Drafting & Negotiating Employment Agreements for Executives

Long Island Employment Law

Long Island employment lawyer Steven Mitchell Sack understands the legal, business, and professional implications of entering and exiting employment, partnership, business, and buy-sell agreements. He has extensive experience negotiating and helping clients negotiate such agreements, as well as reducing exposure to breach of contract litigation when appropriate.

Specific areas of Sack’s experience include:

• Drafting letters and employment agreements for executives, officers, managers, and employees
• Crafting agreements for partners, independent contractors, consultants and commission salespeople
• Creating severance, retention, and change-of-control agreements
• Reviewing and advising clients on the merits of restrictive covenants, including trade secret, non-disclosure, non-competition, non-solicitation and confidentiality clauses
• Executive restructuring in mergers and acquisitions
• Negotiating severance packages for executives, officers and employees

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Checklist of Key Negotiating Points to Cover During the Hiring Interview

The following checklist is divided into three main sections: The Job; Job Security; and Salary and Benefits. Where appropriate, detailed “strategies” have been inserted into the checklist for further information.

The Job

1. Job description. (Understand the nature of the job being offered.)
2. What is your title?
3. What will be your job functions? Will you report to a superior? If so, who?
4. When are you expected to begin working (start date)?
5. What is your employment status?
   1. Are you considered a regular full-time employee eligible for all employer-provided fringe benefits (as opposed to a part-time or exempt employee paid on an hourly basis with limited fringe benefits)?
   2. Are you considered an employee or an independent contractor? (As an independent contractor, you may be required to pay all federal, state, and local withholding taxes, Social Security, and other taxes. However, there are certain advantages to being hired as an independent contractor which will be discussed later in this chapter.)
   3. Are you being hired as a consultant? If so, can you work for other companies, have outside work and sidelines, etc.? This, too, will be discussed later in the chapter.

Job Security

1. Will you be given job security (as opposed to merely being “hired at will,” which gives the employer the right to fire you at any time with or without notice and with or without cause)?
2. If so, what kind of job security is being offered?

STRATEGY 1: Your objective in negotiating for job security is to avoid being fired suddenly at the employer’s discretion.

The best job security to obtain is to be employed for a definite term—for example, two years. This means that the employer cannot fire you prior to the expiration of that term except for a compelling reason—that is, for cause. (Most employers are reluctant to hire people for a definite term because it reduces their ability to fire employees at any time.) Thus, always ask for a definite term when being hired. Use your discretion as to the amount of job security you request. Your request can range from six months to several years. Tell the employer you want an X-year contract; the employer will know what you mean.

STRATEGY 2: If the employer refuses to hire you for a definite term, ask for a guarantee that you cannot be fired except for cause or as long as you achieve certain goals (for example, a minimum sales quota if you are being hired as a salesperson). This request can give you needed protection without locking the employer into a time frame.

STRATEGY 3: If this request is refused, ask to be guaranteed a written warning within a definite period of time (for example, 30 days to cure alleged deficient performance) before being fired. This will protect you from a sudden firing, and some employers will accept this. Or you can ask for a written notice of termination (for example, 30 days before the contract will end) before the effective termination date so that you can plan ahead and look for other employment while still collecting a paycheck.

STRATEGY 4: If the employer refuses #3, request pay in lieu of notice in the event you are fired without warning; for example, ask to receive two weeks’ additional pay at your current salary level in the event you are fired suddenly. (This is in addition to severance pay, more fully discussed below.)

STRATEGY 5: Be sure you understand if you are being hired for a probationary period. Some employers establish a probationary period (for example, the first 90 days of employment) ranging from 30 to 120 days to evaluate an employee’s performance. If you are hired for a probationary period but are fired before the end of the period, you may be entitled to receive salary and other benefits until the end of the probationary period in certain situations.

