Tips To Avoid C-Suite Contract Disputes

Executive disputes can be expensive and pose significant reputational risks

In the last few years, we’ve seen an increase in lawsuits filed by C-suite executives asserting contractual, statutory and common law claims. Gone are the days when terminated C-suite executives moved along quietly to avoid publicity of the reasons for their termination.

Below is a summary of best practices to avoid these costly disputes with C-suite executives:

A Clear and Unambiguous Employment Agreement

The executive’s employment agreement is the linchpin to avoiding executive contract disputes. Working with experienced employment law counsel to prepare the C-level employment agreement is an investment that minimizes contract disputes down the road. Too often, employment agreements contain vague terms, particularly with regard to the term of the agreement and what constitutes “cause” for termination of employment. 

Here are some recommended provisions to include in executive employment agreements: 
 

• If the employment arrangement is not “at will,” a precise term of the contract is a must.  

 

• If the contract provides for renewal terms following the expiration of the initial term, include the specific pre-requisites for renewal or non-renewal, including specific notice dates.

 

• Include specific reasons for “cause” termination. Be sure to include violations of the company’s established policies, including anti-discrimination, anti-harassment and retaliation policies as “cause” events. Avoid vague terms, such as “moral turpitude.” In addition, draft the “cause” events so they are determined in the company’s sole discretion, particularly for performance-based and reputational reasons.  

 

• Clearly define conduct constituting “good reason” for termination so the “triggers” can be objectively determined by either party. Similarly, provide a specific deadline, such as 30 days after the triggering event, for the executive to provide the company written notice of the good reason trigger and an opportunity for the company to resolve. 

 

• Include a catch-all provision for termination that avoids a dispute over whether the termination is without cause, for cause or good reason, such as the contractual right of either party to terminate the agreement at any time, for any reason, upon 90 days’ prior written notice.

 

• For non-compete, non-solicitation, non-disclosure and confidentiality provisions, ensure the terms comply with the most current federal regulations and respective state laws.

 

• Ensure any severance provisions are clear on triggering events, payment amount, timing of severance payments and conditions for receipt. For Section 409A compliance, attach an example of the form of the general release of claims the executive must sign as a condition of severance payments. Similarly, remember Section 409A’s rules on timing of severance payments if relying on the short-term deferral exception to deferred compensation.

 

• Precisely set out non-discretionary compensation terms in the agreement, such as base salary and additional perquisites. If the executive will be eligible for short-term incentive plans (STIPs) or long-term incentive plans (LTIP), cross-reference the plans in the employment agreement and specify that the plans’ terms control. Ensure any STIP or LTIP plans address the effect of termination upon eligibility and vesting, including any forfeiture provisions.

 

• For discretionary bonus opportunities, the employment agreement should state clearly that any bonus award is in the sole discretion of the company. 

 

• Ancillary Restricted Share Units (RSUs), Performance Share Units (PSUs) or similar forms of deferred compensation should comply fully with IRC §409A (Section 409A). In the event of termination of employment, don’t deviate from the plan terms, as this will likely run afoul of Section 409A.

 

• If the company requires or expects the executive to work in the office rather than remotely, specify this condition in the employment agreement.

 

• Include a provision for binding arbitration of any disputes to minimize the leverage a terminated executive (and a plaintiff’s attorney) has with a public lawsuit filing.

Clearly Document the Reasons for Termination

Whether the executive’s employment is at will, only for cause (as defined in the employment agreement) or terminable at any time with a notice period, C-suite executives are increasingly turning to statutory and common law claims against their former employers. To minimize liability risks, companies should have clear written evidence of the reasons for termination, prepared prior to the termination date.
 

• Performance evaluations should document performance deficiencies, areas for improvement and objective goals for the executive in the coming calendar/fiscal year. This avoids the frequent allegations from plaintiffs’ lawyers that the executive “consistently received stellar performance evaluations” in their effort to prove that the stated termination reasons are pretext for discrimination or protected activity.

 

• Performance discussions with the executive should be memorialized in writing in real time, including internal notes of discussions, emails or memoranda to the executive. Since these materials are discoverable in any lawsuit or arbitration proceeding, the meta data is important to establish the documents were prepared in or around the document dates. Most importantly, be sure to gather all pertinent documents that support the termination decision in a secure (electronic) file prior to termination.

 

• If the executive’s termination is for violation of company policy, applicable regulations or for compliance reasons, ensure the company’s HR team or an outside HR professional or employment/compliance attorney investigates and documents any violations prior to making the termination decision.

Consider Federal and State Discrimination Laws

Terminated executives recently have enjoyed lucrative success in lawsuits pursuing discrimination and harassment claims. Multimillion-dollar jury verdicts in favor of executives have become more common. Consider age, race, disability, gender, religion, whistle-blower, retaliation and all other protected categories and protected activity prior to making the termination decision. Due to the risk associated with termination of a highly-compensated employee, always consult with the company’s Chief Human Resources Officer (CHRO) and/or outside employment counsel prior to termination.

Executive disputes pose a heightened risk for companies due to reputational concerns, as well as the potential for high-dollar recoveries if the executive prevails. Taking these precautionary measures, even before the employment relationship begins, will minimize the risk of future disputes and liability.

Beth Langley has over 25 years of experience counseling employers of all sizes in an assortment of employment law issues. A partner at Brooks Pierce in Greensboro, North Carolina, she has represented businesses in employment litigation in matters involving civil rights, non-competition agreements and trade secret protection.