Prudent executives should utilize the services of an employment lawyer when they are initially hired and offered an executive compensation agreement, but they seldom do. Making sure an executive compensation agreement is properly drafted in favor of the executive employee, from the get-go, is of paramount importance. Otherwise, the executive risks not being properly paid, being fired without notice, having an illusory employment contract, or ending up in litigation. Lesson: Executives should hire their own employment lawyer to protect their rights during the drafting process of their executive compensation agreements.
Us lawyers often appear on the scene once the executive is being terminated, has been fired, the executive realizes they will never be properly paid under their executive compensation agreement, money is due under the agreement, or there is clearly the need to sue the employer. Sometimes they are asked to assist in severance negotiations when a high level employee is being fired. As an executive employment agreement lawyer, they represent executives in negotiating executive contract terms, including compensation, relocation, tax gross-ups, restricted stock and options. The best time to negotiate an employment contract is before an offer is made or accepted. However, there may be times when you need to re-negotiate your employment agreement such as when there is a change in executive leadership or reporting relationships. An employment contract attorney can help set up a well-planned executive employment agreement that will pave the way for a successful executive/company relationship. However, compatibility with company and fit of skills and personality, as well your own intelligence information on the company’s current business status and potential, are key to the success of the partnership. The company’s conduct during the negotiations can offer you valuable insight into the company’s decision-making process, motivations and flexibility, as well as your potential fit. Below are ten critical areas that executives and companies should both consider negotiable to assure that both are treated fairly. Executives should utilize the services of an employment lawyer when they are initially hired and offered an executive compensation agreement. Making sure an executive compensation agreement is properly drafted in favor of the executive employee, from the get-go, is of paramount importance. However, executives rarely hire their own employment lawyer to protect their rights during the drafting process of their executive compensation agreements.
Common problems employees face due to improperly drafted employment agreements by the employers’ lawyers whom fail to take into consideration the interests of the employee:
• The employment contract lacks a term: A term means the specified length or duration of the contract.
• The employee has signed other employment documents which contain at-will language. The signed employment documents might be an acknowledgement of an employee handbook, employee arbitration agreement, or an employment application
• The employment contract itself claims the employee is at-will
• The employee was given an offer letter that is signed by somebody of authority, but it states the employment is subject to the will of the employer, or that it is not a contract
• The employee handbook or a document the employee is asked to sign contains a statement that nobody other than the President of the Company, CEO, or like high ranking officers of the employer are able to making a legally binding contract on the employer
• The employment agreement contains liquidated damages in the event of a breach of contract, and the liquidated damages are limited such as 30-90 days of pay
• The employment agreement allows the employer to terminate the employee if they provide the employee limited notice such as 14-60 days, and if notice is not provided the employee’s remedy is the amount of pay they would earn during the notice period
• Damages under the employment contract are to be figured on the basis of straight salary which does not consider 401k marching, bonuses, commissions, stock options, or any other valuable employment benefits including health insurance
• The manner of determining commissions or bonus is unclear free directory
• The employment contract is only a small portion of the employment agreement because there are riders, addendums, or attachments that can be found who knows where and say who knows what
As you can see there are many contract provisions employers insert in employment contracts that are completely unfavorable to the employee, and favorable to the employer. A contract can end up providing little benefit to the employee. An attorney can be of help if these situations require litigation in arbitration or court. They can also be able to help you properly draft and obtain the terms of employment that will help you, in your employment contract.
An experienced employment lawyers can assist if:
• An employment contract has been breached and there needs to be litigation
• An employment agreement is terminated by the employer before its expiration
• If the employee is fired for unlawful reasons such as wrongful termination or a form of discrimination (age, disability, medical condition, or race)
• The employer is refusing to pay a bonus, commissions, or stock options which comes up somewhat frequently in the world of employment litigation
• There is a dispute about what percent, or override commissions are figured at
• There is a dispute about what the employer’s gross profits or net profits are for the purpose of determining how much money is owed to the employee
A severance agreement is an agreement between an employer and an employee which specifies the terms of the employee’s separation from the employer. A severance agreement is typically a legally binding document, but it can often contain tricky and confusing language. A severance agreement will contain a number of provisions that can affect your legal rights. There are a number of common important sections in a severance agreement, including provisions regarding:
• Severance pay;
• A release by the employee of all claims against the employer;
• Continuation of health care benefits;
• Non-compete or non-solicitation requirements;
• Eligibility for unemployment;
• No rehire issues;
Of all of these provisions, the one that employees need to be careful of and which is usually the most important is the “release.” When employers offer severance agreements to employees, it is usually to get them to sign a release of all of their claims against the employer. By signing a release, you may be giving up critical rights if you sign the agreement without consulting with an attorney. In an employment setting, a severance package is usually offered to an employee in connection with their termination. It generally includes pay and some benefits, which may vary from instance to instance. Although many employers may offer them, there are no specific laws making severance packages mandatory. An employer is only legally required to provide unpaid wages and unemployment benefits to a terminated employee if the employee is entitled to them. There is no uniform standard for determining what is included in a severance package. Like many other employment agreements, they can sometimes be negotiable. They can vary based on the employee, or the employer’s policies, and may include different things. Most times, a severance agreement will require you to agree not to sue the employer for wrongful termination in order to accept it. While severance packages vary, in many cases they are based on length of employment. For example, in a severance package, an employer might offer a week’s pay for every year someone has worked for the company. However, an employer can basically choose to offer any amount they want, so long as it does not violate any type of law. In addition, some employers may offer different severance packages depending on the level of the employee. For instance, a company may choose to offer their executives or managers a much higher severance package than an entry-level employee.