Salary and Benefits

1. What is your base salary, and when is it payable? Understand all deductions from your paycheck.
2. When does the pay period start and end?
3. If payday falls on a holiday, when are paychecks distributed?
4. Is overtime offered? If so, at what rate? Is there a seniority basis for offering overtime (e.g., a policy that overtime is first offered to longtime workers)? Most states, in addition to federal law, require that overtime must be paid whenever a part-time or hourly employee works in excess of 40 hours per week. Special employees working in government contracting or subcontracting work may also be required to be paid overtime if they work more than eight hours on any given day. Discuss this if relevant.
5. Will you be required to outlay expenses? If so, are expenses reimbursable? Be sure you know the kind and amount of expenses that are. Be sure you understand the kind of documentation to be supplied to the employer for reimbursement and how long you must wait before reimbursement.
6. Are you entitled to commissions? If so, understand how commissions are earned, the commission rate, and when commissions are paid.
7. Are you to receive a bonus? If so, how is it calculated, and when is it paid? Is the bonus gratuitous (in other words, merely paid at the employer’s whim and discretion in an amount determined solely by the employer), or is it enforceable by contract with a verifiable sum linked to some specific formula (profits, revenue, output, etc.)?

Many people fail to understand their rights regarding bonuses and are later disappointed or exploited. For example, while some peoplework a full year counting on a bonus and don’t receive it, others receive bonuses that are not even closely related towhat they were expecting. But that is not the worst problem that frequently arises. Employers sometimes fire individuals after the bonus has technically been earned (at the end of the year) but before it is distributed (on February 15 of the following year). They then tell the ex-employee that he or she must be working for the company at the time the bonus is paid in order to collect!

These common abuses can be avoided by understanding and negotiating the following strategies.

STRATEGY 1: Request a verifiable bonus that is not subject to the employer’s discretion. Specify the amount, when it will be paid, and that there are to be no strings or conditions attached. In other words, treat the bonus as part of your salary package; this will increase your legal rights in the event you are not paid.

STRATEGY 2: Request a pro rata bonus in the event you resign or are fired prior to the bonus being paid. For example, if the bonus is computed on sales volume and you work a full year and resign or are fired on December 1 of that year, you should be able to receive eleven-twelfths of the expected bonus. Many employers will accept this provided you give ample notice before the resignation and you are not fired for misconduct (that is, for cause).

STRATEGY 3: Avoid allowing the employer the right to arbitrarily determine when and if a bonus will be paid and in what amount. This arrangement is considered a gratuitous bonus, which may not be enforceable by contract. When an employer controls the timing, amount, and whether or not to pay a bonus at all, or states that the money is paid in appreciation for continuous, efficient, or satisfactory service, employees have a weaker chance to recover an expected bonus from the employer when they are not paid.

STRATEGY 4: Resist arrangements that require you to be on the job after a bonus is earned in order to receive it. If the employer insists on this condition, negotiate the right to receive a bonus if you are fired due to a business reorganization, layoff, or any reason other than gross misconduct.

STRATEGY 5: Get it in writing. Verbal promises to pay bonuses are not always enforceable. Confirm your understanding in writing for additional protection.

STRATEGY 6: Are additional services required in order to earn the bonus? If so, promises to pay a bonus for work, labor, or services already completed at the time the promise is made may not be valid.

STRATEGY 7: Try to link the bonus to some verifiable formula (for example, gross profits or sales volume). Such an arrangement can give you extra legal protection; in the event you are not paid a correct amount, you would be able to verify the bonus from the company’s books and records. In fact, if a bonus-enforceable-by- contract arrangement could be proved in court, you would have the right to inspect the employer’s books and records in a lawsuit.

Many employers are reluctant to base bonuses on verifiable components because they are aware of the vulnerability to exposure in a lawsuit. However, you should leave nothing up to chance when negotiating a bonus. You want to know precisely how the bonus is to be earned and steps to take (for example, the right to be given company records for review) in the event you are not paid what you believe you are owed. Insist on nothing less.

What fringe benefits will you receive? Most employees fail to properly negotiate extra compensation in the form of fringe benefits. Many forms of fringe benefits are even more valuable than salary because they are nontaxable. Don’t forget to ask for fringe benefits during the negotiating process.

The following detailed summary of fringe benefits will be helpful in this area.

