Termination of the Employment Relationship
February 3, 2021
By: Colin A. Walker
Employment in the United States is generally “at-will,” meaning that the employee and employer both have the right to terminate the employment relationship at any time, without prior notice, for any reason or no reason. However, this can be altered by contract and, unlike most employees, this is commonly done for C-Level executives.
One common provision is a “for cause” termination provision. Here, the employment agreement provides that the employer can terminate the employment relationship at any time, without prior notice, for any reason or no reason, but, if it terminates employment without “cause” (sometimes called “good cause” or “just cause”), it must pay the executive a certain amount of severance pay. Cause should be carefully defined in the employment agreement and typically includes various types of misconduct by the executive, such as insubordination, theft, conviction of a crime, or breach of an agreement with the company (such as a confidentiality or non-compete agreement). The definition of cause is often the subject of intense negotiation. The employer typically wants to have as broad a definition as possible and retain as much discretion as possible, while the employee attempts to narrow the definition as much as possible.
C-Level executives should pay close attention to the language of the cause provision. Some employers attempt to include language which is so broad that it eviscerates the cause provision, resulting de facto at-will employment. For example, a definition of cause which includes “performance that does not meet the expectations of the employer” would allow the employer to terminate for even minor deficiencies in performance. Executives should endeavor to remove such language. Such provisions can be softened by adding the word “material.” Another approach is to require the employer to provide notice and an opportunity to cure a deficiency.
C-Level executives should request a “good reason” resignation provision, which gives the executive the right to resign for specified reasons and still receive severance pay. Good reason could include such things as decreasing compensation, requiring the executive to relocate more than a specified distance from his/her current location, requiring the executive to do something illegal or unethical. Like cause termination provisions, good reason provisions should be negotiated and carefully drafted.
With many high-level executives receiving generous compensation packages (“golden handcuffs,” remember?) and heavenly severance benefits (“golden parachutes”), the stakes are often high when a C-Level executive is terminated. C-Level executives and companies employing them should carefully think through how the employment relationship should be terminated and consult competent employment counsel.
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