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Annotated Executive and Key Employee Employment Agreement

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Prepared and Presented by

Jeffrey B. Oberman

Oberman Thompson & Segal, LLC

One Financial Plaza

120 South Sixth Street, Suite 850

Minneapolis,MN 55402

Telephone:  612-217-6441

joberman@obermanthompson.com

2011 DOCS MADE EASY SERIES

Minnesota State Bar Association

Continuing Legal Education

These materials are provided for educational and informational purposes only.  They are not intended to constitute legal advice in any particular situation.

 

ANNOTATED EXECUTIVE AND KEY EMPLOYEE

EMPLOYMENT AGREEMENT

I.                   INTRODUCTION.

This Annotated Executive and Key Employment Agreement is intended to highlight drafting issues, practices and strategies. [Sections in brackets may not appear in many agreements, depending on the parties’ viewpoints and negotiations.] It is a sample, which has been edited and annotated for purposes of this presentation.  Actual agreements need to address the specific needs of the parties and their unique factual and legal issues.

II.                ANNOTATED EXECUTIVE AND KEY EMPLOYEE EMPLOYMENT AGREEMENT.

This EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the ____ day of _____________, 2011, by and between XYZ Corporation (“Company”), a Minnesota corporation, and _____________________________ (“Executive”).

A.         RECITALS.[1]

  1. Executive has the professional and personal skills to serve Company as its [Chief Operating Officer].
  2. [The parties wish to establish an employment relationship, to protect Company’s business and other interests, to provide protections to Executive in the event Executive’s employment is terminated without cause, and to provide the essential terms of Executive’s employment.]
  3. [Company’s current business activities include, among other things, designing, developing, manufacturing, shipping, marketing and selling ______________ products [and/or] providing ____________ services to _________________.]
  4.  [Company and Executive recognize that, in performing his/her anticipated job-related duties and responsibilities, Executive will have extensive access to Company’s confidential design, manufacturing, distribution, marketing and sales information; and will have opportunities to cultivate valuable business relationships with Company’s employees, customers and vendors.]

B.         AGREEMENT.

In consideration of the foregoing premises, the mutual covenants and obligations of this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

  1. Employment.  Company agrees to employ Executive, and Executive agrees to accept employment with Company, pursuant to the terms and conditions of this Agreement.  It is understood that Executive will be subject to the policies and terms (as they may be amended from time to time) by Company, Company’s Employee Handbook, Company’s Code of Conduct and other policies in effect for salaried employees and officers of Company, except as otherwise specifically provided in this Agreement. [2]
  2. Duties.[3]  The services of Executive shall be exclusive to Company, except as otherwise agreed to in writing by Company.  Executive will [initially] serve in the capacity of [Chief Operating Officer].  Executive will assume responsibility for the job titles, reporting responsibilities and duties, which are assigned and which may be changed from time to time, by Company’s [Chief Executive Officer].  Executive will perform Executive’s obligations in a competent and professional manner, consistent with the expectations of Company’s [Chief Executive Officer].  [Notwithstanding the above obligations, Executive may serve on outside boards of directors or committees if the outside activities are first disclosed to and approved in writing by Company’s (Chief Executive Officer).  That approval will not be granted if the outside activities are deemed by the (Chief Executive Officer) to conflict with the provisions of this Agreement, to impair Executive’s ability to perform Executive’s duties, or to otherwise conflict with Company’s business interests.]
  3. Term of Employment.[4]  [This Agreement is not intended to establish any minimum or maximum period for Executive’s continuing employment.  Executive and Company will have an “at-will” employment relationship, which means that either party has the right to terminate the employment relationship[5] at any time and for any reason, with or without Cause.]  [The reason for and timing of the termination, as set forth in Paragraph 5, will determine the amount of post-termination payments and benefits, as set forth in paragraph 6.]
  4. Compensation, Reimbursements and Benefits.[6]  Company agrees to provide Executive the following compensation, reimbursements and benefits:
  5. [Signing Bonus.  As an inducement to enter into this Agreement, Company will pay Executive a signing bonus in the gross amount of $__________, less standard withholdings, payable within ___ days of _________________.]
  6. Base Salary.[7]  Company will pay Executive a monthly base salary (the “Base Salary”), payable in accordance with Company’s standard payroll practices.  The initial monthly Base Salary will be in the gross amount of _______________ Dollars ($_________).  The Base Salary will be subject to annual performance review and possible adjustment by Company’s [Chief Executive Officer.]
  7. [Incentive Awards.[8]  Executive [may] [will] be eligible to receive [discretionary] annual bonuses and/or long term incentive compensation (“Incentive Awards”) pursuant to the terms and conditions of Company’s Annual Bonus Plan and/or Company’s Long Term Incentive Plan (jointly, “Incentive Plans”), subject to the following:

 

(1)  Executive’s eligibility to receive Incentive Awards will be determined by Company’s [Board of Directors.]

