Employment agreements: What you need to know

Employment agreements, which are very common for C-suite executives, can benefit the company as well as the executive.

The agreements come into play normally during negotiations when an offer is being considered. The most important and often contentious issue that arises is the concern about a “change of control” provision as part of the agreement.

In most cases, the executive is looking for some protection should the company be merged or sold and they will lose their job, benefits and/or other perks. There are circumstances in which an executive’s duties, responsibilities and/or reporting relationships will materially change or often diminished, which would trigger a change of control provision.

From the company’s perspective, the reason to have an employment agreement will be forced by the executive who won’t take the job unless they have one. On the other hand, if the company is sold, the acquiring company or merged company will want to know if the C-suite have agreements to stay around to facilitate the transition and information sharing.

Even when a company buys or merges, the acquiring company might want to retain they entire C-suite and the employment agreement can force that to happen.

There are several contentious issues from these agreements that will need to be considered. Employment agreements typically provide severance payments to terminated executives, including extended benefits as long as they are not terminated for “cause.”

How the definition of “cause” is written and interpreted will often make the difference as to whether the agreement is enforceable. Most attorneys recommend a narrow definition of “cause” and not a broad one.

An example would be, “conviction of a felony, embezzlement, theft or gross misconduct connected to work.” But I also have seen performance metrics with supporting material that the company made the executive aware of their substandard performance included in the agreement.

I have seen a clause for resignation — with severance — for “good reason.” Employment agreements do not contain provisions that allow an executive to resign and be entitled to severance and outplacement services.

A “good reason” clause provides for that to occur, as long as the executive resigns for “good reason” that is not disputable. Typically, the “good reason” is defined to cover situations where the executive is not given sufficient resources to perform their duties, the duties or compensation is reduced, or they are required to relocate.

If I was the executive, I would ask for my legal fees to be paid for by the company if I had to sue the company based on an alleged breach of the employment agreement. Again this often is difficult to determine but the courts have upheld the provision if the company has breached the agreement.

A change of control provision provides that, in the event of certain triggering events, including a change of company’s ownership, merger, material change of duties, responsibilities and reporting relationships, the executive is entitled to specific payments, benefits and in most cases career transition assistance.

Vague and ambiguous change of control agreements often result in litigation over whether such a change has occurred and it’s not unusual for executives to lose such lawsuits. To avoid this fate, executives should insist on change of control provisions that are clear and easy to understand and apply.

In most cases, when an employment contract is offered, the company will ask for the executive to sign a non-compete and a non-solicitation provision that blocks the executive for a period of time, usually a year and sometimes two, from working for a direct competitor and/or recruiting any employee to the new company.

These provisions often include geographic restrictions depending upon whether there is a significant burden to the company’s future financial success. Every state looks at non-competes/non-solicitation provisions differently and the courts in general don’t like when the provisions are too restrictive and prevent people from earning a living or last too long. Courts will allow the provisions to stay but will “red line” the final agreement to lessen the restrictiveness.

I am not a lawyer but I have 36 years of experience working with executives and companies in an executive search capacity. Whether you are an executive looking at a new opportunity or a company being asked for an employment agreement, my best advice is hire an experienced employment lawyer who should be able to guide you through the “do’s and don’ts” that could be very costly to you down the road.