Employment Agreements & Contracts

Do I Need an Employment Agreement or Just an Offer Letter? Low Risk

Applies to: All California employees

Offer letter works for most hires; full agreement needed for executives, commission roles, or complex IP situations.

When an Offer Letter Suffices

A simple offer letter is typically adequate for:

Standard exempt or non-exempt employees
Roles without commission or bonus structures
Positions without access to sensitive trade secrets
Entry to mid-level positions with standard duties

Your offer letter should include: job title, start date, compensation, at-will status, and reference to company policies.

When You Need a Full Employment Agreement

Commission-based roles: Labor Code 2751 requires written commission plans
Executive/C-suite positions: Severance, equity, change-of-control provisions
IP-heavy roles: When you need enforceable invention assignment
Roles with trade secret access: Stronger confidentiality protections
Employees with existing IP: Need to document prior inventions schedule

Decision Matrix

Scenario

Recommendation

Standard software engineer, salary only

Offer letter + IP/Confidentiality exhibit

Sales rep with commission

Full agreement + Commission plan exhibit

VP or C-level executive

Full agreement with all exhibits

Contractor-to-employee conversion

Full agreement (document transition clearly)

California-Specific Consideration

Regardless of document type, all California employees must receive a Wage Theft Prevention Notice (Labor Code 2810.5) at hire containing pay rate, pay day, employer info, and workers' comp details.

California's Non-Compete Ban High Risk

Applies to: All California employees, regardless of where agreement was signed

Non-competes are void and unenforceable. As of 2024, employers must notify employees of void clauses.

The Core Prohibition: B&P Code 16600

Business & Professions Code 16600

"Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

This is not merely "unenforceable"—it is void. California courts will not give it any effect whatsoever.

2024 Expansion: Section 16600.1 (AB 1076)

B&P Code 16600.1 - Notification Requirement

Employers must provide individualized written notice to current and former employees (employed after January 1, 2022) that any non-compete clause in their agreement is void.

Notice deadline was February 14, 2024 for existing employees
Must be individualized written notice (not just general announcement)
Failure to notify: civil penalty plus attorney fees

2024 Expansion: Section 16600.5 (SB 699)

B&P Code 16600.5 - Enforcement Prohibition

An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of where and when the contract was signed.

Non-compete is void even if signed in another state
Void even if governed by another state's law
Creates private right of action + injunctive relief + attorney fees
Applies to current and former employees

What's Prohibited

These Provisions Are Void in California

Traditional non-competes: "Employee shall not work for a competitor for 12 months"

Overbroad customer non-solicitation: If it effectively prevents competition

Garden leave with employment restriction: Paying someone not to compete

Forfeiture provisions: "Equity vesting stops if you join a competitor"

Choice-of-law end-runs: "This agreement governed by Texas law" won't save it

What's Permitted

These Provisions Can Be Enforceable

Trade secret protection: Legitimate confidentiality (not disguised non-compete)

Narrow employee non-solicitation: Cannot recruit your former coworkers

Confidentiality agreements: With proper carve-outs (see Card 3)

IP assignment: Subject to Labor Code 2870 (see Card 4)

Required Void Notice Language

Sample Notification (Required by 16600.1)

"This letter is to notify you that [Company Name] will not enforce any non-competition clause or agreement, or any non-solicitation clause or agreement to the extent it functions as a non-competition clause, contained in any agreement between you and [Company Name]. Such clauses are void and unenforceable under California Business and Professions Code section 16600."

Confidentiality & Trade Secrets Medium Risk

Applies to: All employees with access to proprietary information

Enforceable if properly drafted with required carve-outs for whistleblowing, DTSA immunity, and wage discussions.

Enforceable Elements

A well-drafted California confidentiality agreement can include:

Definition of confidential information (be specific, not overbroad)
Non-disclosure obligations during and after employment
Non-use obligations (cannot use for personal benefit or other employers)
Return of materials upon termination
Reasonable scope and duration (perpetual for true trade secrets is okay)

Required Carve-Out #1: Whistleblower Protection

Labor Code 1102.5

An employer may not prevent an employee from disclosing information to a government or law enforcement agency, or to a person with authority over the employee, if the employee has reasonable cause to believe the information discloses a violation of law.

Your confidentiality agreement cannot prohibit employees from reporting suspected violations to government agencies, law enforcement, or internal compliance personnel.

Required Carve-Out #2: DTSA Immunity Notice

18 USC 1833(b) - Defend Trade Secrets Act

An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in confidence to an attorney or government official solely for the purpose of reporting or investigating a suspected violation of law.

Required DTSA Immunity Notice

"Pursuant to the Defend Trade Secrets Act of 2016 (18 USC 1833(b)), Employee is hereby notified that: (1) An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made (A) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (B) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. (2) An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order."