(2)  The Incentive Plans are not necessarily all-inclusive because circumstances which Company has not anticipated may arise.  Company reserves the right to make any changes at any time to the Incentive Plans or to terminate the Incentive Plans.

(3)  Any questions regarding the computation of Incentive Awards under the Incentive Plans will be conclusively determined by Company’s [Board of Directors], pursuant to the terms and conditions of the Incentive Plans.]

  1. Discretionary Bonus.  Executive may be awarded an annual discretionary bonus (“Bonus”).  The amount of the Bonus and the timing of payment of such Bonus will be determined in the sole discretion of the Company’s [Chief Executive Officer.]
  2. [Stock Options.  Executive may be awarded stock options from time to time, pursuant to the terms and conditions of Stock Option Plans, which may be adopted by Company’s Board.]
  3. Expenses.[9]  Company will reimburse Executive for ordinary, necessary and reasonable business expenses that Executive incurs in connection with the performance of Executive’s duties [including entertainment, telephone, travel and miscellaneous expenses].  Executive must obtain proper approval for such expenses pursuant to Company’s policies and procedures, and provide Company with documentation for such expenses in a form sufficient to sustain Company’s deduction for such expenses under the Internal Revenue Code.
  4. Time Off.[10]  Executive will be entitled to time off with or without pay in accordance with Company’s policies in effect at any particular time [; provided, however, that Executive shall, in any event, be entitled to _________ (____) days of Paid Time Off (“PTO”) during each full year of employment.  Executive may carry over up to _________ (___) days annually of PTO.]
  5. Health, Disability, Life Insurance and Other Employee Benefit Plans.[11]  Company will provide Executive with health, disability, and life insurance coverage and other employee benefits that are presently existing or which may be established in the future by Company for its full-time salaried employees, subject to the terms and conditions of the applicable benefit plans.
  6. Indemnification.  Company will defend, indemnify and hold Executive harmless from costs, expenses, damages and other liability incurred by Executive as a result of performing services in good faith to Company, subject to the limitations and other terms and conditions of applicable Minnesota statutes and Company’s Articles of Incorporation or Bylaws.
  7. Changes in Benefit Plans.[12]  No references in this Agreement to particular employee benefit plans established or maintained by Company are intended to change the terms and conditions of the plans or to preclude Company from amending or terminating the plans.
  8. Withholding; Taxes.  Company may withhold from any compensation, reimbursements and benefits payable to Executive all federal, state, city and other taxes as required by any law or governmental regulation or ruling, as well as other standard withholdings and deductions.
  9. Termination.[13]  Executive’s employment may be terminated at any time as follows:
  10. Death.[14]  Executive’s employment shall automatically terminate upon Executive’s death.
  11. Disability.[15]  Either party may terminate Executive’s employment at any time, upon written notice to the other party, if Executive sustains a disability which precludes Executive from performing the essential functions of Executive’s job, with or without reasonable accommodations, as defined, and if required, by applicable state and federal disability laws.  [Executive shall be presumed to have such a disability for purpose of this Agreement if Executive qualifies to begin receiving disability income insurance payments under any long term disability income insurance policy that Company maintains for the benefit of Executive.  If Executive does not qualify for such payments, Executive shall nevertheless be presumed to have such a disability if Executive is substantially incapable of performing the essential functions of Executive’s job for a period of more than ________________.]
  12. With Cause.[16]  Company may terminate Executive’s employment at any time, with “Cause,” upon written notice to Executive.  “Cause” shall mean any one of the following events:

 

(1)  Executive’s breach of any material obligations under this Agreement or any other agreement with Company, or Executive’s [willful and/or repeated] failure or refusal to perform or observe Executive’s duties, responsibilities and obligations to Company;

(2)  Any breach of Executive’s duty of loyalty or fiduciary duties to Company;

(3)  Use of alcohol or other drugs in a manner which affects the performance of Executive’s duties, responsibilities and obligations to Company;

(4)  Conviction of Executive, or a plea of nolo contendere for a felony or of any crime involving theft, misrepresentation, fraud, or moral turpitude;

(5)  Commission by Executive of any other [willful or intentional] act which could reasonably be expected to injure the reputation, business or business relationships of Company and/or Executive; or

(6)  The existence of any court order or settlement agreement prohibiting Executive’s continued employment with Company.