INSURANCE BENEFITS. These include basic group term life insurance, basic accidental death and dismemberment coverage, optional group term life insurance, dependent term life insurance, optional accidental death and dismemberment insurance, business travel accident insurance, weekly income accident and sickness plans, illness payment plans, short and long-term disability insurance plans, medical benefit plans, dental benefit plans and legal benefit plans.

This list is not meant to be all-inclusive. Rather, it gives you an idea about the kinds of benefits that are available. However, most insurance benefits are not negotiable, since employers must offer them to all employees so as not to be liable for charges of discrimination.

OTHER BENEFITS. These can include the use of an automobile, free parking, car insurance, gasoline allowance, death benefits, prepaid legal services, credit cards, and loans at reduced rates of interest with favorable repayment schedules. Be sure you know all the elements of your benefit package, and don’t be afraid to negotiate extra benefits when appropriate.

PENSIONS AND PROFIT-SHARING PLANS. Are you entitled to additional compensation in the form of defined benefit, profit-sharing, money purchase, and pension plans? Other benefits you should be aware of are Social Security benefits, Individual Retirement Accounts (IRAs), 401(k) plans, thrift plans, stock bonus plans, and employee stock ownership plans (ESOPs).

All of these plans are extra financial perks to help you accumulate additional revenue for financial security and your retirement. Be sure you understand what benefits the employer offers in this area and what contributions will be made on your behalf. Other questions to ask:

• Are you required to contribute matching sums of money? If so, how much will this cost you? Can you increase or decrease matching contributions at your discretion? If so, is notice required and how much
• Does the investment accumulate tax-free?
• Can the money be taken prior to your retirement? If so, is there a penalty?
• What happens if you resign or are fired for cause? Is the money forfeited?
• What happens if the company is sold or goes bankrupt? Is the money protected?
• Who administers the plan benefits? How can you be sure that there are no funding liabilities—in other words, how can you be sure that monies will be set aside as promised? Are the plan benefits invested in such a manner as to preclude large losses?
• If as a result of an acquisition through the purchase of the company you are laid off, how will COBRA and ERISA laws apply?
  • ERISA (Employee Retirement Income Security Act) as modified by COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986) is a federal law designed to protect you and your beneficiaries’ pension and other benefit rights when you are laid off. Note that ERISA does not apply to employment by churches or federal, state, or local governments, or by companies with 20 or fewer employees, and may not apply if it can be proved that your termination was for gross misconduct. However, in most situations, these laws ensure that money previously set aside on your behalf will be given to you, regardless of internal changes or organizational restructuring in your company.

All of these points and many more should be explored and explained to your satisfaction. Since these financial benefits can account for a large part of additional compensation, never overlook their importance. Always negotiate to receive the maximum amount of benefits available.

RAISES AND JOB ADVANCEMENT. Are periodic raises given? What is the procedure for merit raises and job advancement?

STRATEGY: Employees are sometimes disappointed by the size of annual or periodic merit increases or the speed of job advancement. To avoid problems in this area, be sure you know if such increases are determined by one person’s subjective decision. If they are, request the right to appeal this person’s decision and discuss how this may be accomplished.

RELOCATION EXPENSES. This is money often paid to employees who are required to relocate. Points to discuss and negotiate include questions like these: How much relocation pay will be given? When is it payable, and who will pay for it? Are taxes taken out of the payments?

Be sure to determine whether you need to furnish supporting documentation (copies of bills for legal fees incurred in a house closing, etc.) in order to receive reimbursement. Also, ask what arrangements will be made if you resign or are terminated within a short period of time.

STRATEGY: Do not allow the employer to unilaterally cancel relocation expenses if the job doesn’t work out, because you may have relocated yourself and your family thousands of miles at great expense with no protection. If you are planning to relocate to a distant location, always receive assurances in writing that relocation expenses will be paid regardless of how long you work for the company.

SEVERANCE PAY. Does the employer have a definite stated policy regarding severance (e.g., two weeks of severance for each year of employment)?

Inquire whether severance is paid if you resign as opposed to being fired. Some companies do not pay severance upon resignation and do not pay severance when the termination is for cause.

