Employment contracts outline an employee and employer’s agreed upon terms and conditions, usually at the very least salary and job description. However, it is a best practice for both parties, especially at the at the executive level, to include more than just salary and job description.
Executive employment contracts are in fact usually different from non-executive employment contracts in that they generally include terms and conditions that are not typically contemplated by the parties to a non-executive employment contract. In case of executive employment contracts, both employer and employee are desirous of certain protections, and quite unlike a non-executive employment contract, both parties have much bargaining power.
Accordingly, over time, executive employment contracts have to come to include the following standard terms and conditions not always found in a non-executive employment contract:
- Change of Control clause;
- Good Reason clause;
- Disability clause;
- Well defined bonus clause (which also contemplates termination payment);
- Equity incentive clause (which also contemplates termination vesting);
- Well defined expenses clause, often including vehicle, residence, social club, professional fees and business class travel contemplations;
- Benefits clause, often including expanded benefits such as executive health care (i.e. Medcan), Directors and Officers (D&O) insurance and life insurance;
- Fiduciary obligation clause;
- Loan clause;
- Well defined resignation notice clause;
- Without cause termination clause that far exceeds the rights of a non-executive (minimum of 12-32 months’ payment in lieu of notice even after a short period);
- Expanded just cause clause;
- Death clause;
- More onerous non-competition clause;
- More onerous non-solicitation clause;
- More onerous confidentiality clause;
- Intellectual property clause;
- Liability and indemnification clause;
- Arbitration clause; and
- Various schedules attached defining key issues.
Most disputes concerning executive employment contracts concern the payment of salary or bonuses, or the vesting of equity after the employment relationship ends whether by termination or resignation for “good reason”. In that regard, it is especially important that the executive employment contract well defines the payment of salary and bonus and the vesting of equity after the executive employment contract is terminated for whatever reason. In many cases, ultra-expensive lawsuits turn on the wording or even grammar of such clauses. Therefore, it is recommended that both the executive and employer see an employment lawyer before agreeing to an executive employment contract. A few thousand dollars to review and assist in negotiating an executive employment contract costs a lot less than the millions of dollars most executives contemplate obtaining following termination or resignation for “good reason”.
“Good reason” is thus a very important clause in the executive employment contract not usually found in a non-executive employment contract. A “good reason” clause defines if the executive has been constructively dismissed per se and can therefore obtain their very generous without cause termination clause payment. Most “good reason” clauses contemplate a constructive dismissal when:
- Remuneration is reduced;
- The employer materially breaches the employment contract;
- The employer changes the executive’s reporting structure;
- A majority of the board of directors changes; and
- A majority of the shares of the employer changes hands.
It follows that executive employment contracts are drafted, unusually, in favor of the employee, rather than the employer as is the case in 99% of all non-executive employment contracts. This is not unreasonable, however. Competent executives are in high demand, and employers need to attract them by offering them friendly employment contracts with extremely generous compensation. That said, an employer can fairly and reasonably protect itself even in an employee-friendly executive employment contract by ensuring that it well defines the executive’s duties, obligations and restrictive covenants.
Finally, we have started to see that arbitration provisions are more likely to appear in executive employment contracts than non-executive employment contracts. We believe this is happening because both parties are desirous to keep litigation a secret, and because arbitration is much cheaper than executive wrongful dismissal litigation through the courts, where some lawsuits cost, as we have seen, a million dollars or more (combined by both parties’ cost submissions).
Dutton Employment Law specializes in executive compensation and executive employment contracts. Contact us for a consultation.