  1. Without Cause.[17]  Company may terminate Executive’s employment at any time, without Cause, upon ______ (  ) days written notice to Executive.  [Company may, at its sole discretion, opt not to have Executive provide active employment services during some or all of the notice period, and place Executive on a paid leave of absence for some or all of the notice period.]
  2. Resignation.[18]  Executive may, upon _______ (  ) days written notice to Company, terminate Executive’s employment at any time.  [Upon receiving such notice, Company may, at its sole discretion, opt not to have Executive provide active employment services during some or all of the notice period, and place Executive on a paid leave of absence for some or all of the notice period.  If Company exercises this option, it shall not convert the resignation to a termination by Company.]
  3. Resignation for Good Reason.[19] Executive may terminate Executive’s employment at any time, with “Good Reason,” upon written notice to Company. “Good Reason” shall mean any one of the following events [that is not satisfactorily explained to Executive or cured within _____ (  ) days of written notification thereof to Company by Executive]:

(1) Company’s [intentional and material] breach of Company’s obligations under this Agreement or any other agreement with Executive [Among other things, if Company materially alters the terms and conditions of Executive’s employment, or materially reduces or changes Executive’s job duties or authority in conflict with this Agreement, it shall be considered a material breach of this Agreement.];

(2) Working conditions created by Company, which are in violation of Executive’s rights under any federal or state law.  or

(3)  ______________________________________________________ _________________________________________________________________.]

  1. Other Reasons.  [_______________________________________ _____________________________________________________________________.][20]
  2. Payments and Benefits upon Termination.[21]  Upon the termination of Executive’s employment, Executive shall only[22] be entitled to the following payments and benefits:
  3. Death; Disability.[23]  If Executive’s employment is terminated due to Executive’s death or disability, regardless of the date of termination, Executive or Executive’s estate or heirs, as appropriate, shall only be paid (i) Executive’s Base Salary and accrued, but unpaid, PTO, prorated through the date of termination; (ii) any unpaid expense reimbursement; (iii) other accrued and vested benefits, if any, under any of Company’s Incentive Plans or any of Company’s other employee benefit plans (e.g., 401(k) plan), subject to the terms and conditions of those plans; and (iv) any benefits payable under any life or disability insurance policy maintained by Company for the benefit of Executive at the time of the termination of employment, subject to the terms and conditions of such policy.
  4. For Cause [; Resignation without Good Reason].[24]  If Company terminates Executive’s employment for Cause, [or if Executive resigns without Good Reason,] regardless of the date of termination, Executive shall only be paid (i) Executive’s Base Salary and accrued but unpaid PTO, prorated through the date of termination; (ii) any unpaid expense reimbursement; and (iii) other accrued and vested benefits as of the date of termination, if any, under any of Company’s Incentive Plans or any of Company’s other employee benefit plans (e.g., 401(k) plan), subject to the terms and conditions of those plans.
  5. Without Cause [; Resignation for Good Reason].[25]  If Company terminates Executive’s employment without Cause [or Executive resigns for Good Reason], regardless of the date of termination, Executive shall be paid the same payments and benefits as set forth in Subparagraph 6.b. above.  In addition, if Executive signs (and does not rescind, as allowed by law) a Release of Claims [in a form satisfactory to Company which assures, among other things, that Executive will not commence any type of litigation or assert other claims against Company] [or] [a copy of which is attached hereto as Exhibit A], and if Executive complies with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement,[26] Company shall pay Executive a post-termination payment [in the amount of_______________] [, as set forth below:

(1)  If the effective date of termination of employment is during the first full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination;

(2)  If the effective date of termination of employment is during the second full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination; or

(3)  If the effective date of termination is after the second full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination.]

The [applicable] payment shall be made [in a lump sum on] [at the same intervals and amounts as Executive’s pre-termination Base Salary, beginning with] the first payroll date after Executive signs (and does not rescind, as allowed by law) the above referenced Release of Claims, subject to appropriate withholdings and deductions, and subject to Executive’s compliance with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement.  No Incentive Awards, retirement savings contributions, 401(k) contributions or other employee payments or benefits will be paid to Executive by Company based on the amount of the post-termination payment[.] [, except the following:  ______________.]

