Do You Need an Executive Agreement Lawyer?

What is the purpose of executive contracts?

If employers do not offer their employees a definite term of employment, the presumption is that, absent a clear expression of the intent to form a contract of employment for a fixed period of time, the employer may terminate its employees’ employment “at-will,” or at any time and for any reason or no reason at all, so long as the employee is not terminated for an unlawful reason.

Although most employers do not negotiate employment agreements with a majority of their employees as a routine practice, such agreements can be beneficial to both employers and employees.  Employment agreements can be beneficial for all classes of employees, whether executives, managers, or hourly workers.

More specifically, executives, by the nature of their specialized education, training, and experience, are more likely to be bound by employment agreements and/or agreements not to compete with their employers.  Negotiating employment agreements with executives can assure employers that their executives will work for them for a predetermined amount of time and that their executives will not compete with them after their employment has ended.  Executives can negotiate their compensation, criteria for raises, bonus structure, and severance payments and take comfort in the knowledge that they will not have to haggle over these important aspects of their employment in the future.

What provisions should an employment contract contain?

To be sure that an employment agreement is viewed as a contract, at the beginning of the agreement, the employer should include a short section discussing the purpose of the contract (i.e., to offer employment to an individual in a certain position for a certain length of time).  The employer should also include a section wherein the employee acknowledges that he or she accepts the employer’s offer of employment.

To avoid confusion and contention over an employee’s position, duties, and responsibilities, the employer should clearly state the employee’s title and should clearly delineate the employee’s main responsibilities.

Other key terms of an employment agreement are provisions that state the length of the contract as well as the employee’s compensation and benefits.  The parties should evaluate the appropriate length of a contract by analyzing the nature of the position and the skills needed to execute the duties and responsibilities of the position.  The parties should also address criteria for extending the period of the contract and what should occur if the contract expires but the employee remains employed with the company.  An employer should also set forth the benefits for which the employee will be eligible and should also state which benefits the employee will be eligible to retain should the parties’ employment relationship terminate.

Finally, both parties must be sure to include a provision stating that the employment agreement represents and contains the entire agreement.

How should an employee’s compensation be structured?

The parties should plainly state the amount of compensation to be paid and the timeframe in which the employee shall receive his compensation.  The parties should also be sure to set forth criteria under which the employee’s performance may be evaluated and under which the employee will be eligible for raises and/or bonuses throughout the course of their employment with the company.  In addition to setting forth the criteria for earning bonuses, the parties should also delineate the timeframes in which bonuses can be earned and when the bonuses will be paid.  Additionally, the parties should state whether an employee earns a bonus for any given timeframe but is no longer employed by the company when the bonus is scheduled to be paid.

What is a “for cause” provision?

A “for cause” provision in an employment contract typically sets forth the grounds for which an employer may terminate an employee’s employment while avoiding liability for payment of severance payments.  “For cause” provisions typically include the following definitions:

• the employee’s conviction of, or plea of nolo contendere to, a felony (other than in connection with a traffic violation) under any state or federal law;
• the employee’s willful and continued failure to substantially perform his essential job functions hereunder after receipt of written notice from the employer that specifically identifies the manner in which the employee has substantially failed to perform his essential job functions and specifying the manner in which the employee may substantially perform his essential job functions in the future;
• a material act of fraud or willful and material misconduct with respect, in each case, to the employer, by the executive; or
• a willful and material breach of the employment agreement.

What is the purpose of a severance agreement?

Severance provisions in an employment agreement can be an easy way for both the employer and the employee to obtain the severance package that they desire should the employment relationship end while the parties are on good terms with each other.

In addition to the amount of the severance payment (or a formula upon which the severance payment will be calculated), the severance agreement should state whether the benefits shall be paid in a lump sum or in installments.  If the payments are to be made in installments, the agreement should also contain a defined schedule of payments so that each party understands when each payment is due.  An employee should also avoid consenting to permitting the employer to deduct from his paycheck or bank account any amount equaling a negative vacation balance or an overpayment of expenses.

