“Incorporated by Reference” Provision – Brings in Other Agreements, etc

“He is a fine friend. He stabs you in the front.”

-Leonard Louis Levinson

ACTUAL “CASE HISTORY”: For three years Peggy had been employed by a large Denver-based wholesale pharmaceutical distributor. She was the Senior Vice President of Sales, and managed a team of 14 Regional Sales Managers.

When Peggy was hired, she was presented with a simple one-page Offer Letter that welcomed her to the company, and laid out the basic terms of her hiring: her title, salary, benefits and start date. The Offer Letter also noted that she would have to provide proof of her right to work in the U.S., and that she would have to undergo a pre-employment physical exam. There was also some wording that said she would always need to comply with the company’s Employee Guidebook, the Code of Conduct, and the Policies Manual, and that each document was available for her to read on the company website. Everything seemed quite “standard.” Peggy signed the Offer Letter, without giving it much thought. It seemed to her to be just “basic stuff.”

As part of a company restructuring three years later, in February, Peggy’s position was eliminated, and she was laid off. She wasn’t overly concerned about it, though, for three reasons: First, her skills were highly marketable; in her industry they were in great demand. In fact, she was frequently contacted by recruiters trying to hire her away. Getting a new job in her field should not take much time. Second, according to the company’s compensation plan, Peggy was due a Commissions Override from the previous fiscal year of almost $150,000, which would serve as a nice “cushion” between jobs. Third, according to the company Severance Plan, Peggy was due a minimum of six months’ severance and benefit continuation. Despite her being laid off, there didn’t seem to be any “dark clouds” on Peggy’s horizon. Or so Peggy thought.

When Peggy was told by her supervisor and HR that she was being laid off, she was given a Severance Agreement, which she sent to our office for review as a prelude to her upcoming telephone consultation with us. When we read it, right away we noticed three big problems in the Severance Agreement, and shared them with her:

A. Peggy was offered only four weeks of severance, not the six months she expected.

B. There was no mention of her getting paid the $150,000 Commissions Override she had earned.

C. Worst of all, it said that Peggy had previously agreed not to work in her industry for 12 months after her departure.

To say Peggy was crestfallen would be a gross understatement. Peggy retained our firm’s services to look into what she thought “had to be wrong.” We contacted her company’s Human Resources Director, and this is what we learned about each of the three big problems we detected:

A. As to Peggy’s severance, the company’s Policies Manual, at page 78, was very clear: the company was entitled to modify any of its benefit plans, including its Severance Plan, without prior notice. It seems that, in accordance with the Policies Manual, which was considered a part of Peggy’s Offer Letter, the company had done just that: without notice to employees, reduced severance amounts.

B. As to Peggy’s Commissions Override, the company’s Employee Guidebook, at page 92, was very clear: any employee who left the company “for any reason” prior to the date Commission Override checks were distributed would not receive one. It seems the Employee Guidebook, which was considered a part of Peggy’s Offer Letter, had ended up denying Peggy her Commissions Override.

C. As to Peggy’s freedom to work at a new job in the industry, the company’s Code of Conduct, at page 41, was very clear: every employee who signed an Offer Letter and was an officer of the company was considered to have agreed to a non-competition clause, by which they agreed not to work in the wholesale pharmaceutical industry for one year. It seems that, the company’s Code of Conduct, which was considered a part of Peggy’s Offer Letter, made it near impossible for her to accept a job for a competing company.

By a process called “incorporation by reference,” over 170 pages of the company’s (A) Policies Manual, (B) Employee Guidebook, and (C) Code of Conduct, all became part of Peggy’s one-page Offer Letter. What initially seemed like “basic stuff” ended up becoming “toxic stuff” to Peggy’s finances and career. While we were able to negotiate a reduction of the “damage” done to Peggy’s finances and career, she still suffered considerably by failing to beware of documents that became a part of her offer letter – and, hence, her life – through “incorporation by reference.”

LESSON TO LEARN: Any time you see any “other documents” mentioned in an agreement, or in an offer letter, or even in a “notice” of some kind, BEWARE: those “other documents” must be considered part of that agreement, offer letter or notice. Your delay or failure to carefully read those “other documents” carefully, and to understand that they are probably binding on you, is just that: a failure to protect yourself, your finances, your career, and thus, your loved ones.

In various and often hidden ways “other documents” are what lawyers call “incorporated by reference” into agreements, offer letters, and notices. We often see seemingly innocuous phrases used for this purpose, such as “Your attention is directed to,” “You will be required to comply with,” and “Compliance with its terms is considered a part of your duties as an employee.”

