SEVERANCE PAYMENT SLIP AND FALL

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.

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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.

 

Copyright © 2017 by G. A. Finch, All rights reserved.

 

POLITICS AND LINKEDIN

BY G. A. FINCH

In recent weeks I have seen LinkedIn updates and discussions about whether talking politics or curating politically tinged or themed posts and links and other materials is appropriate on LinkedIn.  It is clearly because of the political season and the stridency and controversy surrounding the presidential election that political matters have spilled over into the business social medium of LinkedIn.

We would expect people to discuss political subjects on Twitter, Facebook, Instagram and You Tube.  We would not expect the typical business with a presence on Twitter or Facebook to engage in political discussions.  Businesses exist to make money for their owners and managers and employees, and they do that by attracting customers and clients, not repelling them with unfavorable messaging.  Professionals want to get  hired by a client or recruited by or promoted by an employer and to not turn off the employer or the client.unclesamsmokesandvotes

Growing up as a young adult, I was always told that one should avoid talking about politics or religion if one wanted to steer clear of controversy and keep conversations pleasant.  Although it was a general statement, I knew that this rule was honored in the breach when it came to discussions with family, friends, and neighbors and one’s various clubs and affinity groups.  What was clear was that the prohibition on speaking about politics and religion in polite society especially was to be strictly adhered to in the work place.  This is great advice and a good personal policy to have.

We have seen businesses make policy and business decisions to affirm or condemn certain actions that have a political or ideological cast to them.  These are sometimes viewed as ethical, moral, justice or religious values stances.  Some corporate boards or business owners choose to undertake a risk of adverse impacts on their business in order to do the “right thing” as they see it.

Should one’s LinkedIn page be a forum for one’s political views?  I was an early adopter of LinkedIn.  I use it for my business and professional life and to connect with other business people and professionals.  If someone works or has worked for a political party, a political candidate, or an elected official, then that affiliation is relevant information.  It gives me context and background about that person.  Would I be interested in updates, postings, or articles that are   political?  No.  Would I post or send an update with a political theme?  No.  I do not believe most people join LinkedIn for political content.  They join it to present their credentials to the world and to see other members’ credentials and to make possible connections.

Political content is a divider on LinkedIn, not a connector.   Political statements can easily offend.  One’s displaying political content can cause one to have fewer professional or business opportunities and not even know the opportunities were missed.  Personal political content is more suitable to a blog, a Twitter account,  and a non-business  website and, perhaps, Facebook and Instagram.

 

Copyright © 2016 by G. A. Finch, All rights reserved.

MORALS CLAUSE

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.

 

Copyright © 2016 by G. A. Finch, All rights reserved.

COVENANT NOT TO SUE

BY G. A. FINCH

“A covenant not to sue” as the term suggests is a legal promise not to file a lawsuit.  It is usually a companion provision to releases and waivers in a release agreement. Releases and waivers are de rigueur in employment separation/severance agreements.  Lawyers drafting separation/severance agreements favor including a covenant not sue because it can be raised as an affirmative defense in litigation if the party giving the covenant not to sue then decides subsequently to file a lawsuit.

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As the employer’s attorney is the person that usually does the initial draft of a separation agreement, the covenant not to sue is a provision  that an employee reflexively gives to an employer without much thought and not vice versa.  When I represent the employee, I negotiate for the covenant not to sue be mutual, i.e., what is good for the goose is good for the gander.

canadan goose clipart

If the employer requires peace of mind that the separation agreement will prevent future controversies, so should the employee have the same.

In a separation/severance agreement, a covenant not to sue is subject to certain limitations and exceptions concerning 1) an employee’s ability to file administrative charges with the Equal Opportunity Commission and corresponding state or local agency, 2) an employee’s ability to file a lawsuit to challenge whether the employee signed the agreement knowingly and voluntarily for purposes of the Age Discrimination in Employment Act, 3) an employee’s ability to being a witness in a class action suit against the employer,  or 4)  an employee’s ability  to waive a right which waiver is prohibited by law.

 

Final points:  Although releases and covenants to not sue are usually set out together in a separation/ release agreement, there is a subtle difference between them.  A release gives up or relinquishes a right to enforce a right or a claim that could have been enforced while a covenant not to sue is an agreement not to assert a right to bring a cause of action in court.   Put another way, a release extinguishes a right and a covenant not to sue does not allow a right to proceed to litigation.  A permanent or perpetual covenant not to sue, as opposed to a set time limit not to sue, has the same effect as a release or discharge.

This may be too much information for the typical executive to know or care about.  The important thing to remember is to make reciprocal both releases and covenants not to sue.

 

Copyright © 2016 by G. A. Finch, All rights reserved.

NEVER START A JOB BEFORE EMPLOYMENT AGREEMENT IS SIGNED

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

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

 

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.