It is usually an exciting and promising time when a new executive joins an organization. The focus is on future goals and plans, with both the executive and organization hoping for a long-term and rewarding relationship. Unfortunately, even the most promising start can end on a sour note if the executive and organization decide to part ways. When this happens, it is often the executive who finds him- or herself at a disadvantage.
Executive employment agreements that provide a level of severance in the event the employment relationship is terminated by the employer “without cause” can be a solution to this potential issue—and provide peace of mind to the executive. If the executive has negotiated to keep his or her severance in the event of termination without cause, the executive will at least have the safety net of a severance package on which to fall back.
But what if the executive finds herself in a situation where she feels the best option is to quit? For example, what if the employer assigns the executive duties not consistent with his title (for example, the CEO is replaced but told he has the option of becoming the head of sales). Or, what if benefits are reduced significantly or the employer moves the offices out of town? These circumstances, as well as other possible scenarios, may effectively place the executive in the position of being forced to quit, which would allow the employer to sidestep the severance payment obligation since the employer technically did not terminate the employment.
Executives can protect themselves from this de facto termination by including a provision in their executive employment agreement that states severance will be paid if the executive resigns for “good reason.” The good reason circumstances are matters for negotiation, but typically include unforeseen and unwanted changes in the executive’s working environment—such as an uncured breach of the employment agreement by the employer; assignment of duties by the employer materially inconsistent with the executive’s role/title; reductions in salary or benefits; or moving the office location out of town.
An example of a good reason termination clause in an executive employment agreement would be as follows:
1. If Executive terminates his employment with the Company for good reason (as defined below), Executive shall be entitled to:
i. Executive’s accrued portion of the applicable base salary, accrued vacation, and reimbursable expenses through the date of termination (all such payments described in this clause are collectively referred to herein as “Rights”); and
ii. Executive’s base salary for the one year period following termination, payable when due as though Executive remained an employee.
If an executive already has an existing employment agreement but is unsure if it includes a good reason clause, the typical place to look is in the termination provisions. Often, the executive employment agreement breaks into separate sections the various reasons terminations may occur (e.g., with cause, without cause, death, disability, and so on). Ideally, one of those provisions would be a “termination for good reason.”
Some executives are lucky and find a home in an organization for a long, promising career. But in the ever-changing business world, nothing is guaranteed. Hopefully, instituting a good reason clause in an executive employment agreement not only gives the executive peace of mind, but also starts the business arrangement on a positive, solid foundation.
Michael J. Changaris is a partner with Procopio, Cory, Hargreaves & Savitch, one of the largest business law firms in Southern California with a global network. His practice emphasizes corporate and partnership merger and acquisition transactions for public and private companies; negotiation of joint venture relationships; federal, state, local, and international tax planning and structuring for corporations, partnerships, REITs, and tax-exempt organizations.
