14 Key Points in Negotiating Employment Agreements

Revised and updated on November 10, 2020

A clearly worded employment contract can set the company’s and employee’s obligations and expectations in such a way that future disputes are minimized. Contract negotiations can be difficult, and senior executives often use an experienced labor lawyer.

Below is a checklist of the key points to consider when negotiating employment contracts for CEOs, CFOs, and other senior executives.

1. Compensation

Compensation is the most obvious key issue, but there are several levels of negotiation points involved here, including:

  • Does the base salary increase every year of the contract?
  • Is there a signing bonus, especially if the employee would lose options or other job change benefits?
  • What quarterly or annual bonus is available? Is the bonus guaranteed depending on the achievement of milestones or at the discretion of the Board of Directors?
  • Under what circumstances can the employee’s basic salary be reduced? Some agreements give the company the right to reduce the base salary up to a certain percentage if other similarly located employee salaries are reduced in a similar manner (as may be the case, for example, in the event of financial distress for the company).

2. Equity grants

Equity grants are often an important part of the employment contract. The most important topics include:

  • Should the grant involve tax-privileged incentive stock options, non-qualifying stock options, stock appreciation rights or restricted stock units?
  • If stock options, what is the exercise price?
  • What is the vesting period for equity participation? A typical scenario is a four-year vesting period with a one-year “cliff vest”. This means that the employee must have been employed for at least a year before something becomes vested.
  • What percentage of the share allocation is appropriate – a percentage of shares issued and outstanding or a percentage of fully diluted shares?
  • If the employee is terminated for no reason, is part of the equity participation accelerated?
  • How long does the employee have to exercise options after termination of the employment relationship? The typical period is 90 days. However, this may vary depending on whether the termination is for an important reason or not for an important reason, or whether the employee is voluntarily quitting to take another job.
  • Is there an acceleration of the options when acquiring the company? Does it require an acquisition plus a termination of the employee’s employment relationship (a so-called “double trigger”)?
  • Will the shares acquired when exercising an option be bought back upon termination of the employment relationship? If so, at what price?
  • Are the shares received when exercising an option subject to a right of first refusal? If so, under what conditions?

3. Scope of employment

The scope of employment and responsibilities raise a number of questions:

  • What is the title of the employee’s work?
  • What tasks does the employee have?
  • Can the employee be demoted? Can the employee’s responsibilities be significantly changed, decreased or increased?
  • Is the employee guaranteed a seat on the board of directors as an employee?
  • Where is the workplace?
  • Can the employee be relocated to another city unilaterally or only with the consent of the employee?
  • Can the employee take part in other activities (e.g. a directorate in other bodies, participation in community activities)?

4. Advantages

The various employee benefits available to an employee can pose a number of problems, including:

  • Will the employee participate in all of the company’s pension plans?
  • Which of these plans should the employee have? Are all payments for the services the responsibility of the company?
    • Health and Medical (including spouse and dependent insurance)
    • disability
    • 401 (k)
    • Pension
    • Cafeteria plan
    • Life insurance
    • Stock option / stock grant
    • vision
    • Dental
    • Executive financial advice
  • How much vacation is the employee entitled to per year? Does unused leave still accrue in favor of the employee and must this be paid upon termination of the employment relationship?
  • How much vacation can be carried over to the following years?
  • Any special loans or lending agreements?
  • Are some of the benefits taxable for the employee? Should the employee be reimbursed the tax?

5. Term and termination

The circumstances under which the employee’s employment relationship can be terminated and the consequences thereof raise the following problems:

  • How long is the duration of employment or is the employment “at will”?
  • For what reasons can the company terminate the employee?
  • What conditions, if any, apply to early termination compensation?
  • Under what circumstances can the employee be dismissed “for an important reason”, e.g.
    • Convicting a crime or an act involving moral injustice;
    • Theft, fraud, dishonesty or forgery of an employment record;
    • Material breach of employment contract that was not resolved after prior notice;
    • Failure to perform appropriate assigned tasks; and
    • Improper disclosure of Company’s material confidential information
  • Is the employee entitled to severance pay in the event of termination without a reason? How much? Is it a flat rate or payable over time?
  • If the employee is terminated for no reason, will the company have to continue paying benefits or COBRA benefits for some time?
  • If the employee is to receive severance pay, do they have to sign a release from liability in favor of the company? The employee wants this to be a mutual release.

