Drafting and Negotiating Executive Employment Agreements
R. Scott Oswald
The Employment Law Group, P.C.
888 17th Street, N.W., Suite 900
Washington, D.C. 20006
In the District of Columbia, Maryland, and Virginia, if employers do not offer their employees a definite term of employment, the presumption is that, absent a clear expression of the intent to form a contract of employment for a fixed period of time, “the parties have in mind merely the ordinary business contract for a continuing employment, terminable at the will of either party.” Bible Way Church of Our Lord Jesus Christ of the Apostolic Faith of Washington, D.C. v. Beards, 680 A.2d 419, 433 (D.C. 1996) (quoting Sullivan v. Heritage Found., 399 A.2d 856, 860 (D.C. 1979)). Under the at-will doctrine, an employer can terminate an employee at any time and for any reason or no reason at all, so long as the employee is not terminated for an unlawful reason. See Byrd v. Voca Corp. of Washington, D.C., 962 A.2d 927, 931 n.4 (D.C. 2008); see also Clampitt v. American Univ., 957 A.2d 23, 40 (D.C. 2008).
Although most employers do not negotiate employment agreements with a majority of their employees as a routine practice, such agreements can be beneficial to both employers and employees. Employment agreements can be beneficial for all classes of employees, whether executives, managers, or hourly workers.
Generally, employees can secure a definite term of employment, can negotiate their duties and responsibilities, can negotiate criteria upon which their employers will evaluate their performance and/or grant them bonuses, and can even secure their rights as potential whistleblowers. Employees can also incorporate aspects of traditional employee manuals by negotiating performance evaluation standards, anti-discrimination and/or anti-retaliation policies and/or reporting procedures. Such clauses would reassure employees that they may rely on these policies and procedures and that their employers are bound to follow these protocols.
Employers can clearly define the manner in which employees shall spend their time at work, can negotiate agreements not to compete, and can negotiate severance payments while they have a positive and functioning working relationship. Employers can also negotiate the rights to employees’ inventions and/or patents that the employee obtains during their employment, and can assure that employees cannot claim that additional promises were made to them to induce them to work for the employers.
Further, by entering into an employment agreement, both employers and employees eliminate the possibility when disputes arise over promises made or alleged to be made at any point during the employment relationship. Most importantly, an employment agreement prevents the issues that arise when oral agreements or representations govern the parties’ relationship.
Oral promises that limit employers’ rights to terminate at-will employees must be definitive and limited in duration to be enforced against an employer. See, e.g., Beards, 680 A.2d at 433 (allegation by former employee that “tacit agreement” between employee and former pastor that employee would work for church as long as she desired, even assumed to be true, was insufficient to rebut presumption that employment was at-will). In Rinck v. Ass’n of Reserve City Bankers, 676 A.2d 12, 17-18 (D.C. 1996), the court upheld an oral agreement, finding that a terminated employee had a valid claim against his employer for breach of contract where the employer terminated him after a merger despite the employer’s oral statement that the employee would not be terminated as a result of the merger.
Employment agreements also prevent either party from invoking the statute of frauds to defend against a potential or actual claim. In the District of Columbia and in Virginia, the statute of frauds requires that contracts which cannot be performed within one year to be in writing and signed by the party to be charged in order to support a claim for breach of contract. See D.C. Code Ann. § 28-3502; Va. Code § 11-2(8). However, if a party admits that the agreement at issue exists, that party has waived the statute of frauds objection to the enforcement of an oral agreement. See, e.g., Wemhoff v. Investors Mgmt. Corp. of Am., 455 A.2d 897, 899 (D.C.1983); Kwon v. Lee, 1993 WL 946217 at *1-2 (Va. Cir. Ct. Sept.1, 1993) (citing Harris v. Diamond Consr. Co., 184 Va. 711, 722, 36 S.E.2d 573 (Va. 1946)) (admission of existence of contract constitutes waiver of the protections afforded by statute of frauds). Further, the doctrine of equitable estoppel prevents a defendant from asserting the statute of frauds defense to an alleged breach of contract “if the plaintiff can prove that she reasonably relied on a representation by the defendant to her detriment.” Morris v. Buvermo Properties, Inc., 510 F. Supp. 2d 112, 116-17 (D.D.C. 2007) (citing T. v. T., 216 Va. 867, 873, 224 S.E.2d 148 (Va. 1976); Landow v. Georgetown-Inland West Corp., 454 A.2d 310, 313 (D.C. 1982)).