The “red flag” you need to watch out for is simply the very mention of the “other documents” in any agreement, offer letter, or notice. That “red flag” is your warning sign that either you should ask for and carefully review those “other documents,” or have someone else who you trust do it for you, such as a close friend or your attorney.

Special care should be devoted to the question, “How do the provisions of the Employee Handbook, or the Compliance Manual, etc., intertwine with and possibly affect the provisions of my agreement or offer letter?” Don’t be afraid to ask that very question, or to pose it to your attorney or Human Resources. Be afraid only not to do so. You may, or may not, be able to remove, change or exempt yourself from these “other documents,” but at least you will know what you’ve agreed to and, as they say, “gotten yourself into.”

Incidentally, don’t let names confuse you. We have found limitations on your future employment freedom, such as non-compete obligations, in documents entitled “Understanding Regarding Employee Invention and Creations.” And if you hear the word “standard” used in connection with any such document, presume it is far from “standard.” In fact, there really is no such thing as “standard” in employment, business and law.

WHAT YOU CAN DO: Here are eight of the “other documents” most commonly “incorporated by reference” to watch out for, and how each may affect your compensation, rights, interests, entitlements and freedom:

1. Employee Handbook: The Employee Handbook (sometimes called the Employee Manual or Employee Guidebook) is the most common “other document” incorporated by reference into employment agreements and offer letters. One of our clients had a “guaranteed bonus of $3 million in an offer letter signed by the Head of HR. We were lucky to notice that the Employee Handbook, at page 102, stated “No offer of compensation in excess of $1 million is binding, unless signed by a member of the Board Compensation Committee,” of which the Head of HR was not a member. We were able to correct that, but only because we noticed it before our client resigned from her prior job. In employee handbooks, watch out for provisions stating, among other things: (a) loss of earned commissions and bonuses in many events, (b) very vague definitions of what constitutes “cause” for firing, and (c) required methods of resolving disputes, such as “in the sole and absolute discretion of management.”

If you are ever required to sign that “I acknowledge receipt of a copy of this Employee Handbook,” you are on Red Alert Notice that you may one day be very sorry if you don’t read it carefully.

2. Code of Conduct: The name “Code of Conduct” suggests to many people that the document provides, simply, “Behave yourself, and don’t do anything improper or illegal.” The problem with many Codes of Conduct is that they go far beyond those anticipated purposes. Many Codes of Conduct describe as “misconduct” such things as (a) the failure to give at least six months notice of resignation, resulting in the obligation to pay back last year’s bonus, and (b) “It is grounds for firing if you transmit company information to your home,” while everyone does that nearly every weekend, by email, to simply get work done.

Codes of Conduct are another place we find post-employment restrictions, such as “Following your departure for any reasons, you may not solicit customers for two years,” or “You hereby give the company the right to contact any future employer to advise them of your restrictions on your future activities.”

In recent years, we have seen more Codes of Conduct containing provisions seemingly meant to prevent “leakage” of information to the Company’s Board of Directors, the media, and even regulatory bodies. These usually state that “Prior notice to and written consent of management” is required for such activities.

Most recently, this is where we have found restrictions on “outside” behavior, such as bans on appearing in Facebook, or commenting in blogs, or identifying your employer on the internet.

3. Confidentiality Agreement: Confidentiality is important in business, and growing increasingly so. Even though the law provides employers significant protection against theft or use of trade secrets and other “confidential information,” many employers are now requiring that employees sign agreements attesting to their personal responsibility for any use or transfer of confidential company information.

Our experience is that most “confidentiality agreements” are reasonable. However, more and more such agreements go far beyond what is within the realm of reasonability. Some confidentiality agreements provide that the employee must give up a good deal of his or her own privacy (such as agreeing to a lie detector test), or even confidential information belonging to the employee’s next employer (such as an obligation to divulge the activities being engaged in, and for which clients, that is, confidential information of the next employer.)

4. Compliance Manual: Compliance Manuals usually address procedures meant to ensure compliance with applicable laws and industry rules and regulations. A careful review of your employer’s compliance manuals may reveal other, unrelated restrictions, obligations and intrusions, including many related to activities outside your employment, and even activities engaged in by your family members.

5. Company Dispute Resolution Program, or Arbitration Agreement: Would it surprise you to learn that some companies require their employees to resolve disputes in ways that make it impossible to do just that? It shouldn’t. Just two weeks ago I reviewed one company’s mandatory Dispute Resolution Program that said: (a) You cannot go to court, but must arbitrate all differences with your employer; (b) however, you cannot arbitrate your differences with your employer unless you have first filed a necessary “Complaint Notice”; (c) you must file the necessary “Complaint Notice” within seven days of the day the problem arose, and (d) finally, you cannot file the necessary “Complaint Notice” without the prior written consent of the CEO, who often travels out of town for weeks at a time. (I jokingly suggested to the client that she keep a pile of Complaint Notices in her drawer, and keep tabs on the CEO’s whereabouts.)

