Tip No. 1: Define “Cause” Broadly
Executives and other high-level employees often negotiate a contractual provision requiring the payment of severance if terminated without “Cause” prior to the expiration of a term agreement. While the definition of Cause often depends on the parties’ respective bargaining power (highly sought talent typically has considerable leverage), the employer should attempt to negotiate as broad a definition of Cause as possible. Too often, employers limit the definition of Cause to intentional misconduct that harms the company, criminal behavior, or the executive’s death. Such a narrow definition ties the employer’s hands when an executive is not making a good-faith effort to perform well or is performing very poorly despite reasonable efforts. Under these circumstances, the employer’s options are limited to continuing to employ the underperforming executive or terminating the executive and paying out severance.
It is also fairly common for Cause definitions to include a cure period in the event of a breach by the executive – e.g., “a material breach by the Employee of any of the terms of this Agreement and failure to correct such breach within twenty (20) days after notice from the Company”). By providing the executive the right to breach the Agreement and then cure the breach (if the Company learns of the breach, which it may not), the Company is limiting its options and ability to hold the executive accountable for his/her performance. Moreover, depending on the nature of the breach and its impact on the Company’s operations, an extended cure period may negatively impact the Company even if the breach is ultimately cured. This is not to suggest that an employer should never agree to a cure period (many executives will insist on such a provision and, as noted above, they are fairly common), but the employer should weigh the pros and cons of the cure provision in the context of the overall negotiations with the executive.
The Cause definition also should include the executive’s disability that prevents the executive from performing his/her responsibilities for an extended period of time. However, the definition must comply with the Americans With Disabilities Act (“ADA”), the Family & Medical Leave Act (“FMLA”), and applicable state and local laws addressing disabilities and employee leave rights. In other words, an executive’s employment agreement does not trump his/her rights under the law. For example, it would be illegal to include in the definition of Cause a disability that prevents the executive from performing any of his/her job responsibilities. This is because the ADA protects employees so long as they are capable of performing the “essential functions” (i.e., not necessarily all duties) of the position “with or without a reasonable accommodation.” Likewise, depending on the size of the employer and the length of the executive’s tenure (among other eligibility factors), the executive may have the right to take up to twelve (12) weeks of leave under the FMLA without the threat of termination. Thus, Cause definitions must be carefully drafted to avoid running afoul of applicable law.
In short, the executive is entitled to be treated fairly and to not be terminated prior to the end of a term agreement for a false reason, an illegal reason, or an unfair reason. But the Company has the right to demand good-faith effort and an acceptable level of performance from the executive. Accordingly, the Agreement should contain a provision requiring the executive to use his/her “best efforts” in the performance of his/her duties under the agreement, and the definition of Cause should provide the Company with the flexibility to terminate an executive without a severance pay obligation for legitimate, non-discriminatory business reasons (assuming it has the leverage to negotiate such terms).