Both parties should also ensure that the employment agreement’s severance provisions contain a statement of whether the employee shall be paid for accrued vacation.  Indeed, payment for accrued vacation may be considered earned compensation under state law unless otherwise stated in the parties’ severance agreement.  Importantly, the parties should also ensure that the severance provisions of their employment agreement address how the severance payments will be taxed, if at all.

Next, should the employee hold any stock or other interest in the employer, the parties should also be sure to address how the rights of employee-stockholder will be affected by the employee’s departure.  The parties should examine the employee’s stock options and determine how to dispose of both the employee’s vested and non-vested options.  Employees should also ensure that there is no immediate loss of their stock grants or vested options and that they have adequate time in which to exercise their options.

Further, because severance plans are governed by ERISA, the severance provisions should also include all formalities of an ERISA plan.  It should comply with all of the ERISA disclosure and notice provisions, it should include a continuing obligation of the employer and an ongoing administrative framework for administering the plan, and it should include an immediate payment of monies due as wages under wage payment law.

The parties should also be sure to negotiate what an employer may disclose about an employee’s employment after the parties’ relationship has ended.  Both parties should avoid language that permits the employer to provide information that reflects the employee’s work to any potential employers.  Such references could reflect poorly upon the employee and later subject the employer to claims of defamation.  Instead, the parties should negotiate a neutral reference that confirms the employee’s employment, position, employment status, dates of employment, and salary.

Finally, the parties should be sure to clearly define when the severance provisions will apply.  Neither an employer nor an employee wants to be in a situation where the parties’ agreement ends, and so facially, it appears that the employee is entitled to severance provisions, but the employee is staying with the company, either in their same capacity or in a different capacity.  Accordingly, the parties should clearly state whether the severance provisions are only applicable if contract ends and the employee leaves the company or if the contract ends and the employee remains employed with the company.

When should you negotiate a severance agreement?

Including severance provisions in an employment agreement can be an easy way for both the employer and the employee to obtain the severance package that they desire should the employment relationship end while the parties are on good terms with each other. Accordingly, the severance agreement should be negotiated before agreeing into enter the employment relationship rather than at the end.

What is the purpose of a non-compete agreement?

To prevent employees from taking their talents and employer’s trade secrets to competitors, a growing number of employers are requiring employees to sign non-compete agreements.  A broad-form agreement that is not narrowly tailored to serve the employer’s business interest is likely unenforceable. In addition, an employer’s effort to enforce an invalid non-compete can invite counterclaims and in certain extreme cases, sanctions.

The enforceability of non-compete agreements differs from state to state.  The analysis generally focuses primarily on the following factors:

• The temporal scope of the non-compete;
• The geographic scope of the non-compete; and
• The clarity and unambiguous nature of the non-compete.

In other words, an employer must narrowly tailor the time, function and geographic restrictions in a non-compete agreement to protect nothing more than its legitimate business interest.   An employer should not be able to enforce a restrictive covenant that hinders an employee’s ability to earn a living, including a non-compete that:

• Applies for an unlimited time;
• Extends the restrictions to areas where the employer once did business;
• Extends the restrictions to locations where the employer merely has intentions of doing business; or
• Extends the geographic reach of the agreement to an area that is not coterminous with that of the business at the time of the agreement.

An employer seeking to enforce a non-compete must show that the restrictive covenant is supported by consideration, which exists when someone gives up a legal right in return for obtaining a tangible benefit.  If an employer requests that its employees sign a non-compete agreement, the employees are in a good position to (and should) negotiate additional compensation prior to signing the agreement, as the employees’ ability to work will be restricted.

If you would like to discuss your employment agreement with an experienced attorney, contact us to schedule a meeting with our executive compensation negotiating team. We’ll meet with you, and discuss the trends and package options.