 

d.         [At Any Time As a Result of a Change of Control.[27]  If Company terminates Executive’s employment at any time as a result of a “Change of Control,” and if Executive does not receive [and accept] an offer of employment [, which has comparable responsibilities and compensation] [that continues for at least ____ (  ) months] with the new controlling entity, Executive shall be paid the same payments and benefits as set forth in Subparagraph 6.b. above.  In addition, if Executive signs (and does not rescind, as allowed by law) a Release of Claims in a form satisfactory to Company and the new controlling entity which assures, among other things, that Executive will not commence any type of litigation or assert other claims against Company, and if Executive complies with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement, Company shall pay Executive a post-termination payment equal to ___ months of Executive’s Base Salary as of the effective date of the termination of employment.

This payment shall be made [in a lump sum on] [at the same intervals and amounts as Executive’s pre-termination Base Salary, beginning with] the first payroll date after Executive signs (and does not rescind, as allowed by law) the above-referenced Release of Claims, subject to appropriate withholdings and deductions, and subject to Executive’s compliance with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement.  The payment under this Change of Control provision will be paid in lieu of, and not in addition to, the post-termination payment referenced in Subparagraph 6.c.(1), (2) or (3) above.  No Incentive Awards, retirement savings contributions, 401(k) contributions or other employee payments or benefits will be paid to Executive by Company based on this post-termination payment[.] [, except the following:  ________________].

If Executive does receive an offer of [comparable] employment with the new controlling entity, and chooses not to accept that employment, Executive’s termination of employment shall be considered a resignation, and treated as set forth in Subparagraph 6.b. above.  For purposes of this provision, “Change of Control” means a sale or lease of the assets or a controlling interest of the stock of Company to a third party, which may come as a result of a divestiture, an acquisition, a lease arrangement, or a merger.]

  1. Business Protections.[28]
  2. Representations by Executive.[29]  Executive represents to Company that Executive has not signed and/or entered into any written or oral noncompetition agreements, confidentiality agreements, or other proprietary information agreements that would prevent Executive from accepting this offer or performing the anticipated duties and services at Company.  This Agreement is subject to these representations being correct.
  3. No Violations of Others’ Rights.[30]  Company does not authorize Executive to utilize any other individual or entity’s intellectual or other property, confidential or proprietary information on Company’s behalf.  Executive will not knowingly do any of the following on Company’s behalf:

(1)  Use any other individual or entity’s intellectual or other property, confidential or proprietary information. Specifically, Executive will not bring any other individual or entity’s proprietary information, customer lists, records, trade secrets, or any other property or confidential information with Executive when Executive comes to work at Company.  All of that information and property should be left with the proper owner(s);

(2)  Contact or do business with any supplier or other individual or entity who or which has an exclusive contract or any other agreement with any other individual or entity which prevents him/her/it from doing business with Company; or

(3)  Interfere with, infringe, misappropriate or violate any intellectual property rights of a third party.

  1. Protective Covenants.[31]  Company has many confidential and proprietary business interests and other information relating to its products, services, customers and employees, which it needs to adequately protect.  Company’s willingness to enter into this Agreement is contingent upon Executive simultaneously signing a separate Confidentiality, Noncompetition and Nonsolicitation Agreement with Company.  The business protections in that Confidentiality, Noncompetition and Nonsolicitation Agreement will apply throughout Executive’s employment, and will continue to apply thereafter even if Executive’s employment is terminated under Paragraph 5 of this Agreement, regardless of the reason for or timing of the termination.
  2. Miscellaneous.
  3. Entire Agreement.  This Agreement contains the entire agreement of the parties relating to the subject matter hereof and, except as otherwise stated[32], supersedes any and all oral or written prior agreements and understandings with respect to such subject matter.  The parties have made no agreements, representations, or warranties relating to the subject matter of this Agreement which are not set forth herein.
  4. Construction.  Each provision of this Agreement shall be interpreted so that it is valid and enforceable under applicable law.  If any provision of this Agreement is to any extent invalid or unenforceable under applicable law, that provision will still be effective to the extent it remains valid and enforceable.  The remainder of this Agreement also will continue to be valid and enforceable, and the entire Agreement will continue to be valid and enforceable in other jurisdictions.
  5. Waivers.  No term or condition of this Agreement shall be deemed to have been waived, nor there any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought.  A waiver shall operate only as to the specific term or condition waived.  No waiver shall constitute a continuing waiver or a waiver of such term or condition for the future unless specifically stated.  No single or partial exercise of any right or remedy under this Agreement shall preclude any party from otherwise or further exercising such rights or remedies, or any other rights or remedies granted by law or any other document.
  6. Captions.  The headings in this Agreement are for convenience of reference only and do not affect the interpretation of this Agreement.
  7. Modification.  This Agreement may not be altered, modified or amended except by an instrument in writing signed by each of the parties hereto.
  8. Choice of Law; Forum Selection.[33]  The laws of the State of Minnesota shall govern the validity, construction and performance of this Agreement, to the extent not pre-empted by federal law.  Any legal proceeding related to this Agreement shall be brought in Minnesota in the Hennepin County District Court or the Minnesota District of the U.S. District Court, and each of the parties hereto hereby consents to the exclusive jurisdiction of the Minnesota state and federal courts for this purpose.  The parties acknowledge the existence of sufficient contacts to the State of Minnesota and Hennepin County to confer jurisdiction upon these courts.
  9. Notices.  All notices and other communications required or permitted under this Agreement shall be in writing and provided to the other party either in person, by fax, or by certified mail.  Notices to Company must be provided or sent to its [Chief Executive Officer]; notices to Executive must be provided or sent to Executive in person or at Executive’s home.
  10. Survival.  Notwithstanding the termination of Executive’s employment with Company, the terms of this Agreement which relate to periods, activities, obligations, rights or remedies of the parties upon or subsequent to such termination shall survive such termination and shall govern all rights, disputes, claims or causes of action arising out of or in any way related to this Agreement.
  11. Successors and Assigns.  This Agreement shall be binding on and inure to the benefit of Company’s successors and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