More specifically, executives, by the nature of their employment, are more likely to be bound by employment agreements and/or agreements not to compete with their current and/or former employers. Negotiating employment agreements with executives can assure employers that their executives will work for them for a predetermined amount of time and that their executives will not compete with them after their employment has ended. Executives can negotiate their compensation, criteria for raises, bonus structure, and severance payments and take comfort in the knowledge that they will not have to haggle over these important aspects of their employment in the future.
Managers and hourly employees are less likely to be bound by employment agreements. However, by setting forth employees’ duties and responsibilities in employment agreements, employers can use such agreements to avoid claims of misclassification for the purposes of the Fair Labor Standards Act. In drafting these duties and responsibilities, employers should closely examine the regulations surrounding each FLSA exemption and ensure that their internal classifications do not conflict with the law. Employers should then ensure that their employees’ job descriptions, as well as the actual duties performed by the employee, fall within the correct classification.
Employers can also use employment agreements for lower-level employees to protect their employees from discrimination at the hands of poorly trained or maverick managers who disregard the companies’ policies. Employment agreements should contain, at a minimum, a term stating the employees’ length of employment, as well as terms discussing early termination of the contracts. Should a manager desire to terminate an employee’s employment for an improper reason including discrimination or whistleblower retaliation, the lower-level employees would be protected by their employment contract.
Finally, as set forth more fully below, employment agreements can also prevent misunderstandings between the parties as to employees’ duties and responsibilities, criteria for earning bonuses, and eligibility for promotions and/or transfers.
II. KEY PROVISIONS FOR EMPLOYMENT CONTRACTS
A. Offer and Acceptance of Employment
To make certain that courts interpret an employment agreement as a contract, at the beginning of the agreement, the employer should include a short section discussing the purpose of the contract (i.e., to offer employment to an individual in a certain position for a certain length of time). The employer should also include a section wherein the employee acknowledges that he or she accepts the employer’s offer of employment. Additionally, for the sake of absolute clarity, and as a showing of good faith on the employer’s part, the employment agreement should contain a section wherein the parties acknowledgment that the agreement binds both the employee and the employer to the terms contained therein.
B. Position For Which Employer Hires Employee
To avoid confusion and contention over an employee’s position, duties, and responsibilities, the employer should clearly state the employee’s title and should clearly delineate the employee’s main responsibilities. However, both the employer’s business needs and the employee’s skills and knowledge will grow and change over the course of the contract. Accordingly, it is in both the employer’s and the employee’s interests to leave room for flexibility and change in these descriptions.
When the parties enter into their contractual relationship, neither party can fully anticipate how well that relationship will develop. To allow both the employer and the employee room to grow and the ability to fulfill their needs, employers should also consider developing and including protocols for executing various personnel actions in the employment agreement. Employees may seek, and employers may desire, transfers or promotions within the company. However, if the parties’ employment agreement does not provide for these personnel actions, the parties may be forced to prepare a separate and new employment agreement to cancel or to modify their existing agreement.
C. Length of Contract, Compensation, Benefits, and Bonuses
Other key terms of an employment agreement are provisions that state the length of the contract as well as the employee’s compensation and benefits. The parties should evaluate the appropriate length of a contract by analyzing the nature of the position and the skills needed to execute the duties and responsibilities of the position.
The parties should plainly state the amount of compensation to be paid and the timeframe in which the employee shall receive his compensation. The parties should also be sure to set forth criteria under which the employee’s performance may be evaluated and under which the employee will be eligible for raises and/or bonuses throughout the course of their employment with the company. In addition to setting forth the criteria for earning bonuses, the parties should also delineate the timeframes in which bonuses can be earned and when the bonuses will be paid. Additionally, the parties should state whether an employee earns a bonus for any given timeframe but is no longer employed by the company when the bonus is scheduled to be paid.
An employer should also set forth the benefits for which the employee will be eligible and should also state which benefits the employee will be eligible to retain should the parties’ employment relationship terminate.
