Employees hired for senior management roles are often presented with a formal employment agreement. Herrmann and Murphy’s employment law attorneys are experienced at both drafting and in negotiating executive compensation agreements on behalf of individuals.
There are many pitfalls to consider in light of the usual “at-will” employment rule that compensation agreements need to overcome if they are going to be of any use at all for the executive. This usually means that the agreement must include a specific duration for the contract. Employment contracts that say employment is “indefinite,” “permanent,” “forever,” or “until terminated” are all unenforceable and viewed by the courts as at-will employment, no matter what else the agreement may provide.
These agreements are usually drafted to benefit the company more than the executive. Common areas where we have been successful in negotiating additional terms to protect the individual executive include: compensation terms, equity provisions, severance benefits, guaranteed terms of employment, limited “for cause” reasons for ending the relationship, enumerated “good reasons” the executive may resign and still receive severance and equity benefits, and the non-compete and non-solicitation provisions.
Each situation is unique and usually driven by the parties’ relative leverage in the negotiations. However, the employer is often intending to provide great benefits, but failing to do so because of poor drafting or lack of attention to detail. Our attorneys efforts have been especially successful in these situations to ensure that the benefits and incentives intended to be offered are in fact enforceable. Executive compensation agreements are not written for the warm feelings and good relationships intendant upon the hiring phase. Instead, they must be written to withstand the sour grapes and scorched earth tactics the company may engage in at the end of the relationship.
Tax issues also commonly arise during the negotiation of executive employment agreements. Section 409A contains special tax provisions for compensation that workers earn in one year but that is not paid until a future year. This is referred to as non-qualified deferred compensation. Section 409A does not apply to qualified plans (such as a section 401(k) plan) or to a section 403(b) plan or a section 457(b) plan. If deferred compensation covered by section 409A meets the requirements of section 409A, then section 409A has no effect on the employee’s taxes. The compensation is taxed in the same manner as it would be taxed if it were not covered by section 409A.
If the arrangement does not meet the requirements of section 409A, the compensation is subject to certain additional taxes, including a 20% additional income tax. Given these high stakes, and Section 409A’s complex requirements, the goal is usually to avoid coverage of 409A. This can be done by ensuring that bonuses are paid on or before mid-March, severance payments do not exceed certain caps or payment delays, and stock options comply with detailed requirements.