Employment Contracts: Should You Sign One?

The recent defection of three General Motors executives to Volkswagen caused GM to start requiring all its top executives to sign a contract pledging their allegiance to the Detroit giant and promising not to divulge company secrets if they do move to another auto company. Salon employees earn far less than auto executives, and salons don’t stand to lose the same kind of money a car manufacturer does, yet the principles of company loyalty and discretion still apply. Employees have daily access to the salon’s most precious assets: clients and their files. Many salon owners are finding that a written agreement between owner and employee can protect the salon owner’s business, the employee’s rights, and the client’s faith.

According to Charles Penzone, owner of Charles Penzone, Inc. in Dublin, Ohio, “If you’re running your business properly and investing in training and development of the technicians, you should protect yourself from those who might use you and your reputation to establish their own clientele and complete against you.” But written agreement won’t help you retain good employees if you’re not doing everything else properly. “People won’t be held hostage,” continues Penzone.

Ken Andres, owner of Kenneth’s Hair Salons in Columbus, Ohio, adds, “The progressive salons of tomorrow will use employee contracts or they won’t have a business. But the idea is to protect your business, not to keep people from working.”

Anders’ employee agreement has been tested and upheld in court. He was able to show the effect on his business of the employee’s loss because he had documentation, including an accounting of his advertising expenses for attracting new clients and a list of the employee’s preexisting clients. Other salon’s contracts have not held up, primarily because they were judged to deprive the employee of the right to work.

The Human Side

Requiring an employee to sign a contract may be a good way to stay out of court, but it can also intimidate a new employee.

Richard Calcasola, owner of Maximus Day Spa Deluxe in Merick, N.Y., does not use a contract. “It’s intimidating,” he explains. “I think it starts off the relationship with negative vibes. For the employee, it’s like wanting to buy something and discovering you have to put up too large a deposit up front. There’s really no way to insulate yourself as an owner [from defecting employees] except to provide an atmosphere that’s too good for stylists to leave. Be fair to all employees, but make it clear that clients belong to the salon.”

Gina Marsilii, owner of Perfect 10 in Wilmington, Del., has this to say to salon owners: “You can stop someone from practicing what they do, and once they’re in a salon five or six years, clients will be so loyal to them that they could go work in a forest and the clients would follow.”She says salon owners shouldn’t be threatened by their high-quality technicians, but should encourage clients to be comfortable seeing any technician available, but then be asked when she’d like to see her regular technician again. This makes the client comfortable with the salon,” says Marsilii.

Marsilii fosters this level of client comfort and technicians teamwork in her own salon by greeting every client by name and asking her technicians to introduce her to new clients. That way, they know she’s the owner and can develop a personal connection with her. “Our clients know one another and have a sense of the salon as a place they enjoy,” she adds.

Treating employees well and giving clients a sense of belonging in the salon is important, but it won’t protect a salon entirely. Even if the client herself doesn’t leave with a departing employee, her record may if the client files are unprotected. Calcasola correctly points out that client record cards are salon property and that it is illegal for an employee to remove them regardless of whether a contract exists. “But an employee can always ask clients for home phone numbers behind your back,” he says.

It’s this practice that employee contracts can he prevent. Many standard contracts prohibit former employees from soliciting the clients or employees of their former employee and usually contain a non-compete clause, which sets the para-meter that must be met for the employee to open her own salon.

To Sign or Not to Sign

While most technicians would rather not sign contract, it may be a protection in the long run. Additionally, the technician won’t be hit with a surprise lawsuit by her former employer, she’ll know if she’s invited one.

Arnold Pedowitz, a Manhattan attorney with his own practice, co-edited Covenants Not to Compete, a state-by-state legal guide published by the Bureau of National Affairs (BNA) in Rockville, Md. According to him, if a technician is currently working for an employer, she should be concerned with the legal principle called “duty of loyalty.”

“While working, an employee may not copy notes or records of her employer, or try to take clients, or try to get other employees to leave to join her in a competing venture,” he explains. “Duty of loyalty exists with or without a written contract, and it has been upheld in many states because it addresses engaging unfair competition.”

But Pedowitz says to use caution in signing a contract. “My best advice is to not sign a contract, or at least to try to water it down before signing. One way to water it down is to take it to an attorney before signing it. It’s been my experience that people sign a contract because they’re enamored with the job. They realize later that they’re in a pickle.”

