Archive for the ‘Employment Contracts’ Category

SEVERANCE PAYMENT SLIP AND FALL

January 23, 2017

BY G. A. FINCH

 

I was fascinated with a 22 December 2016 Crain’s Chicago article “Feud explodes at one of the city’s most connected PR firms” by columnist Greg Hinz.  The story intersected two worlds in which I practice law and work: executive employment and governmental affairs.  Although not personally acquainted with the antagonists, Leslie M. Fox and Guy Chipparoni, from my own circles, I have some familiarity with their respective body of work and reputations.

Let’s set the stage. In September, 2014, Greg Hinz pens a short Crain’s piece , writing “Two of the more colorful figures in Chicago’s world of media and politics are getting hitched – professionally, that is…. Neither Mr. Chipparoni nor Ms. Fox is a shrinking-violet type.  But both are capable of doing first class work.  We’ll see how they do together.” The hint of skepticism of Mr. Hinz was prescient.Boxing_gloves

Fox had helped organize and raise funds for Chicago’s hosting the 1996 Democratic National Convention and 1994 World Cup Games (the latter event yours truly had a bit part at the creation).  Chipparoni had been a flack for Illinois Governor Jim Edgar and founded his own successful public relations firm, Res Publica Group, of which he later asked Fox to become a part.

In December 2016, Fox filed a law suit against Chipparoni personally and his firm alleging that Chipparoni breached an employment agreement by not providing her severance benefits after she invoked a “Good Reason” termination provision  “because during her employment there was a consistent, persistent and continuous diminution of Fox’s contractual duties, responsibilities, powers and authorities which … were to be those customarily associated with the position of Executive Vice-President.”Bossth

Two of the most serious allegations were A) that Chipparoni diminished her ability to prevent Chipparoni from appropriating opportunities and assets belonging to the firm and B) that Chipparoni treated the firm as his alter ego and did not maintain the firm as a separate legal entity.  These allegations lay the foundation for a claim of personal liability of Chipparoni. Ouch!

Fox also has a more common variety breach of employment contract allegation that Chipparoni disparaged her to others.  We do not know from the complaint what alleged disparaging remarks were made.  We can assume that Chipparoni will file an answer to Fox’s complaint denying making disparaging statements or otherwise breaching the contract and file affirmative defenses to her claims.

In my executive employment blog, I have written that employers usually underestimate the destructive power that an angry, committed terminated employee can have on the morale, reputation, and resources of their organizations.  What many employers fail to understand in their not being reasonable in their severance offer is that the terminated, aggrieved employee may present a sympathetic image to a judge or arbitrator or the court of public opinion.  Moreover, the peeved employee may dig up bones of alleged legal and regulatory liability of which the organization’s higher ups may not even be aware.   The organization may have unintentionally birthed a whistle-blower.   A boss may have not ever thought of liability for the firm, let alone, his own personal liability

An employer’s having and abiding by a non-disparagement employment contract provision should be basic practice.  From the employer side, the employer does not want a disgruntled former executive trashing the company thereby diminishing the brand, reputation, and good will of the company.  The executive certainly does not want the executive’s ability to work effectively at the executive’s job to be made more difficult or to find new employment to be precluded by negative comments being made about the executive during the executive’s employment or after the executive’s employment.  In the Res Publica case, Chipparoni’s alleged disparaging comments has produced a claim of breach of contract.  A further take away for employers is that an employer must not say or write anything that injures the reputation of the executive that could form the elements of a defamation claim.

As I have blogged previously, severance payments are pragmatic.  Employers ought to consider providing for severance payment and a neutral letter-of-reference in separation agreements where there is no employee misconduct. These provisions often generate goodwill from a departing employee, thereby reducing lawsuits, and the provisions can be used to bind an employee to confidentiality, non-disparagement, and non-compete obligations as well as release most claims against the employer.  Severance payments demonstrate humaneness and compassion on the part of the employer.

courthouse

Employment lawsuits are expensive and generate bad public relations for a company. As long as the severance compensation is not excessive, it really is a no-brainer in terms of a cost-benefit trade-off for an employer.