Failure to include this notice means you cannot recover exemplary damages or attorney fees in a trade secret misappropriation action against the employee.

Required Carve-Out #3: NLRA Section 7 Rights

Wage Discussion Protection

Under the National Labor Relations Act Section 7, employees have the right to discuss wages, hours, and working conditions with coworkers. This applies to non-union workplaces too.

Your confidentiality agreement cannot prohibit employees from discussing their compensation with colleagues. Broad language like "all personnel information is confidential" is problematic.

Overbroad Provisions to Avoid

These Make Your Agreement Unenforceable

Prohibiting wage discussions: Violates NLRA Section 7

"All information is confidential": Too broad to enforce

No carve-out for legal disclosures: Subpoenas, court orders, government requests

Infinite scope: Information that becomes public should no longer be covered

Missing standard exceptions: Prior knowledge, independent development, rightful receipt from third parties

IP & Invention Assignment High Risk

Applies to: All employees, especially engineering/technical roles

Section 2870 protects employee side projects. You MUST include the statutory notice or your assignment may be unenforceable.

The Core Protection: Labor Code 2870

Labor Code 2870(a) - Full Text

Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the employer.

Labor Code 2871 - No Retaliation

Employers may not discipline, terminate, or threaten an employee for refusing to assign an invention that is protected under Section 2870.

Labor Code 2872 - Mandatory Notice

Critical Requirement

Any employment agreement with an invention assignment clause MUST include written notice of Section 2870 rights. Failure to provide this notice may render your entire assignment provision unenforceable.

Required Section 2870 Notice Language

"I have been notified and understand that the provisions of this Agreement requiring assignment of inventions to the Company do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code, which provides:

[Insert full text of Section 2870(a)]

I will advise the Company promptly in writing of any inventions that I believe meet the criteria set forth above and are not otherwise disclosed on Exhibit A (Prior Inventions)."

What Employer CAN Require Assignment Of

Assignable to Employer

Inventions conceived or developed using employer equipment, supplies, facilities, or trade secrets

Inventions related to employer's current business or demonstrably anticipated R&D

Inventions resulting from work performed for employer

Work product created during work hours as part of job duties

What Employer CANNOT Require Assignment Of

Protected Employee Inventions

Inventions developed entirely on own time + own resources + unrelated to employer's business

Pre-existing IP employee brings to job (should be scheduled in Prior Inventions exhibit)

Side projects meeting all Section 2870 criteria

SaaS/Tech Side Project Considerations

Scenario

Likely Ownership

Personal GitHub repo, own laptop, weekends, unrelated to work

Employee (protected by 2870)

Side project using company laptop after hours

Employer (used company equipment)

Weekend app similar to company's product

Employer (relates to business)

Open source contribution to unrelated project

Usually Employee (get policy approval)

Hackathon project at company-sponsored event

Likely Employer (company facilitated)

Best Practice: Prior Inventions Schedule

Have employees list any pre-existing inventions at hire. This creates clear documentation of what they brought to the job versus what was created during employment.

Commission Plan Requirements High Risk

Applies to: AEs, SDRs, sales reps, anyone with variable comp tied to sales

Labor Code 2751 requires a signed, written commission plan. Verbal agreements and handshake deals won't cut it.

Labor Code 2751 Requirements

Labor Code 2751

Whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.

What the Written Plan Must Include

Method of computing commissions: Base rate, percentage, tiers, accelerators
Method of paying commissions: When earned vs. when paid, payment timing
Signed by employer: Authorized company representative
Signed by employee: Must acknowledge receipt and agreement
Copy provided to employee: Employer must give signed copy
Receipt obtained: Get written acknowledgment of receipt

What Counts as "Commission"?

Definition

Commission is compensation paid for services rendered in the sale of the employer's property or services, based proportionately upon the amount or value of sales.

Compensation Type

Is It Commission?

Percentage of closed deal value

Yes - requires 2751 plan

Flat bonus per closed deal

Likely Yes - tied to sales volume

Discretionary annual bonus

No - not tied to sales

Piece-rate (per unit produced)

No - not sales-based

Hourly rate + productivity bonus

No - not sales-based

SaaS Sales Traps

Common Compliance Failures in SaaS

AE variable comp: Almost always commission. "Variable compensation" is not a magic word that avoids 2751.

SDR bonuses per meeting booked: If tied to eventual sales, may be commission.

Accelerators and SPIFs: These are part of your commission structure and must be documented.

Draw against commission: Must clearly document as recoverable advance.

Clawbacks/chargebacks: Need explicit contractual basis. Cannot claw back after termination without written agreement.