VACATION PAY. How much vacation pay you get often depends on your salary grade, type of job offered, and how well you negotiate. Be sure you understand how vacation pay is computed and other important matters regarding the granting of vacation time. Consider the following as starting points:

• Must vacation days be used in the year they are granted, or can they be carried over to the next year? If they can’t, can a prorated share (e.g., one-half the days) be carried over?
• How long must you work in order to be qualified?
• Does the amount of vacation time increase depending on the number of years with the company (e.g., two weeks of vacation pay for the first five years, increasing to three weeks of paid vacation from years six to ten)?
• Must vacation days be taken all at once, or can they be staggered? If so, how?
• How much notice are you required to give before you can take vacations?
• Are there times during peak seasonal demands when requests will not be granted?
• If you leave or are terminated, will you be paid for all unused vacation time?

This last point should be considered carefully. Employees frequently leave their jobs expecting to receive large payments for unused vacation (carried over for several years) but are denied payment in this regard. Some states require companies to pay accrued vacation pay in all circumstances, even when the employee is fired for cause. Thus, check with the Department of Labor in your state or speak to competent legal counsel.

PERSONAL DAYS. Personal days give you a chance to attend to personal business, religious observances, or special occasions. Some companies add them to vacation time with pay. Others only allow personal days without pay. In addition, inquire about absences due to medical and dental appointments, bereavement pay, military leave, paternity leave, appearance in court, and jury duty.

PERSONAL LEAVES. Employers are not required by law to allow employees paid personal leaves of absence, but must apply such practices consistently to all employees if they do. If you are considering taking an extended leave, what about the continuation of medical benefits during this period? Ask whether medical and other benefits terminate at the end of the month when the leave becomes effective. Can you keep those benefits in effect during the absence period by continuing to pay your payroll deductions?

Be aware that federal law prohibits companies from requiring employees to work an extended period of time (such as 12 months) before being allowed to take unpaid personal leaves. The Equal Employment Opportunity Commission has ruled that not allowing unpaid leave has a disparate impact on women who desire to nurse their newborn children and may violate the federal Family and Medical Leave Act (FMLA).

DISABILITY LEAVE. If you will be a full-time employee, you may be entitled to disability leave should you become unable to work due to a nonoccupational illness.

Note: A company cannot treat pregnancy-related disability or maternity leave differently than it treats other forms of disability leaves of absence.

DISABILITY. What happens in the event you are disabled? Can you receive salary and other benefits for a predetermined period of time? If so, how much and for how long? Understand themeanings of temporary disability and permanent disability and know what ramifications will ensue in the event of such disability.

Other Matters of Concern

In addition to financial benefits, job security, and duties, there are many other matters to discuss at the hiring interview. The following checklist will cover concerns often enunciated by the employer (which may or may not be relevant depending upon your particular situation).

1. Are you required to protect confidential information and trade secrets acquired while working for the company? If so, agree how this can be accomplished.
2. Can you have side ventures in a noncompeting business, or must you work exclusively for the company on a full-time basis?
3. Who owns inventions and processes created by you during employment?
4. Will disputes be resolved by litigation or binding arbitration? Can the prevailing party recover attorney fees and court costs from the losing party?
5. To perform your job better and reduce misunderstandings, it is also wise to receive information regarding the following policies:
   • Time clock regulations • Rest periods • Absences • Safety and accident prevention • Authorized use of telephones • Reporting complaints • Making suggestions • Resolving disputes • Personal appearance rules • Solicitation rules • Conflict of interest and code of ethic rules
6. Does the company require you to sign a contract containing a restrictive covenant prohibiting you from working for a competitor or calling on customers previously solicited during your employ? If so, does the company require all new employees to sign similar contracts?

