Client Alert

Our previous Client Alert regarding employment issues arising out of the economic crisis gave a broad overview of employer concerns. Now it’s time to focus on both existing employment contracts and those which may be drafted in the near term. Since the subjects of executive compensation and separation payments such as “golden parachutes” will be explored by Womble Carlyle’s Employee Benefits group, this Client Alert will concentrate on other employment contract terms, also leaving for later alerts topics such as reductions in force, employment considerations in bankruptcy and separation agreements. Today, we’ll discuss these items:

1. Separation Events: Typical employment contracts provide differing terms based upon the relative responsibility of employer and employee:

• Was the separation involuntary or voluntary, whether by retirement or resignation?
• If the separation was involuntary, was it based on “cause,” a word normally signifying employee fault? Or was it due to employer concerns, ranging from economics to employee fault not rising to the level of “cause”?
• Was the separation due to death, disability or other circumstances not within the control of either employer or employee?

These considerations require careful drafting. A contract entered into when both parties have engaged in the establishment of an employment relationship or when the employee has been given new responsibilities may be seen as one based on the assumption that the future will be free of problems, but if things change, the friendly terms may become obstacles for the employer. For a case in point, see the saga discussed recently at Bloomberg.com in which a retiring executive was granted a consulting arrangement paying $1 million per month.

2. Post-Termination Contracts: Contracts containing restrictions on post-employment activity are subject to rules which vary widely from state to state and which may be altered by the courts without notice. A one-size-fits-all contract is unlikely to be enforceable; to the extent possible, the specifics of the job and its location need to be taken into account, and all pertinent technicalities need to be addressed. A representative list of questions includes whether the cause for separation is important in the jurisdiction, whether some “additional consideration” needs to be given at the time of signing the agreement, and what territorial, time and restricted activity limitations are acceptable. Some jurisdictions generally will not enforce such provisions (California); some have very exacting standards (Georgia); others have written guidelines establishing terms which are presumptively enforceable (Florida); and others allow the courts to “blue pencil” to adjust the terms to fit the situation. Simply “choosing” the law of a state which has the greatest flexibility for employers may not produce a workable solution either. Careful consultation with counsel who have deep familiarity with these issues is critical; that consultation needs to be had before an agreement is signed, and there needs to be an ongoing review of agreements to adjust to changes in the law.

3. Remedies: Good agreements set out what happens when the contract needs to be interpreted, challenged or enforced. Arbitration or some other form of alternative dispute resolution may be a logical choice, but should not be selected without an appreciation of costs and benefits. It is prudent to carve out situations in which a prompt action is needed—an injunction to protect the employer’s economic interests, for example. The right to recover damages in addition to injunctive relief may be important, and there may be benefit to considering whether a set sum of “liquidated damages” is a good option.

A Minnesota Court of Appeals decision, Zebeck v. Metris Companies (Minn. App. A07-0756) highlights the perils employers face. The court affirmed a jury verdict of $30.2 million to a terminated executive, as well as an award of some $11.5 million in attorneys’ fees, stemming from a lack of precision in the language of the employment contract. Not only was there no clarity concerning what a “change of control” meant under the contract, but the contingent fee agreement between Zebeck and his attorney controlled since the employment contract provided no standard for computing fees and no cap on the amount recoverable.

Troubled times afford us with opportunities to anticipate and avoid problems if we make the effort to do so. If you have any questions about these or any other employment contract issues, please contact the lawyer with whom you regularly work, or any of the firm's Labor and Employment attorneys.