Robert Niebuhr, owner of Hair Majesty in Madison, Wis., and past president of the National Cosmetology Association (NCA), agrees, “A young stylist who is paid on commission and quits because there isn’t any work could discover fine print that says she can’t work within a 25-mile radius of the salon. That’s the size of the entire city of Madison!”

This is Niebuhr’s to technicians seeking work. “Always understand what you’re signing. Take the contract to the Better Business Bureau. It costs nothing, and they can at least tell you if it’s a legitimate contract. If you have a friend or relative who is an attorney, take it to him or her. If you have questions, get the answers, from the employer in written form. If either party terminates, it’s usually unforeseen, so be sure you understand everything in a contract when you sign it.”

Penzone’s employees always have the opportunity to take his employee agreement to an attorney before signing it. Some job candidates decide they’d rather not sign a contract, but most sign it.

“We spend a great deal of money on training and advertising,” he says.”We demonstrate that we’re developing designers and technicians in a valuable training program. It’s worth their while to sign.”

 Ties that Bind

The technicians we spoke to who have been or currently are involved in contract litigation could not talk about it. Many contracts include a stipulation not to discuss the case because attorneys for the owner want to keep other employees getting ideas they can use, however, we did speak to few owners who have won suits and were willing to discuss contracts.

Fred Huggins, CEO of the Minneapolis-based salon chain Barbers Hairstyling for men and women, has used an employment contract for 10 years.  Because his chains are in several states, the contracts are modified by an attorney to adhere to local laws.

Huggins’ contract primarily addresses two issues: that employees may not leave with a customer list, and that they may not leave and go to work within a specified geographic area within one year’s time. “Some [would-be] employees refuse to sign but since it is a pre-condition of employment. I don’t hire them. The contract is only a page and a half long, is written in lay English, and potential employees are free to take the contract home with them and consult an attorney if they wish,” Huggins says.

Vincent J. Apruzzese, a partner in the law firm of Apruzzese, McDermott, Mastro & Murphy in Liberty Corner, N.J., chairs the Labor and Employment Law section of the American Bar Association. According to him, non-compete covenants are viewed differently in various jurisdictions, but the key elements of concern are the duration of the non-compete agreement and the restricted geographic territory. “The wider the area and the longer the period of time, the less likely a contract will be upheld by a court,” Apruzzese says.

Apruzzese recommends that owners who want to protect their business from employee raids should have a contract drawn up by an attorney, who will probably check BNA’s Covenants Not to Compete to review local law. This book is updated regularly with supplements. You’ll want to make sure your attorney refers to it. If you’d like your own copy, it’s available for $40. Call BNA at (800) 372-1033 outside Maryland or (202) 833-7481 in Maryland to order the book.

What happens if a technician leaves to open her own shop and takes her former salon’s clients, saying they choose to go with her of their own accord? Responds Apruzzese, “It is not public policy to restrict choice of individual service. But how ‘individual’ is nail care? You’d have to stretch to say it’s individual.”

Despite what salon professionals would like to believe, courts have generally held that a client can get her hair or nails done anywhere. What this means is that a technician’s skills are not so unique or individual that she’s entitled to keep her clients if she goes to work at another salon. If a technicians takes a substantial number of clients with her upon leaving a salon, it could indicate breach of duty of loyalty; courts aren’t likely to view it as a clients rights issue.

Drawing up a Contract

No one should use someone else’s contract without having it reviewed by an attorney familiar with local laws. For a salon owner who would like to create her own employee agreement, these general guidelines can serve as a starting point.             

