What Executives and Employers Need To Know about Term, Bonus, Severance and Non-Compete, Non-Solicit Provisions

Overview:

The prospective employment contract may be clear on the employee’s job duties and base salary, but there are many issues involved with defining bonus, calculating a bonus, perks, and last but not least, the covenant not to compete or solicit.

In some instances, an employment contract will have a term of years, but yet, it will say that it is “at will” and can be terminated at any time.  Which means, of course, that the employer may lawfully discharge the employee at any time with or without cause (there are some legal exceptions to this general rule), and the employee may voluntarily quit at any time.  These are binding employment agreements, even though the term of employment is not a definite one.

An employment contract can be offered to key employees in the course of forming partnerships, limited liability companies, corporations and other business entities.  In many instances, in a partnership, limited liability company or other entity, an employment contract may be offered to one of the owners, and the owner may receive revenue both from compensation as an employee as well as from her profits interest in the entity.  In such cases, there can be a partnership dispute or shareholders dispute, and the partners or shareholders will seek to have a termination of employment become grounds for invoking a sale of ownership interests in the entity.  We have significant experience in representing both companies and individuals in sorting out the rights and remedies.

In many instances, we have represented employees who are faced with signing agreements containing restrictive covenants not to compete against their employer, regardless of the reason for the discharge.  These non-compete covenants are generally enforceable, if they are not overly burdensome to the employee and serve a business interest of the employer.  These covenants, if not reviewed, can derail an employee’s career, and although an overly burdensome covenant may eventually be reviewed by a judge, the time and expense of going to court can be detrimental to the discharged employee.

Are these provisions enforceable?  Generally, the answer is “yes” in New York and Connecticut, according to the Courts.  The consideration that the employee receives is “continued employment” or perhaps some other benefit, and the covenant is generally upheld if its reasonable in scope to protect the employer.

Bonus;Calculating the Correct Amount

We have encountered other problems in both New York employment contracts and Connecticut employment contracts regarding calculation of bonus amounts, which often constitute a large percentage of overall compensation.  Provisions which just call for a “discretionary” bonus are “we’ll see when the time comes” provisions without legal effect.  However, in instances in which bonus provisions are to be calculated based upon performance, such as sales revenues or net profits, there are any number of pitfall issues that need to be discussed.

What happens when your employer merges or consolidates with another entity, and the new entity agrees to assume your contract?  Often, there are now questions about crediting the work performed previously for the original employers and carrying it forward under the new regime, particularly when attempting to determine bonus amounts.  I have been engaged by numerous executives who asked for my help in making sure that their rights are protected and advocated on their behalf to the new regime’s human resources directors or others.  In instances where the merger or business combination results in a discharge, there is singular opportunity for disputes in accounting for performance results.

Severance

Another issue is severance payment upon termination.  We have advised both employers and employees regarding parameters for severance.

Although we have no fear about going to Court to advance protection of our clients, my firm prefers that employees and employers  get the right to resolve contested  provisions in employment agreements in an arbitration proceeding, rather than in Court.  I believe that arbitration and mediation are preferable in that they are less time consuming, can be less expensive, and decisions are made by the presiding tribunal much quicker than in civil court.

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