One of our key executives recently resigned. Under the terms of his contract, he had the right to resign for “good reason.” He claimed that due to certain financial restructuring our company underwent, his job was going to change significantly. Even if his supposition was correct, didn’t he have to wait until these events played out?

We checked his contract and the “good reason” provision is pretty employee friendly. The agreement states that his conclusion regarding “good reason” is entitled to deference from the company. Does that mean we have to accept any justification he advances?

As you likely suspect, if he resigns for good reason, he gets a substantial severance package. This too troubles us since he apparently resigned so he could accept a more highly compensated position with a friend of his at another company. This just isn’t passing the smell test for us. Do we have a reasonable chance of challenging him on these issues?

Roy’s Analysis

The short answer to your question is that you can challenge your former employee’s assertion that he resigned his employment for “good reason”. Whether your chances of success are “reasonable” is something I hope you will be able to assess more accurately after reading the analysis below.

As a prefatory comment, let’s provide some backdrop to this inquiry. First, as you note, your employee has a contract that contains the provision in question. From a big picture perspective, not too many employees have contracts. Fewer still have contracts that define the circumstances under which they have the right to resign their employment and still remain eligible for a substantial severance package. So, as you note, this contractual provision is for one of your “key executives”. This typically is the group that has these types of contractual provisions.

Second, as in any situation involving contract interpretation, the key is the specific language of the contract. Moreover, it is critically important to evaluate not just the particular provision in question but other provisions of the contract that may bear upon the specific section upon which you are focused. Contracts should be read as a whole.

Third, it is admittedly difficult to evaluate a contract question without seeing the specific contract language. You state, for example, that the good reason provision of the contract is “pretty employee friendly.” I’m not sure precisely what that means but the provision clearly warrants careful scrutiny and may limit your company’s rights.

Fourth, I would want to know whether the resignation for good reason language was coupled with a provision that required the executive to apprise your company of the reasons why he felt he was entitled to resign, along with an opportunity to cure the problems he identified. As a general proposition, if a company finds it necessary to include a resignation for good reason provision, you should tie it into an opportunity for the company to cure the problems that have led to the executive’s resignation decision. This is especially true if there is a “for cause” provision in the contract that imposes on the employer an obligation to notify the employee of the reasons why his or her performance is not meeting the company’s expectations, coupled with a cure period of a specified duration.

With those introductory remarks, there are a number of decisions where courts have examined questions closely analogous to the fact pattern you described. Based on the facts you have shared, there would appear to be at least four different grounds on which you can challenge your employee’s decision.

First, you could challenge your employee’s contention that he had “good reason” to resign. Typically, these provisions are tied into some significant alteration or modification of the employee’s job responsibilities. Often, the contract language is linked to a “diminution” of the employee’s duties. But, you should understand that this is a fact-intensive inquiry. As the Seventh Circuit summarized a few years back, “The determination of what constitutes a substantial reduction in duties and responsibilities obviously varies greatly based on the specific facts of the particular case and the tasks allotted before and after a job reassignment.” Dabertin v. HCR Manor Car, Inc., 373 F.3d 822, 830 (7th Cir. 2004). In making this evaluation, courts consider factors such as: a) whether the employee’s reporting relationship has changed (particularly if the executive reports to someone in a lower position than previously); b) whether the individual’s geographic territory has diminished; c) whether the employee has fewer direct reports following the change; d) whether the employee’s budget is smaller; and e) whether the employee’s job responsibilities have contracted. Particularly where several of these variables are present, courts are more likely to find that the employee’s resignation decision was justified.

Second, your situation is complicated somewhat by the fact that your executive seemingly resigned in anticipation of changes in his position. Some courts have rejected this type of anticipatory resignation, reasoning that the employee is obligated to see how the altered situation actually plays out. For example, in Boone v. Platinum Technology, Inc., 2000 WL 33119415 (E.D. Pa. 2000), the plaintiff resigned his position following a merger because, he claimed, he was “going to be reassigned” to a less desirable position. The court rejected his summary judgment motion, concluding that his resignation decision had not been made in good faith given that that his duties had not actually changed prior to his resignation.

Similarly, in Stafford v. Scientia Health Group, Inc., 2008 WL 2388686 (N.Y. Sup. Ct. June 9, 2008), the plaintiff, who held the positions of President and COO, resigned because he believed the company’s Board of Directors had made the decision to cease making new investments and liquidate the company, rendering him “unable to perform the job for which he was hired.” The court found this argument unpersuasive and held that he did not have good reason to resign because he admitted that he did not know whether there was a formal plan of liquidation. In short, while there is not a great deal of authority on “anticipatory” resignation cases, these factual contexts may increase a court’s skepticism about the legitimacy of a resignation.

Third, you stated in your inquiry that the contract terms on the resignation for good reason are “pretty employee friendly”. As noted above, I’m not certain what this means. But, for example, some contracts have language stating the employee’s determination of the good reason issue shall be “conclusive”. As an aside, from an employer’s perspective, this is terrible language to include in a contract. Language such as this has the potential for raising the bar significantly on any challenge to the executive’s resignation decision. Moreover, I doubt that there is parallel language on the “for cause” standard in the contract, stating that the employer’s determination of a discharge “for cause” shall be “conclusive”. In short, if you are not currently using language of this kind, don’t. If you executive contracts have this language, revise them.

That having been said, all is not lost if your contracts do include this verbiage. Deference to the employee’s decision is not absolute. For example, in Brown v. Dr. Petter/Seven Up, Inc., 2000 WL 370669 (N.D. Tex. April 11, 2000), the court found that the plaintiff lacked good reason to resign, despite contract language that the executive’s good faith determination of good reason would be conclusive. Courts have observed that an executive’s determination of good reason is made in “good faith” only when: a) the determination is informed; and b) the diminution in the executive’s responsibilities is actual reason for his resignation. Thus, in the “anticipatory” resignation context, some courts have held that the decision could not have been “informed,” because the relevant events had yet to unfold. Likewise, courts have held that the executive’s decision to resign is not necessarily entitled to deference when the resignation appears to have been based on other factors or variables.

Fourth, the last observation spills over into your fact pattern – you state that your employee took a more highly compensated position with a friend of his at another company. You need to flesh out these facts. If you are able to demonstrate that this was the real reason for the employee’s resignation, you may have a compelling defense.

As you can see, there may be a number of different grounds on which you can challenge your employee’s resignation for good reason, if you elect to do so. But, this decision also should be balanced with a thoughtful evaluation of a number of other factors, including, by way of example: a) would a decision denying the executive severance compensation likely lead to litigation; b) if so, what is the cost/benefit comparison between the severance expense and the litigation expense; c) how many other executives have similar contractual provisions and how will they react to the company’s reneging on a contract “benefit” they had bargained for; d) are there independent reasons for keeping your outgoing executive enthusiastic about your company; and e) what are the non-financial costs associated with litigating this issue. After assessing each of these variables and others, you may conclude that the most sensible approach would be to attempt to reach an amicable negotiated resolution of this issue with your former executive. If that cannot be achieved, you then can assess whether you wish to pursue the litigation route.