Restrictive covenants are provisions in employment agreements that prohibit a person from directly competing or working for a competitor after leaving his or her employer. The effect of such clauses varies greatly. For example, they can:

• Restrict an employee from working for a competitor of the former employer
• Restrict an employee from starting a business or forming a venture with others that competes against the former employer
• Restrict an employee from contacting or soliciting former or current customers or employees of the employer
• Restrict an employee from using confidential knowledge, trade secrets, and other privileged information learned while working for the former employer
• Restrict an employee from any of the above in both geographic and time limitations

The above points are illustrated by the following clauses taken from employment agreements:

For a period of one (1) year following the termination of your employment for any reason, it is agreed that you will not contact or solicit any person, firm, association, or corporation to which you sold products of the Company during the year preceding the termination of your employment.

Upon termination of the Doctor’s employment under this Agreement for any reason, the Doctor shall not engage in the practice of neurology or open his own office for the practice of neurology or associate himself with other physicians within a five (5) mile radius of the office of the Corporation or a five mile radius of any hospital for which the Doctor has worked on behalf of the Corporation for a period of one (1) year after the effective date of termination.

In consideration of compensation paid to me as an employee, I hereby recognize as the exclusive property of the employer and agree to assign, transfer and convey to the employer, every invention, discovery, concept, idea, process, method and technique which I become acquainted with as a result or consequence of my employment and agree to execute all documents requested by the employer to evidence its ownership thereof.

You may be surprised to learn, however, that such clauses are not always enforceable. Although every case is different, judges have been taking dimmer views of such attempts to restrict an employee’s livelihood. Consult Chapter 8 for more information about the weight such clauses can carry once you are fired or resign.

Whether or not such covenants are legal, however, defending lawsuits involving restrictive covenants is time-consuming and expensive, so you should avoid signing such agreements in the first place. Many employers have a tendency to “hang” such a clause over individuals by threatening to institute legal action after a person’s resignation or termination. This can discourage you from contacting prospective employers and customers in your industry and trade or establishing your own business. Thus, consider the following strategies for help in this area.

STRATEGY 1: Carefully review and resist signing contracts containing restrictive covenants. An employee who works without an employment contract and who leaves without taking any trade secrets has total freedom to work elsewhere in the same industry. This generally includes the right to solicit the ex-employer’s customers. However, you may be subjecting yourself to a lawsuit (even when no valid grounds exist) by signing an agreement containing such a clause.

Always read your employment contract carefully before signing it. What does the restrictive covenant say? For example, does it prohibit you from working for a competitor or calling on customers you previously sold for the company for an excessive period (e.g., two years) ? If so, make the employer aware of this. Negotiate to reduce the covenant to a reasonable period you can live with (e.g., three months) and insist on the right to receive continued salary and other benefits while the restrictive covenant is in effect. Remember, everything is negotiable before you sign on the bottom line. Once the agreement is signed, however, you may be bound by its terms.

STRATEGY2: Always obtain a copy of the agreement after it is signed. Many people forget to do this. After they resign or are discharged and receive a formal demand requesting them to refrain from certain acts (usually in the form of a written cease and desist letter), they cannot locate the agreement containing the restrictive provision. This places them at a disadvantage. For example, they may be unable to obtain an accurate opinion from a lawyer if he or she cannot review the contract or may be forced to spend unnecessary legal fees trying to obtain a copy from the employer. Thus, request a copy of all documents that you sign, and store them in a safe place for later review.

Confirming These Points in Writing

Once you and the company have agreed to key terms, it is essential to confirm the deal in writing. Legal disputes often arise when people are hired on a handshake. A handshake, or oral agreement, indicates only that the parties came to some form of agreement; it does not say what the agreement was. Failure to spell out important terms often leads to misunderstandings and disputes. Even when key terms are discussed, the same spoken words that are agreed upon have different meanings from the employee’s and company’s perspective. Written words limit this sort of misunderstanding.

Although a written contract cannot guarantee you will be satisfied with the company’s performance, it can provide additional remedies in the event of the employer’s nonperformance. Once the agreement is signed, the law presumes that the parties incorporated their intentions into the contract. The instrument “speaks for itself,” and courts will not hear testimony about understandings or discussions before the contract was signed unless the information is necessary to interpret ambiguous terms or establish particular trade customs.

Additionally, be aware that clauses in written contracts can give you negotiating strength. For example, some employment contracts state that terms cannot be changed without the written consent of both parties. If such a clause was included in your contract and an employer attempted to reduce your salary or other benefits, this could not be done without your written approval.