___________________________________                        EXECUTIVE XYZ CORPORATIONBy:________________________________Its:________________________________

 

III.             CONCLUSION.

In conclusion, the parties’ employment agreements should anticipate all possible scenarios unique to the parties’ situation, and assure that both parties know their rights and obligations during and after the employment relationship.


[1]               Recitals.  Recitals are often viewed as mere “boilerplate.” However, recitals can provide very helpful language, in the event of future disputes. The language in this sample assumes a new employment relationship.  Agreements  are often  made with existing employees, in which case the Recitals would be different, with a goal of clarifying the terms and conditions of  the employment relationship, pursuant to the terms and conditions of the agreement.

[2]               General Terms and Conditions.  It is often unclear which general policies apply to executives. Even high level executives must be aware that they are subject to company rules and requirements (e.g., policies regarding sexual harassment, ethics, legal behavior, etc.), even if they are not summarized in the Agreement – unless, of course, the stated intent is to override other general terms.

[3]               Duties.  Although it is helpful to describe the initial title and duties (perhaps with reference to a job description as an exhibit), companies should be careful about this provision. A disenchanted executive may claim breach of contract, claiming the employer changed his/her title and/or duties. Generally, this section should not create the possibility of having later good faith changes constitute a breach, or otherwise give a disenchanted and/or terminated executive an opportunity to claim that he or she should not be obligated to perform his/her post-termination obligations (non-compete, anti-solicitation, trade secret, etc.) It should be noted, however, that many executive employment agreements clearly do identify that the executive will serve in a particular capacity throughout the term of the agreement “unless mutually agreed” otherwise. Further, several executive employment agreements carefully set out in the body of the agreement, or in a separate exhibit, the exact, detailed duties that are expected. That type of specificity can create problems because detailed job descriptions are rarely kept current.  If circumstances change, a company should have the right to expect its employees to be flexible, without risking a breach of contract claim. A good compromise is to have language that assures that, if the duties or titles are materially reduced, it may give the executive grounds to resign for “Good Reason,” as discussed below.

[4]               Term of Employment.  There are many options here. For example:

  • No Term at All; “At-Will” Relationship.  Some employment agreements do not contain any stated term. They state that the relationship can be terminated by either party at any time, and for any reason – expressly stating an “at-will” relationship. That may be the only provision, with no guarantees whatsoever.  Many “at-will” agreements, like this sample, allow either party to end the relationship at any time, but set forth post-termination rights. The agreement may change the rights, depending on who decides to terminate the relationship, why and/or when. Consider, for example, an agreement that provides the executive with a substantial severance package if the employer terminates the relationship without Cause during the first year, with the size of the separation pay decreasing over time. Such a provision might adequately address an executive’s initial concerns (e.g., not being willing to leave a prior employer without minimum guarantees), without creating an overly generous separation package.
  • Specific Period of Time (e.g., two years, with no reference to what happens once it expires). Presumably, once this expires, the relationship is either over or converts to an “at-will” employment relationship. If the employment continues without a new agreement, and if some of the provisions in the agreement continue forward, there is much room for misunderstandings and disagreements. For example, if the compensation and benefits packages continue to be in force (as they were during the term of the agreement), does that mean the post-termination compensation package continues to apply? What about other provisions such as non-competes, confidentiality clauses, etc? The agreement should be clear on these points.
  • Initial Term with Anticipated Renewals. Employment agreements are often drafted to have an initial term (e.g., one year), with the expressed understanding that the term may continue into the future. If that is the desire of the parties, they should state whether the term automatically renews, absent adequate notice by one party to the other not to renew (commonly referred to as an “evergreen” agreement); or whether the parties must renegotiate a new agreement at the end of its term, and, absent that, the employment will terminate. Regardless which type of renewal system is used, both parties should anticipate and address the renewal period. Beware of an agreement that either automatically renews itself or automatically expires because one or both parties “dropped the ball.”

