Executive Employment Agreements

Most employees in Pennsylvania work without any type of written contract governing the terms of their employment. A fair portion, however, including many teachers, police officers, and skilled laborers, work pursuant to union contracts. The union contract establishes the terms of employment, and the manner in which issues may addressed.  A small portion of non-union workers are considered to be “high value” enough, however, to require an individual employment agreement.  This article generally discusses contractual terms which an employer and the executive would want to consider including in an executive employment agreement.

An employer may want to consider an executive employment agreement with an employee who presents unique issues for the business in terms of compensation, expectations, attractiveness to competitors, access to confidential trade secrets, and other issues not easily addressed by a standard employee handbook or policies which apply broadly to all employees. 

For example, if an employee is critical to the business’s operation and could not be easily replaced, the employer may want a contract that restricts the employee’s ability to leave the position without extended notice. Or, if the employee is to be paid significant remuneration based on performance, the exact standards for qualification and the method for calculating those wages may need to be clearly spelled out in an employment agreement in order to reduce the risk of misunderstanding and litigation.

Executive employment agreements typically arise after careful negotiation between the potential employer and the candidate for hire. The parties’ failure to fully address all relevant terms during negotiations and in the employment contract could expose both sides to costly breach of contract claims down the road.  The following is a list of some key terms which should be discussed, negotiated, and included in an executive employment agreement.

Duration of the Agreement. The parties should consider whether the agreement requires a set term, a renewing term, or no term at all (open-ended). A set term may be valuable if an executive intends to retire at a certain date and both sides want to make that clear. The agreement should also specify what happens if the employee works beyond the set term. In other words, whether the terms of the agreement with respect to compensation and other benefits continue.

Duties. The agreement should clearly specify the individual’s employment duties. This key term will likely influence other terms in the agreement. The duties section may interact with terms related to the executive’s ability to terminate the agreement early for Good Cause.

Compensation and Benefits. The agreement must define the wages and benefits the executive is to receive, and, where appropriate, the qualification for and calculation of that compensation. This section should address compensation such as base salary, commission pay, annual bonuses, signing bonuses, and stock options. It should also specify which benefits the executive will be entitled to receive. For example, health benefits (e.g., medical, dental, vision, etc.), disability insurance, retirement accounts contributions, and life insurance. Relocation expenses are another benefit that, if offered, should be included in the agreement. Lastly, some employers offer additional perks which should be addressed, such as memberships at clubs, use of company vehicles (e.g., car or jet), and entertainment budgets. The company may also want or need to include “clawback” provisions which require the executive to repay compensation and benefits in the event of certain negative actions undertaken by the executive.

Termination of Employment. The agreement should clearly specify what events trigger the termination of the agreement. These events can include termination by the company for Cause, termination by the executive for Good Reason, failure by either side to renew the agreement, or the executive’s death or disability. Both Cause and Good Reason should be clearly defined, as this is an aspect of the agreement particularly vulnerable to litigation, especially if the parties separate on bad terms. Additionally, the agreement should explain whether the executive is entitled to any type of severance upon separation, and the nature of that severance.

Restrictive Covenants. Restrictive covenants normally are one of the more hotly contested terms of an executive employment agreement. There is natural tension here because the employer wants to protect its operation and trade secrets, while the executive does not want to restrict his or her future employment opportunities. Restrictive covenant provisions may include confidentiality, non-compete, non-solicitation, and non-disparagement clauses. The non-compete clause would restrict the executive from working for competitors in a particular geographic area for a specific time-period following separation. The non-solicitation clause would restrict the executive from soliciting the company’s employees, clients, or partners for a period following separation. It is critical that these terms be well-written, and the restrictions clearly defined.

Legal Stuff at the End. Often overlooked is the importance of the standard legal terms that inevitably come at the end of an executive employment agreement. For example, if the company is based in one state and the executive in another, the contract will specify the state or courts in which a dispute can be addressed. This may force the executive to pursue his or her claims in another state, possibly on the other side of the country. This term could give the employer a “home court advantage.” This section may also address whether only one or both parties would be entitled to receive attorneys’ fees if successful in lawsuit. Also, these terms may include an arbitration provision which would prevent the executive from being able to file a lawsuit altogether.

Typically, both the employer and the executive benefit greatly from competent legal representation and thorough discussion of these terms during the negotiation process. The investment in attorneys’ fees and the time involved in preparing a well-drafted executive employment satisfactory to both sides can go a long way in creating a productive work relationship and mitigate both parties financial risk on the back-end. When considering entering into an executive employment agreement, both parties would benefit from a consultation with an experienced employment law attorney who can assist with the identification and negotiation of key issues related to the potential agreement.

Matthew T. Hovey, Esquire is an attorney at the law firm of Wolf, Baldwin & Associates, P.C., which has offices in Pottstown, Reading, and West Chester. He practices in the areas of municipal law, business representation, and civil litigation. He may be reached by telephone at 610.323.7436 or by e-mail to mhovey@wolfbaldwin.com.