Fox wisely obtained an attorney to review and negotiate her employment contract that sets the terms of her separation from Res Publica.  Among other things, it enables her to fire her employer when good reason is shown, namely, the diminishment of her executive responsibilities and receive a severance payment; it provides for non-disparagement of her to protect her reputation; and it sets out clearly the basis of her compensation. It remains to be seen whether she can prove her breach of contract claim, but protracted litigation creates bad optics for Res Publica and Mr. Chipparoni even if they prevail in the lawsuit.  After all, public relations and governmental relations are about achieving positive outcomes or damage control.  Neither positive outcome nor damage control has occurred here.  In my law practice I have seen that this kind of dispute probably will settle  sooner rather than later.

 

MORALS CLAUSE

October 18, 2016

BY G. A. FINCH

Getting Booted for Behaving Badly

I grew up in Southern California and it was commonplace to hear about the lives and sometimes scandals of screen stars and entertainers, but I had never heard of “morals clauses.”  My first year contracts course at the University of Michigan Law School did not cover this concept, so I was unfamiliar with this legal terminology. I was a newly minted young lawyer when the term first entered my consciousness in 1984 because the reigning Miss America, Vanessa Williams, became the subject of notoriety arising from Penthouse magazine publishing nude photos of her.retro_pinup_ocal Using a morals clause in its standard agreement with contestants, the Miss America Pageant took her crown away because of these nude photos.  It was a big deal then; it probably would not even raise an eyebrow now.

Although, it is one of my oldest blog posts, I get more hits and reads of my post “TERMINATION FOR CAUSE: MORAL TURPITUDE,” which is a closely related concept used in employment contracts for executives and professionals.  Anything having to do with “morals” is always of interest to people, especially when it affects their compensation.

Protecting Organization’s Brand

Morals clauses are more commonly used with entertainers and athletes.  Companies desire to use celebrities as spokespersons or endorsers of the companies’ products or services – think NBA stars or Olympic Gold Medal athletes on boxes of Wheaties cereal.  Historically these clauses were directed at both criminal actions and socially disapproved behaviors reflecting the mores of the time.

As companies and organizations seek to enhance their brand, reputation, and goodwill, they also want the ability to protect these assets from damages arising from the personal

actions of their monk_buddhistvendors, consultants, spokespersons, partners and employees.

For example, National Football League Pittsburgh Steeler running back Rashard Mendenhall’s Talent Agreement with Hanesbrands, Inc. contained the following morals clause:

“If Mendenhall commits or is arrested for any crime or becomes involved in any situation or occurrence … tending to bring Mendenhall into public disrepute, contempt, scandal, or ridicule, or tending to shock, insult or offend the majority of the consuming public or any protected class or group thereof, then we shall have the right to immediately terminate this Agreement.  HBI’s decision on all matters arising under this Section … shall be conclusive.”

Because of certain tweets by Mr. Mendenhall on Twitter concerning the death of Osama bin Laden, Hanesbrands, Inc. invoked the morals clause and terminated its Talent Agreement with Mendenhall who then filed a breach of contract suit.

monkeys-speak-no-evil-etc

A recent consultant contract with which I was involved had the following clause:

“The Company may terminate this Agreement without notice if Contractor is deemed to have engaged in misconduct, unethical behavior, or actions that disrupt or are inappropriate in the workplace.”

The consultant would not have gotten the contract without agreeing to this clause.

A CEO employment contract had the following for-cause termination language:

“Any actions taken by Employee which in the sole opinion of the Company’s Board of Directors materially adversely affects the business, goodwill or reputation of the Company or its customers.”

The CEO in this instance was able to negotiate away this broad, absolute language.

Personal Behavior and Private Actions

What we see here is conflict between the right to engage in personal behavior and the right of the employer to protect its brand and reputation.

If one is the attorney for the employer, then one would want to expand the scope of these clauses to give the organizational client complete flexibility to control any potential or actual damages to its brand or to control any future direction of the brand.

