There are certain agreements that every small business must have. Without them, the business may be open to uncertainty and litigation in the future. This article seeks to shed light on the most basic agreements that a small business should ideally have in place and, in a nutshell, what they are. It is always preferable have agreements professionally drafted. The company can however use and amend these agreements according to specifications of the circumstances at hand.
EMPLOYMENT AGREEMENTS
There are two different types of employment agreements regulating the relationship between employer and employee, these being:
- A permanent employment agreement; and
- Fixed Term employment agreement.
Both of these agreements are governed by the Basic Conditions of Employment Act (“BCEA) and the Labour Relations Act (“LRA”).
The permanent employment agreement:
When a person is appointed in a permanent position, it is important that such employment be reduced to writing and signed by both parties. This serves to give both parties certainty about the relationship. The purpose of an employment agreement is to capture in writing the rights of both parties.
There are certain requirements for a valid permanent employment agreement, being:
- The agreement must be reduced to writing and signed by both parties
- The agreement must contain certain terms, such as:
- Date of commencement of employment,
- Place of employment,
- Remuneration,
- Hours of work,
- Duties of employee,
- Annual-, Sick-, Family responsibility-, Maternity-, Parental-, and Adoption leave,
- Termination of employment
The fixed term employment agreement:
In terms of Section 198B of the LRA an employee may be appointed for a fixed period.
There are however certain requirements for a fixed term employment agreement to be valid, these being:
- The agreement must be reduced to writing and signed by both parties
- Period of employment (for a fixed period) must be specified
- Reasons that the employment is for a fixed period
- Remuneration
- Hours of work
- Duties of employee
- Sick leave
- Termination of employment (with a clause indicating that the employment will terminate upon expiry of period of the fixed term.
Independent contractor:
An independent contractor is a person that is not a permanent employee of the company, however, renders specific services to an employer.
The characteristics of an independent contractor are as follows:
- An agreement exists and is in writing and signed by both parties
- The core agreement is for the contractor to render specific services to the employee for payment
- The contractor will invoice the employee on a monthly basis and the employer will pay such invoices
- The contractor uses his own tools of the trade
- The contractor is not entitled to employment benefits such as leave etc
- The contractor is liable for his or her own tax liabilities
This agreement is very similar to a service level agreement (SLA), however the contractor in an SLA is usually a company and not a natural person.
MEMORANDUM OF INCORPORATION
The Memorandum of Incorporation (MOI) is loosely defined as the constitution of a company. the MOI sets out on what basis the company is incorporated (private company, non-profit, public, personal liability) and how it will operate.
There are certain standard clauses that one usually finds in a MOI, some of these being:
- Incorporation and nature of entity (company)
- Business and objects of company
- Membership, shareholding and directorship; which includes:
- Appointment and removal of directors or shareholders
- Powers and operations of directors or shareholders
- Liability of directors or shareholders.
- Rights and obligations of members, shareholders and directors
- Operation of the company, including aspects such as meetings, resolutions etcetera
- Limitations on the company
- Accounting arrangements
SHAREHOLDERS AGREEMENT
A shareholders’ agreement is an arrangement among a company’s shareholders that describes how the company should be operated and outlines shareholders’ rights and obligations. The shareholders’ agreement is intended to make sure that shareholders are treated fairly and that their rights are protected thereby.
There are certain standard clauses that one usually finds in a shareholders’ agreements, some of these being:
- Amount and value of shares
- Ownership of shares
- Appointment of directors and operation of the company
- Meetings of shareholders
- That the agreement is binding upon the board of directors of the company.
SERVICE AGREEMENT
This is the agreement that regulates the relationship between your company and your clients and is likely the most important agreement for any small business to have in place and formally drafted.
The agreement is drafted by or on behalf of the company and usually the terms will aim at the protection of the company’s rights.
A service agreement should ideally be:
- Written;
- Drafted by using professional assistance;
- In line with business requirements.
Although it is tempting to save on costs, a contract sourced from the internet will not serve to protect your interests as they are generic and do not serve the specific purposes of the company.
What should the service agreement ideally contain?
There are infinite clauses that may be included in the most important terms that should be included, are:
- Details of the contracting parties
- Description of the service or goods
- Pricing (in broad terms or by referencing a schedule of costs)
- Payment terms
- Guarantees and/ or warrantees provided by the company
- Consequences of breach
SUPPLIER AGREEMENTS
These agreements regulate the relationship between your company and its suppliers or contractors. In all likelihood, these agreements will be presented to your company for signature and the supplier will not ask for input or invite your comments to it .
It is however important to remember that it is your prerogative to negotiate the terms of these agreements, you are not in any way bound to sign the agreement as is. These negotiations must be done prior to the signature of the agreement or the commencement of services or order of goods.
During the negotiation period, it is necessary to peruse the agreement and note any potential dissatisfaction regarding any of the terms contained.
Once signed, the agreement as it stands is accepted and shall apply, making a dispute of any term thereof near impossible.
SERVICE LEVEL AGREEMENTS
These agreements are used to regulate the relationship the company and a contractor. Examples of when such agreements are applicable would be a recruitment agreement or accounting services agreement.
The defining factor is that a service is rendered to the company usually on a monthly basis and for a specific price. The agreement should set out the scope of work to be completed by the contractor and the price agreed upon.
The duration of the agreement may be limited, but usually is indefinite and the agreement may be cancelled by either party on the terms therein contained.
AGREEMENTS IN YOUR SMALL BUSINESS- THE TAKE AWAY:
It is never a good idea to rely on verbal agreements since neither party can prove the terms when called to. When a written agreement is in place, the proof thereof is simple and the document as it stands will be referenced.
Spending some money on formally drafted documentation will ensure savings should a dispute arise; and in some instances a written agreement may avoid disputes completely.
