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.

Key Provisions of an Employment Contract

The employer/employee contract is a simple document that should be used to protect both parties when they agree upon an employment position.

This is part 1 of a 2-series post. This article will examine entry-level or mid-level employment agreements. In part 2, I will walk you through the executive employment agreement.

An entry-level contract should have a configuration that can be used for most employer/employee agreements, meaning that the layout and sections should resemble each other from contract to contract. An example follows below. This is favorable for the business since it doesn’t have to expend time and resources to draft a unique document each time a new employee is hired.

In this article, I will briefly discuss some of the provisions that a standard employment contract should include.  Two, however, are critical; the non‑compete and non-solicitation clauses.

Non-compete Clause

In entry-level or mid-level employment, a non-compete clause is included primarily to protect the employer’s interests. In practice, it is preventing an employee from leaving the company to work for another business — or start a business — in the same industry. For example, if an employee spends years learning a very specialized set of skills, he is prevented from quitting his job and starting a business that offers the same services as his now former-employer.

Non-compete agreements have to be reasonable in terms of duration to be effective. In Washington, three to five years is considered reasonable.

Non-solicitation Clause

A non-solicitation clause restricts an employee who has left a company from contacting the clients or customers of her now former-employer. Clearly, if an employee spends a number of years at an employer’s company, relationships can build and the possibility for an employee to solicit business from those relationships is very real. By including the non-solicitation provision, the company is protecting itself from a potential loss of business and revenue.

To Sign or Not to Sign?

Employers include these provisions to keep their business intact and guard against clients or customers from leaving and potentially taking new skills and clients with them. But what should a prospective employee do? A consideration of future plans should be the first order of business. If your career goal is to start your own business in the line of work that you’re being offered, you’ll want to seriously consider signing a non-compete, unless you’re going to move out of state.

In my law practice, I hear from people who want to start their own venture after years of employment at a business. They’re excited to strike out on their own, but they are surprised to discover that they signed a non-compete or a non-solicitation clause. Maybe they had forgotten about that part of the contract, or they overlooked it at the time, but that agreement may still be binding.

When you sign that important document, it is crucial to read it carefully and understand what implications might affect your future plans.

Other Aspects of the Contract

In addition to the non-compete and non-solicitation clauses, there are other aspects covered by a general employer/employee contract:

1. Employment Duties — a listing of job expectations.
2. Term — the date which employment starts and how long it is expected to last. This is typically either a fixed-term or automatically renewing.
3. Compensation — payment and vacation time allotted.
4. Benefits — health insurance, disability, life insurance, etc.
5. Confidentiality and Competitive Activities — prohibitions (described above), which might include names of direct competitors that an employee may not work for.
6. Company’s Property — terms of how the employee should act on company property.
7. Termination — the reasons for and the methods by which an employee can be terminated from employment.
8. Miscellaneous — extra provisions, which can include Titles and Subtitles, No Implied Waivers, Personal Services, Severability, Applicable Law, Notices and others.

Although these employer/employee agreements are intended to be simple and routine, you may still have questions that are specific to you. If you are an employer or employee and you have concerns regarding an employment contract, contact us to set up a consultation.