If one is the attorney for the employee, consultant, or celebrity pitch person/endorser, then one would want to carve out as much right to personal action and privacy as possible and have more specificity of actionable behavior.  The definition and application of morality can be vague, subjective and arbitrary.ten-commandments

Meeting Halfway

If one takes the King Solomon approach, then where there is an instance in which reasonable people could disagree as to the degree or appropriateness of the purported transgression, as determined by an arbitrator or mediator, then some liquidated sum payment to terminate the talent or employment agreement is probably the way to go.

Parties are prudent to spend ample time negotiating and crafting termination provisions as well as the morals clause subsections of those provisions in particular.

NEVER START A JOB BEFORE EMPLOYMENT AGREEMENT IS SIGNED

September 13, 2016

BY G. A. FINCH

Too many times, a situation in which an executive starts a job with an unfinished employment agreement does not turn out well.  Not always the case, but often the case.  An executive does not want to be in the percentage of employees who get terminated without a back-on-the-marketcompleted, signed employment agreement.   The executive’s relying on the employer to do the right thing in terms of what the employee thinks the deal was, is not a good choice.

Obviously an executive has the most negotiating leverage when a company is seeking to hire the executive.  At the start of the relationship, there is good will between the employer and prospective employee and there are high, positive expectations on both sides.happy_lady

An executive is eager to demonstrate trust and enthusiasm by agreeing to start while an agreement is being finalized.  I know of executives who have quit their prior jobs, forsaken substantial benefits, and relocated to distant cities without a signed agreement.  Two scenarios usually are the case.  One scenario is that the executive and the employer are still hashing out contract terms after the executive has started employment.  Another scenario is the executive has started working and has never received a signed agreement – it falls through the cracks so to speak.

There is an old saying that “Familiarity breeds contempt.”  An employer’s shiny new executive now has blemishes and scratches upon closer inspection.  The sense of urgency has dissipated once the employer has gotten its prized employee.  It is human nature to value something less after it has been obtained.

Accordingly, an executive must never start a job without a completely finished, signed agreement in hand.  Moreover, whatever “final” employment agreement is tendered to him, the executive’s attorney must review it one last time to ensure that the final draft reflects the latest iteration of the negotiated contract terms.  Last minute language insertions or failure to include agreed-upon provisions can and do happen, sometimes carelessly and in good faith by the employer and sometimes by design.  An executive’s insistence upon having in hand an executed agreement prior to work commencement is prudent and makes common sense.  In order for the executive to be able to maintain a congenial relationship with his prospective colleagues or bosses, the executive’s attorney should take the responsibility for requiring a signed agreement.legal-document-2

An executive does not want to be in the more difficult position of proving up the terms of an unsigned, draft contract in a court of law than the easier position of proving up a final, signed contract.

 

 

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): MORAL RIGHTS

May 13, 2016

BY G. A. FINCH

To the uninitiated, the term “moral rights”, would at first blush (pun intended), seem to suggest having something to do with bad character, improper behavior or religious and philosophical subjects.

Actually it has to do with intellectual property rights of an author, artist, or creator beyond mere copyright interests.

Moral Rights is beginning to appear more often in employment agreement provisions pertaining to intellectual property rights.  The employer usually seeks to obtain a waiver of the employee’s moral rights to works subject to copyright which works are made by the employee within the scope of employee’s employment or using employer’s resources or confidential information.

It is a European legal concept and not rooted in American jurisprudence, although similar and analogous concepts have been asserted or litigated in the United States from time to time.  I believe burgeoning multinational corporations and global trade have facilitated the infiltration of moral rights provisions into American legal documents. The American version of moral rights became codified as the Visual Artists Rights Act of 1990 (VARA) pursuant to the mandates of the Berne Convention.

VARA provides that the author of visual art has the right:

 

A) to claim authorship of his work,

B) to prevent the use of his name as author of any visual art that he did not create,

C) to prevent any intentional distortion, mutilation or other modification of his work that would prejudice his honor or reputation,

D) to prevent any destruction of a work of recognized stature, and any intentional or grossly negligent destruction of that work is a violation of the right.

 

Under VARA, only the author of the subject visual art has these rights whether or not the author owns the copyright. VARA does not provide moral rights for authors of literary or musical works.