[5]               Termination of Employment. From the employer’s perspective, only the employment relationship – not the agreement – should be terminated. Termination of the agreement could inadvertently terminate post-termination business protections.

[6]               Compensation, Reimbursements and Benefits.  Executives often have unique compensation packages. In addition to base salaries and basic benefits, a compensation package may include intricate bonus plans, incentive compensation plans, separation or severance plans, stock grants, stock warrants, stock options, etc.  If unique compensation arrangements are made, be sensitive to the issues that they create. For example, if a stock option is granted, or if stock is given to the executive, it should be clear in the executive agreement and in a separate Stock Purchase Agreement what will happen if the employment relationship ends. From the employer’s perspective, typically one would want a Stock Purchase Agreement which triggers in the event of termination of employment, regardless of the reason. Similarly, if there are unique promises for employee benefit plans that may be covered by ERISA, care should be taken to prepare proper documentation which reflects the company’s ERISA obligations and desires.  Critically, be sensitive to tax, SEC and Sarbanes-Oxley issues and obligations created by an executive agreement.

[7]               Base Salary.  Executive agreements typically set the base salary for the first year, with an understanding that the salary will be subject to annual review. Some agreements state that the base salary will never drop below a certain floor during the entire course of the agreement; some guarantee minimal percentage increases each year; some make no guarantees whatsoever.

[8]               Bonus and Other Incentive Packages.  Executive agreements may indicate that an annual bonus will be considered, at the discretion of the employer, or set up an objective (or combined objective/subjective) bonus plan, which sets out criteria for achievement (e.g., percentage of sales, etc.). Alternatively, the agreement may simply refer to other bonus or incentive programs which are in existence, and state that the executive is eligible for bonuses or incentives under those programs, subject to their terms and conditions. The company should make it clear that it maintains the right to interpret, alter, or replace the bonus/incentive program at its discretion, and specifically should reserve the right to add to, delete from, amend, or even cancel the program if business circumstances warrant.  The agreement should not supersede the company’s obligations under the bonus or incentive plan, unless that is what the parties intend to have it do (which would rarely be the case). The executive may want to set minimum expectations/obligations, or make it clear that if certain award levels are not reached, the executive has a right to resign for Good Reason, discussed below. A common source of disagreement over bonuses and other incentive packages is whether the bonus is payable if the executive leaves before a particular bonus period (e.g., fiscal year) is over. The agreement should state whether a mid-year departure will entitle the executive to a pro rata share of the annual bonus, the entire bonus, or no bonus at all. This may be written to vary, depending on the timing and/or the reason for the departure.  In any event, be sure that the executive agreement does not conflict with other employee benefit plans.

[9]               Business Expenses.  Executive agreements often provide specific provisions for car expenses, plane expenses, country club expenses, and other matters – some of which may or may not be deductible by the company under the Internal Revenue Code. The agreement should clearly state the various responsibilities.

[10]             Time Off. Executives often mix business and pleasure, and generally work while traveling. Depending on a company’s policies and practices, that can lead to large and unexpected accruals of paid time off. Address all of this up front, to avoid major disputes later; and make sure the company’s time off and accrual policies are in compliance with recent legal developments.

[11]             Benefits.  Agreements often summarize specific benefits available to the executive. The company should make it clear that references in the agreement to particular employee benefit plans established or maintained by the company do not change the terms and conditions of the plans or preclude the company from amending or terminating the plans.

[12]             Changes in Benefits.  Companies often change policies or employee benefit plans, at least on a prospective basis. Particularly if the executive agreement identifies specific policies or employee benefit plans (which they often do), it is critical for the company to reserve its right to make changes to those plans.

