Third Quarter 2010
The Negotiation and Structure of Executive Employment Agreements: An Exercise in Risk Management for Both Employers and Executives
The written employment agreement is a powerful risk management tool used by employers and executives to promote understanding and acceptance of the reality of the employment relationship, and thereby avoid the problems that otherwise arise from the general uncertainties in the business environment. Such agreements accomplish critical goals for both parties.
Employers utilize written employment agreements to protect the company’s business assets and intellectual property, and recognize that it is perhaps the principal method of imposing post-employment competitive restrictions on executives. In contrast, executives look to written employment agreements to confirm their compensation packages, as well as to secure severance and other benefits in the event of termination by the employer.
The following is an abbreviated checklist of some of the core concepts of the employment relationship that should be considered during the negotiation and development of such agreements:
Job Responsibilities and Duties. This is an absolutely critical provision to incorporate, particularly when dealing with executives. At a minimum, the agreement should detail the nature and scope of the executive’s work for the company, possibly incorporating a job description or outline of duties and responsibilities, to serve as a benchmark against job performance.
The provision should also identify the person or persons to whom the executive will report (such as the CEO or the Board of Directors), and empower such persons to modify the job responsibilities and duties of the executive at their discretion. Finally, the provision should specifically require an executive to devote full-time efforts to the business of the employer or include such carve-outs that the executive raises with the company to insure that there is no misunderstanding as to the time and effort that he or she will devote to the company.
Compensation. Both parties should consider more than merely the amount of base salary. A well-drafted compensation provision will address how and when salary increases (or corresponding decreases in an economic downturn) will occur.
Additional compensation such as incentive plans, bonuses and stock awards should also be addressed with a clear delineation of what the employer expects of its executives in order to obtain such compensation. When the employer offers such additional compensation, it must be extremely careful to specifically set forth the circumstances under which the additional compensation will be rescinded or forfeited by the executive, such as where the executive voluntarily leaves the company. In short, the provisions on compensation must balance the effort to motivate the executive with rewards against the attendant risk of his or her departure.
Benefits. Some of the same concerns about compensation play an important role in detailing the numerous potential benefits that the company will make available to its executives. For example, given the present economic climate and the uncertainties in changes to healthcare nationally, employers should negotiate flexibility in benefits plans, reserving the right to review and alter plans on a periodic or annual basis. The agreement should delineate what types of benefits are being afforded to measure the expectations of both parties and allow executives to plan for their personal healthcare needs as well as those of their families.
Intellectual Property and Confidential Information. As referenced above, the treatment of the employer’s intellectual property and confidential information is often one of the most important aspects of the written employment agreement from the employer’s perspective. Careful delineation in the agreement is critical to assure the employee is aware of the identity of that intellectual property, what the company deems to be sensitive confidential information, and how that information and intellectual property should be treated and protected.
The agreement should also make clear that all work developed by executives is considered work-for-hire for the employer, such that the work product is the exclusive property of the business (regardless of whether that work product is an idea, a formula or a patentable device). Finally, the agreement must also place tight controls on the executive’s use of confidential information on the employer’s behalf, as well as requiring the executive to return such information to the company immediately upon conclusion of employment.
Post-Employment Restrictions. Surprisingly, many employers still do not appreciate the fact that non-competition agreements are highly disfavored in many jurisdictions, including New Jersey, and will only be enforced if narrowly drafted to insure that the focus of the provision is truly to protect the business of the employer rather than keeping the executive from earning a living. Accordingly, the non-competition agreement must be directed at the particular business conducted by the employer, and must be limited in geographic scope and duration.
There is no point in securing from an executive a five-year non-compete agreement if a court will strike the provision outright and permit an executive to unfairly compete against his or her employer. The employer should also consider including a non-solicitation clause in the agreement, which would bar the executive from specifically contacting certain customers, clients or employees of the company for the purpose of harming the employer’s business or taking its business for a new employer. In recent years, courts have shown an increasing flexibility with respect to such non-solicitation provisions, which they favor over the broad non-compete clauses. There are a variety of means of structuring such agreements, including making them standard company policy for all employees to follow so that executives do not feel that they are being unfairly singled out for treatment.
Severance. In our present economic climate, many employers are cutting back on severance provisions, which may in fact be a mistake, particularly since many of them are still insisting upon post-employment restrictions such as non-competition agreements. In a number of instances, employees have successfully challenged those restrictions without severance as an unfair impediment to their ability to earn a living. Employers with economic constraints might consider offering executives and key employees what is known as a “bridging” severance, which allows executives a limited period of severance while looking for new employment. The severance is terminated immediately once the executive obtains new employment.
Nevertheless, employers must carefully think through a severance offer, including the circumstances under which it is being provided. For example, employers should limit severance only to situations in which an executive is being terminated without cause, and certainly not if the executive voluntarily terminates his employment. Similarly, the employer should require a release of any claim the executive could bring against the company as a condition for receiving severance. In this regard, certain statutory claims must be referenced specifically or they are not deemed waived. That is, a broad waiver is not fully enforceable.
Conversely, executives will want to insure that they are provided with severance in the event that the employer fails to deliver on its promises, such as payment of salary or benefits, or the business of the employer is acquired in what is known as a “change of control”.
Miscellaneous Provisions. There are also a number of other important provisions that should be considered in a written employment agreement, including but not limited to, choice of law and venue (to control where and how a lawsuit regarding employment may be brought), arbitration (to control the procedures and process of such suit, as well as to expedite its handling), merger clauses (to insure that the parties do not argue at a later date that there were promises made that were not part of the signed agreement) and attorney fee provisions (which allow the party prevailing in litigation over employment disputes to collect the fees for hiring a lawyer to handle the suit).
Further information concerning the negotiation and development of written employment agreements is available from Howard Matalon, a partner of the firm. Howard can be reached at hmatalon@olenderfeldman.com.
Firm News
OlenderFeldman is proud to announce that Joseph S. Pecora, Jr. has been promoted to partner at the firm. Joe’s practice includes business counseling, commercial transactions and commercial litigation. In addition, as a Certified Information Privacy Professional, Joe manages the firm’s data privacy and information security practice. He can be reached at: (908) 964-2453 or jpecora@olenderfeldman.com
