14 Key Issues in Negotiating Employment Agreements
Reviewed and updated November 10, 2020 A clearly written employment contract can define the obligations and expectations of the company and the employee in such a way as to minimize future conflicts. Contract negotiations...

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Reviewed and updated November 10, 2020

A clearly written employment contract can define the obligations and expectations of the company and the employee in such a way as to minimize future conflicts. Contract negotiations can be difficult, and high-level executives often hire a lawyer with experience in employment law.

The following is a checklist of key issues to consider when negotiating employment contracts for CEOs, CFOs, and other high-level executives.

1. Compensation

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

  • Does the base salary increase each year of the contract?
  • Is there a signing bonus, especially if the employee would lose options or other benefits for changing jobs?
  • What quarterly or annual bonus is available? Is the bonus guaranteed, dependent on the achievement of milestones, or entirely discretionary with the board of directors?
  • Under what circumstances can the employee's base salary be reduced? Some agreements give the company the right to reduce the base salary up to a certain percentage if the salaries of other employees in a similar situation are reduced in the same way (as might happen when the company is in financial difficulty).

2. Capital grants

Equity grants are often an important part of the employment contract, and key issues here include:

  • Should the grant consist of tax-efficient incentive stock options, non-qualifying stock options, stock appreciation rights, or restricted stock units?
  • If these are stock options, what is the exercise price?
  • What is the vesting period for the allocation of shares? A typical scenario is the acquisition of four years with a one-year “life jacket”, which means that the employee must be employed at least one year before anything becomes acquired.
  • What percentage of stock award is appropriate - a percentage of issued and outstanding shares or a percentage of fully diluted shares?
  • If the employee is dismissed without cause, is part of the share allocation vested accelerated?
  • How long does the employee have to exercise their options after termination of employment? The typical period is 90 days. But this can vary depending on whether the dismissal is motivated and not motivated, or the employee's voluntary departure to accept another job.
  • Are there any acceleration of options during a business acquisition? Does this require an acquisition plus termination of the employee's employment (known as a “double trigger”)?
  • Are the shares obtained during the exercise of an option subject to redemption in the event of termination of employment? If so, at what cost?
  • Are the shares obtained during the exercise of an option subject to a right of first refusal? If so, under what conditions?

3. Field of use

The scope of the job and the responsibilities raise a number of issues:

  • What is the employee's job title?
  • What are the employee's responsibilities?
  • Can the employee be demoted? Can employee 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 unilaterally relocated to another city, or only with the employee's consent?
  • Is the employee allowed to participate in other activities (eg, director position on other boards of directors, participation in community activities)?

4. Benefits

The various benefits available to an employee can raise a number of issues, including:

  • Will the employee participate in all company benefit plans?
  • Which of these plans should be in place for the employee? Are all payments for benefits the responsibility of the company?
    • Health and medical care (including cover for spouse and dependents)
    • Disability
    • 401 (k)
    • Pension
    • Cafeteria plan
    • Life insurance
    • Stock option / allocation of shares
    • Vision
    • Dental
    • Executive financial advice
  • How much vacation per year is the employee entitled? Does unused vacation continue to accrue for the benefit of the employee and is it payable upon termination?
  • How many accumulated vacation can be carried over to subsequent years?
  • Special loans or forgiveness arrangements?
  • Are any of the benefits taxable to the employee? Should the employee be reimbursed for the tax?

5. Duration and termination

The circumstances under which the employee's employment may be terminated and the consequences thereof will raise the following questions:

  • How long is the job or is the job “at will”?
  • What are the reasons for which the company can fire the employee?
  • What, if any, are the conditions for compensation in the event of early termination?
  • Under what circumstances can an employee be terminated “for cause”, for example:
    • Conviction of a crime or any act involving moral turpitude;
    • Commission of any act of theft, fraud, dishonesty or falsification of an employment file;
    • Material breach of the employment contract which has not been corrected after notice;
    • Failure to perform reasonable assigned duties; and
    • Incorrect disclosure of important confidential company information
  • Is the employee entitled to severance pay in the event of termination without cause? How? Is it a lump sum or payable over time?
  • If the employee is terminated without cause, is the company required to continue to pay employee benefits or COBRA benefits for a certain period of time?
  • If the employee is to receive severance pay, will he or she be required to sign a liability waiver for the benefit of the company? The employee will want this to be mutual release.

