Monday, June 24, 2013

Employment Contracts at the Executive Level

In the previous post, I discussed the importance of, and need for, employer/employee contracts and focused on agreements for entry-level or mid-level positions. Part 2 of this series examines executive-level employment agreements.

Executive employment agreements are for officers of the corporation who have management level authority. They typically contain more protection for the executive-level employee than an entry-level agreement would afford.

With the executive agreement, the company may recognize that it has a valuable prospective employee whose employment will benefit the company. Therefore, company leadership frequently allows agreement terms to be beneficial to that executive candidate. There are, however, a few key provisions that should be included in an executive contract.

Severance After Termination

Unlike the entry-level agreement, the executive contract would likely have language included for a severance package. For example, it might read that for every year the executive works for the company, he or she would get one month's salary as compensation, if the company terminated him or her. Rarely would you see a written severance package for entry-level or mid-level employees.

In an executive employment agreement, there are usually two termination provisions: termination for cause and termination other than for cause. Termination for cause is if the executive does something contrary to the best interest of the company, such as dishonesty, for example. If the executive is terminated for cause, he or she is not entitled to any severance pay. Termination other than for cause means that the executive is let go due to a downturn in business or he or she decides to leave for other reasons.

Generally, when an executive decides to leave voluntarily, there is no severance pay. The executive will only receive the severance pay if the company terminates employment, other than for cause.

Other Differences between Executive and Entry-Level Agreements

  • Unlike entry-level agreements, executive-level ones might include bonus provisions if the executive meets certain goals or targets.
  • Another key difference relates to disability. If the executive employee becomes disabled, that is not considered a voluntary leave — it's a "constructive discharge," so there should be a severance package.

    To satisfy the disability clauses, employers often offer a disability insurance package. That is, if the employee becomes disabled, the insurance company will compensate the executive for not being able to work. This is in lieu of severance pay and as long as the benefit of the insurance policy equals or exceeds the severance compensation that would be due, it is a fair way for the two parties to resolve the situation.

An executive-level agreement is a commitment for both the prospective employee and the business. If you are an employer or employee and you have questions about an executive-level employment agreement, contact us to set up a consultation.