You should be aware that severance pay or severance packages do not always come in the form of cash. Instead, some companies might:
• Extend health benefits past termination;
• Cover certain future medical expenses;
• Provide outplacement services; and/or
• Offer a range of various other employee benefits.
Sometimes, a severance package can include both cash payments as well as benefits. Again, these all depend on the employer’s policies or preferences, as well as any other pre-negotiated terms between the employer and employee.
Can I Negotiate the Terms of a Severance Package?
Often, companies will have employment policies that state the way that severance packages are determined. These policies will generally include provisions like when you are entitled to severance pay; how it is calculated; and what the package will include. This could also be addressed in an employment contract between the employer and employee. If this is the case, the employer would be legally entitled to offer you severance pay according to the contract terms. However, you may sometimes have an opportunity to negotiate your severance package. If that is allowed, the following factors will probably be brought up during negotiations with your employer:
• Years of service with the company;
• Employee’s level or role within the company;
• The size of the company; and
• How the severance package was outlined in the company policy and/or employment contract, if any.
Some Common Severance Package Disputes
As with any type of employment agreement, severance packages can sometimes form the basis of legal disputes or conflicts. These can range from minor disputes to company-wide violations that affect many employees.
Some common types of severance package disputes can include:
• Discrimination with regard to an employee’s age, sex, nationality, or other characteristics (for instance, denying a severance package based solely on the employee’s race);
• Conflicts involving some type of fraud or misrepresentation in the way the severance package or pay was negotiated (for example, the employee was tricked into signing a different agreement than the one agreed upon);
• Disputes over the amount of pay, types of benefits, or other severance package terms;
• Issues with non-payment of the severance pay or withholding of the benefits after they were promised to the employee; and
• Various other conflicts.
These types of disputes can sometimes be complex and may require legal action to resolve.
The drafting and negotiation of executive-level employment agreements, and in particular severance packages, require a careful eye toward compliance with principles of contract and relevant employment laws. Severance agreements entered into must offer some compensation or benefit beyond that to which the employee was already entitled (i.e., final pay) in exchange for any agreements not to sue or a relinquishment of rights. Additionally, the agreement must be made available for the employee to consider for a certain period of time before she or he is forced to sign, whether the agreement is a result of termination, layoff, staff reduction, or changing ownership. Additional rules apply for workers over 40 years old; we can help make sure your severance and release agreements comply with the Older Workers Benefit Protection Act and other applicable laws. If you are an executive in the process of exiting a company, you will want experienced counsel to examine the severance package offered to determine if it adequately compensates you for any rights you have relinquished, and to negotiate a more favorable agreement on your behalf if the offered agreement is unfair. A very good attorney will also help to ensure that you have a sufficient right to work within your industry so your acquired skills can be utilized to their fullest. Unless you have a contract of employment with a specific term of employment, employers typically do not have an obligation to provide a Separation Agreement or severance pay. Generally, however, an executive employee holding a high or mid-level management position will be asked by many employers to sign a Separation Agreement, which usually includes a general release of the employee’s claims against the employer as well as additional provisions, including confidentiality and protection of the employer’s proprietary information. Particularly with the termination of executives and managers, it is important to understand the types of rights you are being asked to release as well as the extent of the confidentiality and other obligations. Additionally, employers sometimes seek to add a non-competition or non-solicitation provision, also called restrictive covenants, to Separation Agreements. At a time when companies are reducing their workforces, individual employees often do not receive adequate severance compensation. Many individuals simply assume they have no leverage or basis for demanding more from their employer at the time they are presented with a severance package and release. However, often these employees, either individually or as a group, will have valid legal claims that will enable them to negotiate a more appropriate severance package as they move forward in their careers. In addition, in a down economy, many employers are attempting to cut corners and not provide their employees with compensation and benefits they are entitled such as continuing medical insurance coverage and unemployment compensation. Once an employee asks for a better package or different terms for a Separation Agreement, the employee may have technically rejected the employer’s offer. Therefore, an employee runs the risk of losing the guaranteed offer by making a counteroffer. However, in practice most employers will typically not rescind their offer if an employee makes a counteroffer, although that is a possibility. Consequently, it is imperative that you seek legal counsel who is knowledgeable in such matters.
Severance & Change-in-Control Agreements
Severance agreements provide for payments to executives in the case of voluntary or involuntary termination and can play a constructive role in the recruitment and retention of key employees. Severance agreements are a way of mitigating the risk an incoming executive takes by leaving other employment opportunities and thus are often included in agreements for executives hired from outside the company to encourage him or her to leave a prior employer in case the new arrangement sours. Severance for longer-serving executives can be oriented in a way as to protect the executive’s income, thereby maximizing retention, while offering the company protection through the use of non-compete agreements and “Good Reason” provisions which ensure a severance agreement does not become an incentive to leave. Change-in-Control agreements sometimes referred to as “golden parachutes,” compensate executives for loss of job due to mergers or sale. Executives are fiduciaries, charged with taking action in the best interest of the company and the shareholders. However, CEOs face inherent difficulties when it comes to a merger or a sale of the business, the end result of which will result in the executive losing their position. Change-in-Control agreements are structured to encourage executives to seek out and enter into sale or merger opportunities when it is in the best interest of the shareholders without having reservations about losing their own positions.
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