Black’s Law Dictionary sets out the most succinct global definition of Moral Rights:

“Moral rights include rights of (1) attribution (also termed “paternity”): the right to be given credit and to claim credit for a work, and to deny credit if the work is changed; (2) integrity: the right to ensure that the work is not changed without the artist’s consent; (3) publication: the right not to reveal a work before its creator is satisfied with it; and (4) retraction: the right to renounce a work and withdraw it from sale or display…”  Black’s Law Dictionary, p. 1030 (Eighth Edition, 2004).

 

INTERNAL REVENUE CODE SECTION 409A

May 13, 2016

 

BY G. A. FINCH

If your employment agreement has deferral of compensation provisions, you may very well see a section or paragraph captioned “Internal Revenue Code Section 409A” or simply “409A.”  Its official citation is 26 U.S. Code Section 409A – Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.

This section is too complex and tedious for most lay person executives to understand and figure out.  Your reading Section 409A of the IRS Code is certainly an instant cure for insomnia.080914_jmanscratchhead_tnb

At the outset, before you execute an employment agreement, your retaining an attorney is necessary to interpret and apply Section 409A to the various scenarios of deferral of compensation to ascertain whether such compensation adheres to Section 409A’s deferrals and distributions timing rules.

Failure to comply with the rules concerning deferred compensation has onerous consequences of 1) inclusion of such deferred compensation as gross income for the subject taxable year, 2) payment of the amount of interest on the underpayments, and 3) a penalty amount equal to 20% of the deferred compensation which is required to be included in gross income.IRS_tnb

Accordingly, employers often have a Section 409A provision in the employment agreement that allows the employer to adjust payments under the agreement to comply with Section 409A and allows the employer to disclaim any liability to the employee.

A typical provision can be lengthy paragraphs and include some language like the following:

 

“Anything in this Agreement to the contrary notwithstanding, the parties intend that   all payments and benefits under this Agreement comply with Section 409A of the Code and the regulations promulgated thereunder and, accordingly, to the maximum extent permitted by law, this Agreement shall be interpreted in a manner in compliance therewith.  To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extend reasonably possible, maintain the original intent and economic benefit to you  and the Employer of the applicable provision without violating the provisions of Section 409A.  Notwithstanding the foregoing, the Employer shall not be required to assume any increased economic burden in connection therewith.  Although the Employer intends to administer this Agreement so that it would be exempt or comply with the requirements of Code Section 409A, the Employer does not represent or warrant that this Agreement will be exempt from, or otherwise comply with, Code Section 409A or any other provision of applicable law.  Neither the Employer, its affiliates, nor their respective directors, officers, employees or advisers shall be liable to you (or any other individual claiming a benefit through you) for any tax, interest, or penalties you may owe as a result of compensation paid out pursuant hereto, and the Employer shall have no obligation to indemnify or otherwise protect you from the obligation to pay taxes pursuant to Code Section 409A.”

 

The point of this blog post is that your deferred compensation provisions could trigger 409A tax consequences and your employer, through its employment contract with you, is shifting the risk to you as employee.

I WROTE IT SO WHY CAN’T I USE IT?

April 5, 2016

BY G. A. FINCH

You are leaving your job or you have already left. After you leave, you want to use all of your power point presentations, white papers, newsletter articles, and blog posts that you did for your employer. Not so fast. Are you allowed to do that? Who owns the written work that you produced? Increasingly I am called to advise incoming or departing executives and professionals on how to preserve and protect their intellectual property rights or understand how to avoid violating the intellectual property rights of their former employers. This post focuses on copyrights, not trademarks or patents or trade secrets.

quill_writingYou need to know the copyright laws. You also need to know what confidentiality/intellectual property agreements you may have signed either in an employment agreement or in a separation/severance agreement or both.

The basics for a copyright are:

  • A work must be original
  • A work must be completed and in tangible form like a written article
  • A copyright holder has the right to reproduce, to distribute, to modify the work, and to perform or display it
  • A copyright holder does not have to register his\her\its work to gain copyright protection and does not have to display the copyright symbol

An employee should note well that ordinarily the employee’s work authored within the defined scope of employee’s employment constitutes a work made for hire. Although the employee physically created the work, the employee may not own it, rather the employer does. Most savvy employers will eliminate any legal ambiguity of copyright ownership by having the employee sign intellectual property and invention assignment agreements.