6. Reimbursement of Expenses

Questions related to the employee’s right to receive reimbursement costs include:

  • Will the employee’s business expenses be reimbursed within a specified period of time?
  • Is there a car or a flat rate car allowance, a mobile phone or other such amenities?
  • Are moving costs to be reimbursed?
  • Is there a relocation package for the employee?

7. Employee liability protection

The employee may wish to negotiate certain liability protections that cover the employee providing services in the context of employment:

  • Does the company have directors and officers (“D&O”) insurance coverage?
  • Do company statutes offer compensation protection for executives and employees?
  • Does the company charter limit the liability of officers and directors to the maximum permitted by law?
  • Is there a compensation agreement to protect the employee that covers:
    • Indemnification protection for claims
    • Automatic forwarding of legal costs
    • Protection even if the employee is no longer employed in the company? (Note the legal limitations of liability.)

8. Confidentiality Restrictions

The employer wants confidentiality provisions in the employment contract:

  • Many companies have a separate form of the employer’s confidentiality and invention agreements that can be incorporated by reference.
  • The employee must take care not to use or disclose any confidential information from a previous employer. The new employer often wants a contract from the employee prohibiting such use or disclosure.
  • If the employee is subject to confidentiality restrictions, are the following items exempt from the definition of “confidential information”?
    • Information that is or was publicly known or that becomes publicly known through no fault of the employee.
    • Information obtained from or obtained from a third party who had the right to disclose the information without restriction.
    • Information independently derived from the employee without reference to the confidential information.
    • Information that was lawfully in the employee’s possession or knowledge prior to disclosure of the confidential information.
  • How long are the confidentiality restrictions?

9. Problems with assigning inventions

Companies expect that all inventions or business ideas developed by the employee in connection with the company’s business during the period of employment are the property of the company:

  • What is the scope of the company’s rights to employee development of new inventions, trade secrets and ideas?
  • Do the provisions on the assignment of an invention comply with applicable law?

10. Disability and death

When the employee dies or becomes disabled, various problems arise:

  • What is defined as a disability event?
  • What happens in the event of a disability? Will the employee continue to collect salary and benefits for some time?
  • What happens when you die? Can medical and other benefits continue to exist for the spouse and children for some time?

11. Post-employment restrictions

The employment contract can regulate various restrictions for the employee after termination of the employment relationship:

  • Are there any restrictions on the employees who recruit employees of the company? For which period?
  • Is there a contract not to take part in the competition after the employment relationship has ended?
    • For which geographic regions?
    • For which period?
    • What is the scope of the covenant?
    • Are the restrictions enforceable under applicable law? (Generally not allowed in California.)

12. Dispute Resolution

Most employment contracts contain several provisions dealing with disputes between the company and the employee:

  • How are disputes resolved?
  • Should confidential binding arbitration be the only way to resolve disputes? (This can be beneficial for both the company and the employee.)
  • In which city do disputes have to take place if they are going to be heard in court or in arbitration?
  • What is the applicable law?

13. Golden parachute

A “golden parachute” is a payment or other benefit guaranteed to an executive of the company if the executive is fired as a result of a takeover of the company:

  • In the event of a change of control of the company, is the employee entitled to terminate the employment relationship and receive the golden parachute payment?
  • What are the tax implications of paying the golden parachute? Will the company also extrapolate the parachute payment to cover the tax?
  • Will the company reimburse the employee for an IRS review that results in additional tax claims?

14. Other provisions

Good employment contracts contain a number of “different” clauses, including those that address these issues:

  • Is there a legal fees clause in which the predominant party in a dispute would be entitled to reclaim the legal fees incurred? Or is it better if each side is only liable for its own legal fees?
  • Does the employee ensure that their resume and information provided to the company are correct and complete?
  • Are all the terms and conditions of employment included in the agreement so that a clause stating that there are no other terms of the employment relationship is acceptable?

On the subject of matching items:

Copyright © Richard D. Harroch. All rights reserved.

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