[13]             Termination.  The agreement should anticipate and address all likely reasons for termination of employment. The parties may have a very different view about post-termination packages and obligations, depending on the reason for and timing of the departure. It is better to have a road map for the different options than to leave items vague or open, and subject to later disputes.

[14]             Death of Executive.  Obviously, the death of the executive terminates the employment relationship. It is necessary to state this, however, because the employer almost certainly will have a different view about post-termination payments in this situation, as compared to others.

[15]             Disability of Executive.  An executive’s disability, if serious enough, should be a ground for termination.  Draft the definition so the agreement does not violate the Americans with Disabilities Act or the Family and Medical Leave Act. Many agreements state that, subject to these laws, the executive will be “presumed” to have such a disability if he or she is substantially incapable of performing his or her duties for a particular period of time (12 weeks would be the minimum here, due to the FMLA; the ADA may dictate a longer period).

[16]             Termination by Company “For Cause.”  The agreement should make it clear that the company can terminate, at any time, “for Cause.” The parties should carefully define “Cause.” Various types of misconduct, illegal activities, intentional breaches of the agreement, etc., will often be included in the definition. Employers are well served if they can get the definition of “Cause” to include less heinous actions of the executive that would, nevertheless, justify a termination.  Executives prefer to have “Cause” only in misconduct situations.  Often, the less serious issues may be subject to a notice/opportunity to cure provision.

[17]             Termination by Company Without Cause.  This is the situation that new executives are most concerned about. What if the employer decides to terminate the employment relationship due to a change in business plans, a down turn in the market, a mere personality dispute, or some other reason why “it’s just not working out?” Employers who enter into executive agreements definitely want to reserve the right to terminate “without Cause;” they do not want to prove “Cause” every time they want to part ways with the executive.  Typically, this is a situation where fairness and the new executive’s negotiating demands dictate that post-termination separation packages are warranted.

[18]             Voluntary Termination by Employee.  Employers cannot prevent an executive from voluntarily terminating employment.  However, the agreement should state that if the executive voluntarily quits, separation payment obligations will not apply.

[19]             Resignation for Good Reason. This provision is rare. Employers rarely offer it, and executives often fail to ask for it. Even once it is agreed to in concept, there are often disagreements on the definition.  Executives generally want the ability to trigger this provision if the job materially changes after they begin (e.g., material reduction in compensation or title, or forced and unacceptable relocation), or if there is other treatment that may not necessarily rise to the level of a “constructive discharge” under applicable law, but is nevertheless intolerable to the executive. Employers generally resist some or all of these, preferring to maintain flexibility and discretion.  This may be a very good place to address situations where the employer and executive discuss and fully expect a situation to occur (such as a promotion from COO to CEO in one year, after the current CEO retires), but the employer cannot contractually guarantee it – basically assuring the executive that if it does not occur, there will be some ability to trigger a termination package. Often, the less serious issues may be subject to a notice/opportunity to cure provision.

[20]             Termination as a Result of Other Reasons.  Executive agreements occasionally address the possible termination of employment as a result of other reasons. For example, executive agreements often discuss terminations as a result of divestitures, acquisitions, mergers, or other changes in control. From the company’s perspective, this is not necessary because these types of provisions would constitute a termination “without Cause.” Executives may want to see this type of provision set out separately, however, to set up a later provision for severance pay in the event of this type of separation.  The executive may even want to make it a ground for a Good Reason resignation.

[21]             Post-Termination Compensation Packages.  Many executive agreements provide a flat severance payment (e.g., twelve (12) months Base Salary) regardless of the reason for the termination, the timing of the termination, and whether the executive abides by other commitments. This may not be a logical approach from the company’s perspective. Employers should not agree to pay separation pay simply because an executive’s employment is terminated. The reason for the termination is critical.

[22]             No Additional Pay/Benefits.  There have been many claims by former executives for bonus or other incentive payments, various fringe benefits (e.g., cars, club dues, profit sharing, etc.), and even claims for bonuses based on post-termination severance pay. Not surprisingly, companies usually take the position that no such benefits or payments were anticipated. To avoid such a dispute, executive agreements should clearly state whether additional payments or benefits will result from the payment of a post-termination payment, or whether the gross payment stands alone.

[23]             Death or Disability of Employee.  If the employment relationship terminates as a result of the executive’s death or disability, this is not the employer’s choice. Further, executives often have (usually through the employer) life and disability insurance.