• “Ask employees for an agreement not to solicit the customer of the employer rather than a non-compete agreement,” says Pedowitz . “A non-solicit agreement places less of a burden on the employee and is easier to enforce that a non-compete agreement, which has the potential to deprive a person of the ability to earn a livelihood,” he says. If your agreement seems to inhibit an employee’s ability to earn a living, rather than just protecting the salon, it may not be enforceable, and won’t be held up in court.
• “Courts always look to the time the agreement was entered into. Was the agreement was entered into. Was the agreement signed before employment began, in midstream, or upon leaving? It’s best to have an employee sign prior to employment because the employee has the ability to choose to sign or not before the income stream starts,” Pedowitz says.
• “It’s important to show that the employer has given something of value in exchange for the agreement. Employment is usually considered something of value. If you ask an employee to sign an agreement after she’d already been employed, the question will arise: What did you give of value in exchange for the agreement? Did you give a pay increase, a new title, new responsibilities? Tie the agreement to a promotion or raise if you ask for the midstream. If you ask for the agreement at the end of employment, you should show that the employee was given more than she was entitled to, beyond vacation, severance pay, etc.,” says Pedowitz.
• “The shorter the duration of restrictions,” Pedowitz continues, “the easier it is to enforce the agreement. Each contract is looked at in light of the specific business involved. A nail salon might experience a turnover in clientele every five months. If so, a three-year prohibition is unreasonable because the salon will have a whole new clientele and should not be worried about competition from a former employee.”
• Geography is another issue. In Manhattan, restricting a former employee from doing business within only a few blocks may be reasonable, given the city’s density. It’s hard to say. But the shorter the distance, the easier it is to enforce the contact.
• According to Pedowitz, “protectable interest” is another question. Just because someone works for you and has a following does not mean a contract not to compete is enforceable. An employer must show that an employee is taking something of value from the employer. “If you spend money to train employees,” explains Pedowitz, “it enhances your argument that you made an investment in return for an agreement. It’s easy to see that you’d ask for no solicitation when an employee gets to know your client list.”
• “There is what’s called the blue pencil concept. This refers to a court taking out the provisions it does not like or feels deny someone the right to work. But don’t think you can write a contract and have a court rewrite it for you on this basis. A judge might think you knew the contract was not enforceable and wrote it just to scare the employee and keep her with you,” warns Pedowitz.
• As with anything legal, specifics court. One salon found its contract not to compete was not upheld because the contract read “cannot work within two miles.” It did not say, “cannot work as a hairstylist within two miles.”

Additional Protection

If every employee has access to a salon’s client records, the salon owner isn’t protecting her business. If an employee is asking clients for home phone numbers, the owner should speak to an attorney about how to confront the employee and inform her about duty of loyalty. “Never confront someone based on rumor,” cautions Marsilii. “Try to rise above it, but keep your eyes and ears open. If someone does leave, I’d make a personal call to the clients or send out an enticing mailer [to retain their business].”

At Carmen DePasquale’s salon in New Jersey, employees who are thinking of leaving to start their own business receive a questionnaire that makes them think of struggles they may face when starting their own business. Any owner can develop her own questionnaire by recalling and writing down what was surprising or difficult for her as a new owner.

Allowing one employee to become too powerful can damage a salon’s business. Recently a famous New York salon closed its doors after a top stylist left, taking clients and staff to start his own salon.

When technicians make good money because business is strong, they’ll usually stay. When they make good money because they’re a superstar, they’re likely to feel they’d be better off going solo. A salon owner who employs a superstar has to be very careful about providing an environment where a superstar can prosper, but also an environment where the less-popular nail technicians feel comfortable and appreciated.

                             

Employment Contract Basics

At the heart of the employee contract issue is a question of fairness. An employee cannot take her clients with her any more than she can take an owner’s furnishings with her. For her part, the salon owner cannot create situation that would prevent a technician from earning a living if she did elect to go it alone. She must protect her business, but she can’t control all the future actions of former employees. While no single contract will work in every situation or will be upheld in every state, salon owner Ken Anders’ contract contains important points that every salon owner should consider. It was develop to protect his business-not to deprive his employees of the right to work-and it has been upheld in an Ohio court. Anders’ bolsters the enforceability of his contract by keeping other written documentation, such as advertising invoices, to show the expenses he incurred to obtain the clients. He agreed to share the main points of this contract, but did emphasize that anyone developing a contract should see an attorney. He recommends that the following stipulations be included in standard employment contracts.

• Clients are clients of the salon, not of an individual.
• Profile cards are salon property and are not to be removed or copied.
• Any salon data, including phone message slips, belong to the salon and may not be removed or copied. The same goes for records listing information on specific services clients receive.
• Information on how a client’s nails are done or information on a client profile may not be disclosed to another person or company.
• An employee may not, when on the salon’s premises, discuss future employment or solicit the salon’s clients.
• No lists or client information whatsoever may be removed from the premises.
• New employees are asked to make a list of the names of clients that they are bringing with them to the salon.