Would it surprise you to learn that some mandatory arbitration agreements require the employee to pay thousands of dollars to file a claim, and potentially tens of thousands of dollars to the arbitrators for their time? It shouldn’t; that is the case for nearly all investment industry professionals, whether or not they know it.

6. Post-Employment Restrictions: Many employers seek to impose post-employment restrictions on their former employees. These restrictions include bans on (a) working for a competitor, (b) providing services to company customers, (c) soliciting business from company clients, and (d) soliciting employees to “follow you out the door.” In some instances, employers even insist on the right to contact your next employer, in order to “inform” them of your restrictions.

Many people think these are unenforceable; they are wrong. Post-employment restrictions must be considered a danger to your career and finances, and treated with utmost care.

Unfortunately, post-employment restrictions are often incorporated by reference into employment agreements and offer letters either by (a) being “buried” in handbooks, compliance manuals, stock option plans, etc., or (b) being labeled something entirely different and misleading, such as “Non-Interference Obligations” or “Standard Employment Conditions.”

Future restrictions on your employment freedom are to be avoided, or limited, if at all possible. To read our Newsletter entitled “Hidden Handcuffs – Watch Out for Buried and Disguised Non-Compete Agreements,” simply [click here].

7. Equity Plans (Including Those Related to Stock, Stock Option, Restricted Stock, etc.): If you are someone who has carefully read your company’s equity plans (including those related to stock, stock options, restricted stock, etc.) you are a very rare individual, and deserve a pat on the back. It is very, very common for an employment agreement or offer letter to refer to the terms of an equity plan, and mention that your compensation is subject to their terms.

What is rarely mentioned is that equity plans often contain other provisions – provisions that may pose great risks to your finances and your career – that you would not guess would be there. These are examples we have seen: (a) provisions that state that, if you accept your restricted stock, you agree to the company’s non-competition requirements; (b) if you accept your stock options, you also agree to give them back, even if vested, if you do not provide six months’ notice before leaving; and (c) if you accept your stock award, you also agree that it may be “clawed back” if you leave and work for a competitor.

Equity Plans are very often mentioned in employment agreements and offer letters, and often are accompanied by language that says “In all events, the terms of our company’s Plans shall govern and control,” meaning “read them now, or forever hold your peace.”

8. Inventions, Creations and Copyrights Agreements: What if, on Sunday morning, you come up with a great idea that could revolutionize your industry? An idea that could improve profitability of any company engaged in your business? Must you tell your employer about it? Who owns it? Must you sign papers transferring to your employer all rights to it? Chances are pretty good that you have already agreed that (a) you must tell your company about it, (b) your company owns the idea, and (c) you must sign any papers requested of you to transfer to your employer the rights to that idea. “When,” you may ask, “did I sign such an agreement?” You did so if, in your first “Welcome to Our Company” letter, an “Inventions, Creations and Copyrights” agreement was mentioned.

Now, imagine if you didn’t know that, and you invested your life savings into bringing into existence a working model of your new idea. You’d probably be pretty disappointed to find out you did so to the sole benefit of your employer. That is the kind of thing that can happen to you, if you don’t read carefully, and make sure you have carefully considered each “other document” mentioned in your employment agreement or offer letter. But “forewarned is forearmed,” and now you’ve been “forewarned.”

By incorporation by reference “other documents” may be inserted into any agreement you have with your employer. By incorporation by reference, the seemingly “simple and clear” understanding you have about the terms of your employment may, instead, be “complicated and convoluted.” You are now on notice that you need to ask to see any “other document” referred to, carefully read those “other documents,” and consider “How might this affect me?” If you don’t, chances are you, your family, your finances, your career and your freedom may one day all needlessly suffer. But, now that you know, you will be careful, right? We sure hope so.

If you would like to obtain a “model” memo, letter or checklist to help
you negotiate terms of employment, or related issues [click here].

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation of work and career issues requires that you take the time, effort and care to carefully read and understand everything you are signing. Most people don’t do so, but instead say to themselves, “Oh, this is just standard stuff.” There is no such thing as “standard stuff,” but even if there is, you need to understand that “standard stuff,” and how it may well affect you.

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

© 2009 Alan L. Sklover. All rights reserved. Commercial use prohibited.