Key Plan Elements for SaaS Companies

When is commission "earned" - at booking, at payment, at go-live?
Treatment of multi-year deals (recognized upfront or over time?)
Churn/cancellation clawback rules (time limits, calculation)
Territory splits and account ownership
Quota setting and adjustment procedures
Plan changes (reasonable notice required)
Treatment upon termination (deals in pipeline, post-termination closes)

Arbitration Requirements High Risk

Applies to: All employees if you use mandatory arbitration

Must meet Armendariz 5-factor test. PAGA claims add major complexity after Viking River and Adolph.

Armendariz 5-Factor Test

California's landmark case Armendariz v. Foundation Health Psychcare Services (2000) established that mandatory employment arbitration of statutory claims must satisfy these requirements:

Requirement

What It Means

1. Neutral Arbitrator

Mutually agreed or neutral selection process; no employer-picked arbitrator

2. Adequate Discovery

Sufficient to vindicate statutory claims; not just document exchange

3. Written Decision

Arbitrator must issue written findings sufficient for judicial review

4. Full Remedies

All remedies available in court must be available in arbitration

5. Employer Pays Costs

Employee cannot be required to pay arbitrator fees (beyond court filing fee equivalent)

Unconscionability

Beyond Armendariz, courts scrutinize arbitration agreements for both procedural unconscionability (how it was presented) and substantive unconscionability (unfair terms). Take-it-or-leave-it employment arbitration at hire already has some procedural unconscionability built in.

The PAGA Complication

Private Attorneys General Act (PAGA) claims allow employees to sue on behalf of the state for Labor Code violations. The law here has evolved significantly:

Iskanian v. CLS Transportation (2014)

California Supreme Court Holding

Waivers of the right to bring representative PAGA claims in any forum are contrary to public policy and unenforceable. Employees cannot waive their ability to bring PAGA claims on behalf of other employees.

Viking River Cruises v. Moriana (2022)

U.S. Supreme Court Holding

The FAA preempts California's rule prohibiting division of PAGA claims into individual and representative components. Individual PAGA claims can be compelled to arbitration.

Adolph v. Uber Technologies (2023)

California Supreme Court Holding

Even after an employee's individual PAGA claim is sent to arbitration, the employee retains standing to pursue representative PAGA claims on behalf of other employees in court.

Practical Implication

After Adolph, compelling individual PAGA claims to arbitration does NOT eliminate representative PAGA exposure. The employee can still pursue PAGA claims on behalf of other employees in court, even while their individual claim is in arbitration. This significantly limits the value of arbitration clauses for PAGA defense.

What Makes an Arbitration Clause Enforceable

All 5 Armendariz factors satisfied
Clear, conspicuous presentation (not buried in fine print)
Mutual obligation (both parties bound to arbitrate)
Reasonable scope (not covering claims that cannot be arbitrated)
Carve-outs for claims that should not be arbitrated (workers' comp, unemployment)
Optional: Opt-out provision (reduces procedural unconscionability)

Remote Work Addendum Requirements Medium Risk

Applies to: All remote and hybrid California employees

Remote arrangements trigger expense reimbursement obligations and should include equipment and safety acknowledgments.

Expense Reimbursement Hook: Labor Code 2802

Labor Code 2802

"An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer..."

For remote employees, this means reimbursing reasonable work-related portions of:

Internet service
Cell phone / phone bills
Home office equipment necessary for job
Software and subscriptions required for work
Office supplies

Key Case: Cochran v. Schwan's (2014)

Reimbursement is required even if employee has unlimited phone/data plan. The employee need not prove out-of-pocket loss. A reasonable percentage of the monthly cost must be reimbursed.

Remote Work Addendum Should Address

Equipment Provisions

What equipment employer provides (laptop, monitor, keyboard, etc.)
What equipment employee provides (BYOD arrangements)
Equipment return requirements upon termination
Maintenance and repair responsibilities
Data security requirements for all devices

Expense Reimbursement Method

Approach

Pros/Cons

Fixed Monthly Stipend

Simple admin; must cover actual costs or employer still liable

Actual Expense Reimbursement

More accurate; higher admin burden

Hybrid

Stipend for recurring + actual for one-time purchases

Workspace Safety Acknowledgment

Cal/OSHA's general duty clause extends to home offices. Your addendum should include:

Employee acknowledgment of responsibility to maintain safe workspace
Ergonomic self-assessment or virtual assessment
Injury reporting procedures for remote work injuries
Confirmation that workers' comp covers remote work location

Additional Remote Work Provisions

Work hours expectations: Core hours, availability requirements
Communication requirements: Response time, tools to use
Performance expectations: Deliverables-based metrics
Confidentiality in home: Secure workspace, screen privacy, household awareness
Right to modify: Employer can require return to office with reasonable notice
Tax implications disclosure: Employee responsible for home office deductions

Voluntary Remote Exception

If employer provides a fully-equipped office and employee voluntarily chooses to work remotely, some expense reimbursement obligations may not apply. However, this exception is narrow - if the job was advertised as remote or remote is expected, it's not truly "voluntary."