Although they can vary in length from three sentences to two pages, an assignment of intellectual property provision typically looks like the following:

“ASSIGNMENT OF INVENTIONS. I agree that I will promptly make full written          disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks or trade secrets, whether or not patentable or registrable under copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company ….”

no_copyrightPrior to commencing employment, an employee would do well to carve out in a written agreement any invention, original works of authorship, etc. to ensure such work product or invention is not assigned or deemed owned by employee’s new employer. Also prior to any departure, the employee should set out in an agreement what works employee created that were not created on the job or are not assigned to the company.

When the employee does not own the written work employee created, the most obvious and practical thing to do is simply ask permission from the previous employer.

Lastly, there is a limited way to use copyrighted material without permission and not infringe. This way is called “fair use.” For example, if you fairly and reasonably use a short quote and credit it for commentary and criticism, news reporting, teaching, research or parody, you are probably okay. The evaluation includes whether your use adversely affects the market for or value of the work. When in doubt, consult an attorney.

THE NUTS & BOLTS OF EXECUTIVE EMPLOYMENT AGREEMENTS BY G. A. FINCH (Video)

January 12, 2013

THE NUTS & BOLTS OF EXECUTIVE EMPLOYMENT AGREEMENTS  (click here for video)

A video created by Dignitas Wealth Management – Family Office – Wealth Management.

INDEMNIFICATION AND D & O INSURANCE IN EMPLOYMENT CONTRACTS

June 16, 2012

By G. A. Finch

Indemnification By Employer

In my law practice covering executive employment contracts, I see too infrequently a provision requiring an employer to indemnify an executive for any costs, expenses, liabilities, and losses incurred by the executive in the performance of his duties with the company.  Usually, the indemnification arises in the context of litigation costs.  It should apply to any kind of claim or proceeding including an action, law suit, arbitration, investigation, or administrative proceeding.  It should also apply to both civil and criminal actions, investigation, and proceedings.

The costs, expenses, liabilities and losses should include, but not be limited to, reasonable attorneys’ fees, judgments, interest, expenses of investigation, fines, excise taxes or penalties and amounts paid or to be paid by executive in any settlement.

A well drafted indemnification provision will require the employer to advance to the Executive all his costs and expenses concerning a claim or proceeding.

An indemnification provision may have qualifying language that, as a precondition for indemnification, the Executive must be properly performing his obligations in good faith.

Claw Black of Indemnification Payments

Some indemnification provisions will have a mechanism allowing the employer to claw back the amounts advanced to an Executive if a determination has been made that the Executive was not entitled to indemnification for the subject costs and expenses.

The most comprehensive indemnification provision I have seen used reads as follows: “Employee shall be held harmless and fully indemnified by Employer to the fullest extent permitted by [State X] law without qualification or limitation.”

A companion provision that would be prudent for the Executive to include in his employment agreement is that the employer be required to keep in place directors and officers’ liability insurance coverage for the Executive during his employment with the employer and for four years afterward.

Executives get investigated, prosecuted, and sued all the time.  An Executive’s having indemnification and insurance provisions will offer the Executive some peace of mind.

Indemnification By Employee  

Employers sometimes require an Executive to indemnify the Company.

One kind of Executive’s obligation to indemnify  involves the Executive’s indemnifying, defending, and holding his company harmless from any uninsured portion of any claim, loss or expense arising from any action by the Executive that contravenes the rules and policies of the company, any applicable laws or that arise from intentional misconduct by the Executive.

New Employer’s Protection from Old Employer’s Restrictive Covenants

Another kind of Executive’s obligation to indemnify involves the Executive warranting that Executive is not under any legal or contractual obligations that contravenes the new employer’s employment agreement and execution of the employment agreement will not breach any other agreement by the Executive.  If there is such a breach, then the Executive must indemnify the new employer and must hold the new employer harmless from and against any and all loss, damage, and expense emanating from the claim against the Executive or the new employer arising from Executive’s relationship with his previous employer.  The breaches would typically involve non-compete provisions, non-solicitation provisions, and confidentiality provisions.