Written contracts also protect employees who are fired in a manner prohibited by the contract. The following is an example of a situation that could occur.

Andrew received a one-year contract to work as an advertising executive. The contract stated that it would be automatically renewed for an additional year if notice of termination was not received at least 90 days prior to the expiration of the first year. Andrew’s company gave him notice that the contract would not be renewed one week prior to the start of the next year. Andrew sued for damages; the court ruled that he was entitled to additional compensation because the employer failed to abide by the terms of the agreement.

Working on a handshake for an indefinite period of time is risky. In most states the law says that if you are hired without a written contract and for a nonspecific period of time, you are “hired at will.” This means that, subject to various exceptions outlined in later chapters of this book, your employer can fire you at any time without notice and without cause.

Due to the unfairness of the at-will doctrine, which affects tens of millions of employees, many more people are no longer accepting being hired on a handshake. Instead, they are recognizing that they can be better protected by including favorable clauses in clearly drafted contracts and are insisting on receiving written agreements whenever they accept a job.

A good employment contract should describe in specific detail all important aspects of your employment, such as term of the contract, duties, authority and responsibility, job description and title, compensation and reimbursement, benefits, termination, and methods for resolving disputes, such as arbitration, mediation, and more.

There are three purposes for every written contract. First, the act of writing helps ensure that both parties to the contract understand and agree to its terms. Second, the written word provides a reminder to both parties of the terms of the agreement. Third, the written, signed, and witnessed contract can serve as evidence if legal action is required to enforce the terms. Each employment contract must be drafted to meet specific situations, needs, and understandings for both the employee and the employer.

Everything in the contract should be very specific. Anything that is vague or open for later negotiation creates a potential misunderstanding and may fail to carry weight in a court of law. So be sure to cover everything that is important to you, and be sure that all understandings based on your discussions and negotiations are included in the written words of the contract.

Consider, for example:

• Compensation: salary, salary increases, bonus program and requirements, profit sharing, etc.
• Job description: statement of job duties, authorities, responsibilities, title, etc.
• Terms of employment: contract period and provision for renewal, at-will, etc.
• Fringe benefits: pension plan (and when vested), life and health insurance, savings plan, company contribution, etc.
• Vacation time: number of days, when earned, carryover, etc
• Sick leave: number of days, conditions for allowance, salary and benefits continuance during extended health-based absences, etc.
• Arbitration: provision for arbitration or mediation in the event of unreconcilable disagreements affecting the basis of a term in the employment agreement.
• Termination/resignation: terms leading to employment termination or allowing no-fault resignation, with terms for payment and continuation of benefits upon leaving the company’s employment, etc.
• Special provisions: office facilities, parking space, dining room rights, recreational facilities, health maintenance programs, medical examinations, company car or equivalent, etc.

Don’t stop with the above mentioned points. Consider all of the things that are important to you related to the job, its benefits, its responsibilities, and its expectations, both positive and potentially negative. Consider what will happen if the economic fortunes of the company fade. What if your job or department is abolished? What if the firm is taken over by another firm? Will you, as the newest employee, be the first to be laid off? Or do you have employment protection? If not, are there protections for termination payments if you are asked or invited to leave?

Whenever you obtain an employment contract or any business document, read it carefully. Question all ambiguous and confusing language. Consult a lawyer if you do not understand the meaning of any terms. Remember that contracts prepared by employers usually contain clauses that work to your disadvantage. Thus, you should review the agreement thoroughly before signing.

When written agreements are used, be sure that all changes, strike-outs, and erasures are initialed by both parties and that all blanks are filled in. If additions are necessary, include them in a space provided or attach them to the contract itself. Then note on the contract that addenda have been added and accepted by both parties. This prevents questions from arising if addenda are lost or separated, because it is difficult to prove there were any without mention in the body of the contract.

Also be sure that the contract is signed by a bona fide officer who has the legal authority to bind the employer to important terms. Finally, always obtain a signed copy of the executed agreement for your files and keep it in a safe place where you store other valuable documents.