationship that can benefit the employee that solicited the clients or employees. Employment agreements that fail to contain such provisions risk having employees take valuable clients or employee with them once they depart from the firm.

Even where such restrictions and covenants are included in employment agreements, if they are not properly drafted (e.g., the restrictions or covenants are too broad), courts may not enforce such provisions. Therefore, it’s vital to retain experienced counsel to properly draft such restrictions, particularly since the enforceability of non-competition and non-solicitation covenants can vary widely from state to state. Such restrictions also should have a sufficient amount of detail to ensure that the employee’s obligations are clearly spelled out. For instance, when drafting provisions restricting solicitation of the RIA’s clients, the provision should clearly delineate which clients, if any, the employee may solicit upon departure from the firm.


  1. Failure to Include Provisions Protecting the RIA’s Intellectual Property Rights in Employee Work Product

RIAs sometimes dismiss the need for employment agreement provisions protecting their intellectual property mistakenly believing such provisions only cover patentable inventions. However, employees can create valuable templates, documents, strategies, methodologies, processes, and other inventions that are deserving of copyright or trademark protection in the course of their employment with the firm. RIAs sometimes fail to appreciate that an employee can assert intellectual property rights to such work product created while working for the RIA (especially if the employee used his or her own intellectual property created before becoming employed by the RIA in generating work product for the RIA) if there are not provisions in the employment agreement clearly stating that all work product generated by the employee during the course of his or her employment belongs to the firm, and not to the employee. Therefore, prior to hiring an employee, RIAs should require employees to clearly state if they owned any intellectual property prior to becoming an employee that would be used in the course of their employment with the firm. If employees have any such pre-existing intellectual property, the firm must ensure that the employee assigns or licenses the right to use such intellectual property to the firm so that the employee cannot later claim any intellectual property rights in the work product created for the firm.


  1. Failing to Provide Sufficient Detail on Employee Compensation Terms

While the basic terms of employee compensation may be present in employment agreements, certain important details may be overlooked. For instance, employment agreements may fail to include the performance metrics or other factors to be considered in determining an employee’s bonus compensation. If bonuses are truly discretionary, and there are no mandatory factors to be weighed by the employer in determining the bonus, the agreement should clearly spell out the point that the bonus compensation is at the sole and absolute discretion of the employer and that there are no guarantees of bonuses. If the employee’s compensation is paid out based on the services provided to different clients, the agreement should clearly delineate the clients for whom the employee will provide the various services. If there are trails that are to be included in an employee’s compensation, the employment agreement should clearly spell out whether the employee continues to receive such trails if the employment agreement is terminated.  


  1. Failing to Include Provisions to Protect Against Employee Misconduct

Often employees joining an RIA have ongoing obligations to their prior employer including obligations not to misuse the prior employer’s confidential information or other business assets in a way that is detrimental to the prior employer. Use of such assets while employed by the RIA, albeit unbeknownst to the RIA who hired the employee, could lead to a potential lawsuit from the employee’s prior employer. To mitigate this risk, RIAs should include in their employment agreements provisions requiring the employee to refrain from using any information or assets from their previous employers if such use would violate their ongoing obligations to any previous employer. It is also advisable for employers to include provisions requiring the employee to indemnify the RIA if the employee violates his or her previous employment agreement with a previous employer which leads to a lawsuit filed by the previous employer against the RIA. 


  1. Failing to Clearly Specify Rights of Employees Upon Termination of the Employment Agreement

While employment is typically “at-will” meaning that the RIA can terminate the employment agreement at any time, typically there are different consequences that arise depending on whether the employment agreement is terminated for “cause” (i.e., employee misconduct) or without “cause” (not the fault of the employee). For instance, the employee may be entitled to certain severance payments or the right to keep certain compensation in the event the employee is terminated without cause. However, some employment agreements fail to define what constitutes “cause” with sufficient specificity and when the employer has the right to terminate the agreement for “cause.” This could lead to disputes down the road where an employee claims that the conduct in question does not give rise to the employer’s right to terminate the agreement for “cause”, which could lead to employee lawsuits if the employee believes he or she has been deprived of compensation as a result of the termination.


  1. Failing to Draft Enforceable Provisions for Dispute Resolution

Typically, most employers will want to include provisions requiring mandatory arbitration in the event of a dispute involving the employment agreement because arbitration is more private and often less expensive than litigating in court. However, arbitration provisions must be clearly drafted to ensure compliance with applicable state and federal laws and regulations.

In summary, there are many complexities that go into preparing employment agreements including the fact that different states have different laws governing employment arrangements and that different types of employees may have different types of protections under employment laws. Therefore, it’s vital to retain experienced counsel to help prepare such agreements to ensure that such agreements are enforceable and will adequately protect the RIA’s interests.


What questions do you have about employment agreements or other employment matters? Please reach out, and we’d be happy to help you answer such questions.

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