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Employment Agreement

Definition - What does Employment Agreement mean?

An employment agreement is usually required by a buyer after a transaction is completed. The buyer will identify the seller's key employees during due diligence, and ask them to execute employment agreements in order to secure the company's success post-transaction. Employment agreements usually have a defined term, sometimes tied into non-competition agreements, and may last three to five years. Signing an employment agreement binds both parties to each other. The employee agrees to stick around for the term, and similarly the employer must pay out the employee for the remainder of the term if he/she is let go without cause.

Divestopedia explains Employment Agreement

Employment agreements are part of doing a transaction, and sellers should educate their key employees about them so they are not surprised when a buyer requires them to sign one. Since key employees are essentially giving away their ability to move, they need to be remunerated for this extended commitment. Smart buyers acknowledge this and usually offer commitment incentives in the form of stay bonuses, additional pay, stock options or phantom stock in the company.

All employment agreements are different, but there are some components that are typically included such as:

  • The term of the employment agreement;
  • What happens to the employment agreement in the event of a merger or acquisition;
  • The specific duties that the employee is expected to conduct for the company;
  • Salary and bonus;
  • Employee benefits and other perks;
  • Business expense reimbursement; and
  • Number of weeks vacation.

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