[24]             Termination by Company for Cause [; Resignation Without Good Reason].  If the executive truly did give “Cause” to terminate, and particularly if it was a serious act of misconduct, employers do not want a contractual commitment to make post-termination payments.  Similarly, few employers are happy to make payments to an executive who quits through no fault of the employer.

[25]             Termination by Company Without Cause [; Resignation for Good Reason].  Here, a good argument can be made for post-termination compensation. Through no serious fault of the executive, the employment relationship is ended. Accordingly, it is not uncommon for employers to agree to provide post-termination pay to executives who are terminated “without Cause.” This may be part of an overall benefits package or may be contained within the executive agreement. The amount of post-termination compensation might be a flat amount (e.g., one year), a formula (e.g., one month for each year of service), a diminishing amount (e.g., one year if the termination takes place within the first year, six months, if it takes place in the second year, etc.), or some other formula. If the executive is able to negotiate certain rights to resign for Good Reason, the severance sections may be similar, or even identical, to the severance for a termination by the company without Cause.

[26]             Contingencies.  If an employer agrees to pay post-termination compensation, it should make the receipt of such compensation contingent on the executive’s compliance with all post-termination obligations (noncompete agreements, trade secret and confidentiality agreements, agreements not to hire or solicit employees, cooperation with litigation clauses, etc.); and a signed release of claims.

[27]             Change of Control.  Change of Control provisions are rare. This is a simple change of control provision.  Many are far more complex.  The language in a Change of Control provision, as a practical matter, can make future business combinations difficult, if not impossible.  There needs to be a reasonable balance between protecting executives from the sudden loss of employment and essentially making the business change impossible to achieve.

[28]             Business Protections.  This sample assumes a separate Confidentiality, Noncompetition and Nonsolicitation Agreement.  Any or all business protections could be incorporated into the executive agreement, rather than in a separate document.

[29]             Representations by Executive.  If the new executive has restrictions from a former employer, it is critical to discover that up front, rather than after the fact.  In fact, these representations should be confirmed as part of the offer.  The Company may choose not to go forward with the arrangement, to negotiate or litigate with the former employer as needed or to change the terms of the new agreement, in order to avoid violations with the existing agreements.

[30]             No Violation of Others’ Rights.  Again, it is important to clearly assure, up front, that the employer does not want the executive to violate any other entity’s legal rights.  This language may prevent legal conflicts, or at least support “good faith” defenses.

[31]             Protective Covenants.  It may be critical to the survival of a company to protect its trade secrets, prevent unfair competition, and prohibit the solicitation of its customers and/or employees if a key executive departs.  As further discussed in Section II below, a company can do many things to protect itself with respect to these problems. To stand the best possible chance of prevailing in litigation, the company wants to be able to prove that its trade secrets and other confidential information were truly secret; that it, from day one, took steps to protect that confidential information; and that the executive knew that the information was confidential, etc. Further, the fairness and reasonableness of noncompete agreements, as well as the consideration requirement, should be clear from day one. If the employer does not have a separate noncompete confidentiality/trade secret agreement, those provisions can be included in the executive agreement. Even if the employer does have a separate agreement, it is a good idea to make reference to that agreement in the executive agreement.

[32]             Merger Clause.  The employer should be careful not to inadvertently supersede something that it wants to survive.

[33]             Arbitration Clause. The parties can opt to have future disputes decided in an arbitration forum in lieu of traditional litigation, and they can specially design the procedures under which arbitration will be conducted. Advantages generally include an expedited ultimate resolution, decreased protracted discovery and court procedures, and avoidance of erratic jury verdicts. However, some may perceive these so-called advantages as disadvantages depending upon the facts of the particular case. First, as to both issues of law and fact, the ultimate decisions are left to the arbitrator with limited grounds for appeal (e.g., award procured by corruption, fraud or other undue means). Thus, the threat of an appeal which faces a judge who erroneously applies the law does not have the same effect on an arbitrator who may couch technical applications of the law in order to “split the baby.” Also, beware of the fact that the existence of an arbitration clause in an executive agreement, trade secret/confidentiality agreement, noncompete agreement, etc. can effectively prevent the employer from obtaining an injunction with respect to violations.  If an arbitration clause is vastly preferred, consider at least using compromise language between the two competing issues.  For example, consider making it clear that arbitration is encouraged, but not required; consider adding mediation as another voluntary alternative; and, in any event, make it clear that the arbitration language does not apply to the various non-competition/trade secrets provisions, nor does it bar the company from seeking judicial remedies to enforce them.  Finally, be aware that Arbitration provisions may or may not cover traditional employment claims, depending on how they are drafted.

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