D. Non-Compete/Non-Solicit Provisions
To prevent employees taking their talents and employer’s trade secrets to competitors, a growing number of employers are requiring employees to sign non-compete agreements. While it may seem illogical that an employee cannot use skills learned at one job to advance his career at another job, many companies rely on non-compete clauses to limit just that. In realizing that non-competes are agreements in restraint of trade, courts critically examine and narrowly construe non-compete agreements. Thus, a broad-form agreement that is not narrowly tailored to serve the employer’s business interest is likely unenforceable. In addition, an employer’s effort to enforce an invalid non-compete can invite counterclaims and in certain extreme cases, sanctions.
1. Is the noncompetition provision a contract?
Ordinary contract principles will guide a DCes should also address criteria for extending the period of the contract and what should occur if the contract expires but the employee remains employed with the company. First, the parties must clarify whether an employee is obligated to leave the employment with the employer should the contract end. In cases where the position is dependent upon a certain task, an extension of the contract may not be feasible. However, a majority of workplaces have ongoing relationships with their employees, and would likely desire an employee that is performing well to remain employed with the company. Therefore, the parties should include criteria or circumstances under which an employee may renew or renegotiate his employment agreement once the original agreement expires.
Second, the parties should state what should happen if the employment agreement lapses, but the employee continues to work for the employer. In such a situation, the employee may lose his ability to collect a severance payment, and the employer may lose the employee’s agreements relating to confidentiality and to refrain from competing with the employer subsequent to the termination of the employment relationship.
G. Entire Agreement
Finally, both parties must be sure to include a provision stating that the employment agreement represents and contains the entire agreement. Otherwise, the parties could be subject to litigation over whether the parties included or intended to include other provisions in the employment agreement. To further protect themselves, the parties should also ensure that the employment agreement contains a provision requiring that any modifications to the agreement may only be made in writing and must be signed by both parties in order to be valid.
III. SEVERANCE PROVISIONS
A. Severance Provisions
Including severance provisions in an employment agreement can be an easy way for both the employer and the employee to obtain the severance package that they desire should the employment relationship end while the parties are on good terms with each other.
In addition to the amount of the severance payment (or a formula upon which the severance payment will be calculated), the employment agreement should state whether the benefits shall be paid in a lump sum or in installments. If the payments are to be made in installments, the agreement should also contain a defined schedule of payments so that each party understands when each payment is due. An employee should also avoid consenting to permitting the employer to deduct from his paycheck or bank account any amount equaling a negative vacation balance or an overpayment of expenses.
Both parties should also ensure that the employment agreement’s severance provisions contain a statement of whether the employee shall be paid for accrued vacation. Indeed, payment for accrued vacation may be considered earned compensation under state law unless otherwise stated in the parties’ agreement. Importantly, the parties should also ensure that the severance provisions of their employment agreement address how the severance payments will be taxed, if at all.
Next, should the employee hold any stock or other interest in the employer, the parties should also be sure to address how the rights of employee-stockholder will be affected by the employee’s departure. The parties should examine the employee’s stock options and determine how to dispose of both the employee’s vested and non-vested options. Employees should also ensure that there is no immediate loss of heir stock grants or vested options and that they have adequate time in which to exercise their options.
Further, because severance plans are governed by ERISA, the severance provisions should also include all formalities of an ERISA plan. It should comply with all of the ERISA disclosure and notice provisions, it should include a continuing obligation of the employer and an ongoing administrative framework for administering the plan, and it should include an immediate payment of monies due as wages under applicable wage payment laws.
The parties should also be sure to negotiate what an employer may disclose about an employee’s employment after the parties’ relationship has ended. Both parties should avoid language that permits the employer to provide information that reflects the employee’s work to any potential employers. Such references could reflect poorly upon the employee and later subject the employer to claims of defamation. Instead, the parties should negotiate a neutral reference that confirms nothing more than the employee’s position, employment status and/or title, dates of employment, and salary.
Finally, the parties should be sure to clearly define when the severance provisions will apply. Neither an employer nor an employee wants to be in a situation where the parties’ agreement ends, and so facially, it appears that the employee is entitled to severance provisions, but the employee is staying with the company, either in their same capacity or in a different capacity. Accordingly, the parties should clearly state whether the severance provisions are only applicable if the contract ends and the employee leaves the company or if the contract ends and the employee remains employed with the company.
