Five Provisions All Executives Should Have In Their Employment Agreements

It is often assumed that executives have more job security than most employees. But, executives know that is not necessarily so. Executives lose their jobs because of mergers, acquisitions, shifting political winds in the C-Suite, falling share prices, and a host of other reasons, both compelling and capricious. Given this uncertainty, executives should protect themselves by ensuring that their employment agreements contain the following five provisions.

1. A Narrow Definition Of “Cause” For Termination

Employment agreements typically provide severance payments to terminated executives, so long as they are not terminated for “cause.” Accordingly, the employment agreement should contain a narrow – not a broad – definition of “cause.” An example of a narrow definition of “cause” is: “conviction of a felony, embezzlement, theft, or gross misconduct connected with work.”

2. A “Notice And Cure” Provision

A “notice and cure” provision requires the employer to provide written notice of its grounds for termination to the executive, and then allow the executive a period of time (often 30 days) to cure the problem. Often, employers do not want to take the time to comply with a “notice and cure” clause. In those situations, having such a clause frequently results in the employer offering the executive enhances severance to “agree” to resign and release any claims they may have against the company, including the company’s non-compliance with the “notice and cure” provision.

3. A Clause Allowing For Resignation – With Severance – For “Good Reason”

Employment agreements usually do not contain provisions that allow an executive to resign, and still be entitled to severance pay. A “good reason” clause provides for that to occur, so long as the executive resigns for “good reason.” Typically, “good reason” is defined to cover situations where the executive is not given sufficient resources to perform their duties, their duties or pay are reduced, or they are required to relocate.

4. A Pro-Executive Fee Shifting Provision

Executives should seek to include a provision in their agreements providing that, if the executive sues the company based on an alleged breach of the employment agreement, the company must pay their attorneys’ fees on a month-to-month basis, whether they win or lose the lawsuit. So long as the provision is crystal clear about this, a court will enforce it. Given the attorneys’ fees that litigation tends to generate, this type of provision can give the executive substantial leverage in any legal dispute with the company.

5. A Clear And Broad Change Of Control Provision

A change of control provision provides that, in the event of certain triggering events, including a change of the company’s ownership, the executive is entitled to specified payments and benefits. Vague and ambiguous change of control agreements often result in litigation over whether such a change has occurred, and it is 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 addition, change in control provisions vary widely – some provide payments and benefits only if the executive’s employer is purchased and the executive is terminated as a result, whereas others are triggered merely by a sufficient change in ownership, or such a change, coupled with a material change in the executive’s duties. Executives should seek as broad a change of control provision as possible.

Bonus Tip: A Short And Narrow Non-compete Agreement

Executives are often required to sign non-compete agreements to either be hired, or to obtain stock options or restricted stock. Texas law has changed, so that now most non-competition agreements are enforceable. And, a court is especially inclined to enforce a non-competition agreement against a well paid executive. But, there is still opportunities for executives to negotiate short non-competition agreements – we have seen some as short as six months – that are narrow in scope, so that if they leave the company, they can be reemployed in the industry quickly.

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