Employers must protect themselves from new employees who know they have valid legal obligations to previous employers like confidentiality agreements. One additional way to protect themselves is for the employers to require the prospective employee to provide copies of all employment and separation agreements containing restrictive covenants like non-compete, non-solicitation, and confidential information.

Employers should also be able to be made whole from the bad conduct of their employees giving rise to uninsured liability.

The scope and kind of indemnification by an employee must be appropriately negotiated by each side.  Obviously indemnification amounts can be quite burdensome and even financially catastrophic for an employee.

TERMINATION FOR CAUSE: MORAL TURPITUDE

May 20, 2012

BY G. A. FINCH

Employment contracts may have a termination-for-cause provision.  This kind of provision may include the term “moral turpitude.”  The following are two different examples of a termination-for-cause definition clause containing moral turpitude:

  • Employee’s conviction of, or guilty plea or nolo contendere plea to, or confession of, a Class A-type felony or felony involving moral turpitude.
  • The Employee’s conviction of, or plea of guilty or nolo contendere to, (a) a felony (other than traffic violations), (b) a crime involving moral turpitude, or (c) a criminal act which adversely affects the business or reputation of Company, its parent or its subsidiaries.

These typical for-cause termination clauses that the use term “moral turpitude” do not define the concept.

The term turpitude means vile, depraved, shameful, or base.  It has a grave meaning, and even the sound of the word suggests a perverseness.  You add the word “moral” before “turpitude” and it suggests an egregiously bad act or conduct.  While we have a textbook definition of “moral turpitude” as being reprehensible conduct, what can it mean in practice?  Who knows?  However, an executive should care.

The term is too vague and subjective.  Crimes come in varying degrees of wrongdoing.   Felonies involve varying degrees of criminality.  Some are worse than others. In order to avoid arbitrary results and inconsistent employer or judicial application, we ought to discard this hidebound term altogether.  When representing executives or organizations seeking to enter into employment contracts, I discourage the use of this term.  I prefer an itemized list of causes for termination and plain language like the following clause:

  • Employee’s commission of any act (i) involving (A) misuse or misappropriation of money or other property of Corporation or (B) a felony or repeated use of drugs or intoxicants; or (ii) which disparages the business integrity of Corporation, its parent Corporation or subsidiaries or affiliates or their officer directors, employees or customers, and materially and adversely affects the business reputation of Corporation.

This clause makes it readily understandable, among other acts, what kind of crime would be cause for termination, i.e. a felony. In the moral turpitude clauses above, the term crime or felony is modified by the term “moral turpitude” and, consequently, makes the felony or crime more vague and difficult to determine its applicability.

The use of term moral turpitude is anachronistic and should be eliminated from employment contract termination-for-cause provisions.

PREVAILING PARTY’S LITIGATION EXPENSES

April 22, 2012

A not uncommon provision in employment agreements, separation agreements, or stand alone agreements containing restrictive covenants (e.g. non-competition and non-solicitation) is a “prevailing party” provision.  This kind of provision grants the prevailing party in any litigation over an agreement the right to be reimbursed its, his or her legal fees and costs.

A typical prevailing-party provision will read like the following: “If litigation arises under this Agreement between the Company and the Executive, the prevailing party in such litigation shall be entitled to recover its or his reasonable attorneys’ fees, court costs and out-of-pocket litigation expenses from the non-prevailing party.”

The prevailing-party provision serves as a disincentive for an individual employee to assert his legal rights or to take a risk of violating an agreement.  From the outset, the employer ordinarily would have more financial resources to litigate, and this added provision of saddling the non-prevailing party with all the litigation costs has a chilling effect on the employee’s seeking vindication of his rights.  From the employer’s standpoint, this is precisely the sobering reminder that an employer wants to send to its ex-employees who may choose to test the validity of the employer’s restrictive covenants, especially non-compete clauses.

In any event, the prevailing-party provision is one that must not be overlooked by either the employee or the employer.