B. Breach of Contract
In the event that either party breaches the contract, several provisions are key. First, the parties should state what laws are applicable to a breach of contract. The United States District Court for the District of Columbia has recognized that a “forum selection clause is prima facie valid absent some compelling and countervailing reason for setting it aside.” Cheney v. IPD Analytics, LLC, 583 F. Supp. 2d 108, 117-18 (D.D.C. 2008) (internal citations omitted). Further, although the courts typically give a plaintiff’s choice of forum deference, no deference is given “where the plaintiff has agreed to venue elsewhere under a forum selection clause.” Id. at 126. Therefore, the parties should be sure to contemplate the jurisdiction in which they would prefer to adjudicate any claims arising out of the employment agreement.
Further, the parties should also consider whether to agree to arbitrate or mediate any claims arising out of the employment agreement. These methods can be quicker, less costly, and less hostile than litigation in state or federal courts.
The parties should also consider what damages they would suffer and/or would need to impose on the offending party should a party breach the employment agreement. The damages sought by either party must be reasonable and must reflect the anticipated or actual loss caused by the breach of the agreement. The parties should also consider whether they should include a liquidated damages provision to deter the offending party from breaching the agreement again in the future. The District of Columbia upholds the validity of liquidated damages as long as the amount agreed to by the parties is reasonable. Ashcraft & Gerel v. Coady, 244 F.3d 948, 954-56 (D.C. Cir. 2001) (citing Progressive Builders, Inc. v. District of Columbia, 258 F.2d 431, 433-34 (D.C. Cir. 1958), see, e.g., Horn & Hardart Co. v. National Rail Passenger Corp., 843 F.2d 546, 550 (D.C. Cir. 1988) (citing Vicki Bagley Realty, Inc. v. Laufer, 482 A.2d 359, 368 (D.C. 1984)); Burns v. Hanover Ins. Co., 454 A.2d 325, 327 (D.C. 1982).
Although this article focuses on the law in the District of Columbia, Maryland, and Virginia, the law varies from state to state and can change over the course of time. In drafting or analyzing an employment agreement, one should seek the advice of an experienced employment attorney.
i. Refer to Attachment 1: Checklist for Key Provisions for a list of provisions that should be included in each employment agreement.
ii. Please refer to the bonus provisions set forth in the employment agreements found in Attachments 4 through 6.
iii. During my employment by the Company and for a period of 6 months after I cease to be employed by the Company, I shall not, directly or indirectly, either as an individual, partner, shareholder (other than shares regularly traded in a recognized manner), official employee, agent or otherwise, be employed by, connected with, participate in, consult or otherwise associate with any other business, enterprise or venture that is competitive with Company. By way of example, and not as a limitation, the foregoing shall preclude Employee from soliciting business or sales from, or attempting to covet to other sellers or providers of the same or similar products or services as provided by the Company, a customer, client, or account of Company with which employee has had any contact during the term.
iv. During my employment by the Company and for a period of 24 6 months after I cease to be employed by the Company and within 10 miles of any location nationwide , I shall not without the written consent of the CEO , directly or indirectly, either as an individual, partner, shareholder (other than shares regularly traded in a recognized manner), official employee, agent or otherwise, be employed by, connected with, participate in, consult or otherwise associate with any other business, enterprise or venture that is the same as, similar, or competitive with Company.
Please also refer to the non-competition clauses set forth in the employment agreements in attachments 4 through 6.
v. [Employer] shall, in accordance with its policies and applicable law, provide [Employee] with all base salary and all accrued but unused vacation earned by [Employee] in the normal course of business through the Employment Termination Date, less all required deductions for federal and state withholdings, other applicable taxes, and any lawfully authorized or required payroll deductions.
vi. [Employer] will pay [Employee] the [Agreed Severance Benefit], less all required deductions and withholdings.
vii. You will have twelve (12) months from the date of separation to exercise your vested Company stock options. In addition, you will have one additional year during which additional non-vested stock may become vested and exercisable.
viii. Should a prospective employer call [Employer] concerning [Employee], provided [Employee] directs such prospective employer to [Human Resources or other designated contact], [Employer's] response will be limited to verification of employment, position as [last position], employment status (full-time), and dates of employment and, if asked for verification of the salary information given by the prospective employer, [Employee's] salary.
ix. Any disputes under or in connection with this Agreement shall, be resolved by the United States District Court for the District of Maryland, Greenbelt Division, which shall have exclusive jurisdiction thereof. In any action or proceeding brought in connection with this Agreement, the prevailing party or Parties shall be entitled to recover reasonable attorneys' fees in addition to costs and expenses.
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