6. Reimbursement of expenses

Problems with the employee's entitlement to reimbursement of expenses include:

  • Will the employee's business expenses be reimbursed within a specified time frame?
  • Is there a car or car allowance, provided cell phone, or other similar amenities?
  • Do moving expenses have to be reimbursed?
  • Is there a relocation package available for the employee?

7. Protection of employee liability

The employee may wish to negotiate certain liability protection mechanisms, covering the employee performing services within the scope of employment:

  • Does the company have directors and officers (“D&O”) insurance coverage?
  • Do the articles of association provide for compensation protection for officers and employees?
  • Does the company's corporate charter limit the liability of officers and directors to the maximum extent permitted by law?
  • Is there a compensation agreement protecting the employee that covers:
    • Indemnification protection for claims
    • Automatic advancement of legal fees
    • Protection even if the employee is no longer employed by the company? (Note the statutory limitations on compensation.)

8. Confidentiality restrictions

The employer will want confidentiality provisions in the employment contract:

  • Many companies have a separate form of Employer Confidentiality and Invention Assignment Agreement that can be incorporated by reference.
  • The employee should be careful not to use or disclose the confidential information of a former employer - the new employer will often want an undertaking from the employee prohibiting such use or disclosure.
  • If there are confidentiality restrictions for the employee, are the following excluded from the definition of “confidential information”?
    • Information which is or was publicly known, or which becomes publicly known through no fault of the employee.
    • Information which is or has been obtained from a third party who had the right to disclose the information without restriction.
    • Information obtained independently by the employee without reference to confidential information.
    • Information that was already legally in the possession of the employee, or of which the employee was aware prior to the disclosure of the confidential information.
  • How long do the privacy restrictions last?

9. Problems of attribution of inventions

Companies expect that all inventions or business ideas developed by the employee in connection with the activities of the company during the period of employment will belong to the company:

  • What is the scope of the company's rights to the development of new inventions, trade secrets and ideas by employees?
  • Are the provisions relating to the assignment of an invention in accordance with the applicable law?

10. Disability and death

Various problems arise during the death or disability of the employee:

  • What is a disability event?
  • What happens in the event of a disability? Does the employee continue to collect their wages and benefits for a period of time?
  • What happens to death? Can medical and other benefits continue for a certain period of time for spouse and children?

11. Post-employment limitations

The employment contract can address various limitations regarding the employee after termination of employment:

  • Are there any limits to the employee who solicits the employees of the company? For which period?
  • Is there a commitment not to compete after termination of employment?
    • For which geographic regions?
    • For which period?
    • What is the scope of the alliance?
    • Are the restrictions applicable under applicable law? (Generally prohibited in California.)

12. Dispute resolution

Most employment contracts include multiple provisions dealing with disputes between the company and the employee:

  • How are disputes resolved?
  • Should confidential binding arbitration be the exclusive means of resolving disputes? (This can be beneficial for both the business and the employee.)
  • In which city should disputes be brought if they are contentious or arbitrated?
  • What is the applicable law?

13. Golden parachute

A "Golden parachute»Is a payment or other benefit guaranteed to an officer of the company in the event of the dismissal of the officer following a takeover of the company:

  • In the event of a change of control of the company, does the employee have the right to terminate his employment and receive payment for the golden parachute?
  • What are the tax implications of paying for the Golden Parachute? Will the company also increase the parachute payment to cover the tax?
  • Will the company reimburse the employee's expenses for an IRS audit claiming additional tax?

14. Miscellaneous provisions

Good employment contracts have a series of “miscellaneous” clauses, including those that address these issues:

  • Is there a clause on attorneys' fees where the winning party in a dispute would have the right to recover the fees of his hired attorneys? Or is it better for each party to be responsible only for the fees of its own lawyers?
  • Does the employee declare and guarantee that their curriculum vitae and the information provided to the company are correct and complete?
  • Are all conditions of employment reflected in the agreement, thus allowing a clause stating that there are no other conditions of the employment relationship?
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Copyright © Richard D. Harroch. All rights reserved.

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There are lots of ways in which you can improve your , and not all of them are complicated ! Try out the above tips or integrate them with your existing strategies, and let me know how you go in the comments below. Guest Author : Faye Ferris is responsible for the day-to-day management of the Dynamis APAC Pty Ltd offices in Sydney. She develops the DYNAMIS ne change pas of brands and their expansion into the Asia Pacific region as well as BusinessesForSale. com, FranchiseSales. com and PropertySales. com. If you have an interest in partnering up with Faye or advertising on any of these websites in the APAC territories, please do not hesitate to contact her on faye@businessesforsale. com.


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