August 20th, 2010

Negotiating an Employment Relationship in Today’s Economy

SEVERANCE- Some Key Points

  • Severance takes many forms, from lump sum payment of set amount to salary continuation for a specific period until new employment is obtained.
  • There are always issues of reduction of payments based on other income earned during the severance period.
  • Many employers have been hurt by excessive severance obligations in the past. However, severance protection is still appropriate and should be set out in advance.
    • If some level of severance based upon seniority is the policy, the company should provide assurance of this benefit as it helps to retain key employees.
    • Providing key executives with written assurance of their "safety net" can also benefit the company by keeping executives focused on business and avoiding panic or flight when client losses or employee terminations rock morale.
    • Executives should seek minimum level of severance as protection against future changes in policy.

GET IT IN WRITING

  • Whatever is "promised" as severance should be in writing.  An employment agreement, an appropriate letter agreement, or an offer letter will suffice.
  • Many employers today are advising terminated employees that they would like to offer more severance or post termination benefits, but human resources, company policy, or legal constraints will not permit it. They are also saying that the employer can only offer extended severance to employees who have a written commitment from the company and that the employee had never asked for an agreement.
  • Even if the company has a "no employment agreement policy," an offer letter may provide an employee with legal protection, severance, or similar benefits, without violating this policy.

EQUITY- Things to Consider

  • Phantom equity may be an attractive alternative for a small to mid-size company.
  • Options.
  • Restricted stock.
  • Taxed as ordinary income or as a capital gain?

RESTRICTIVE COVENANTS - Issues to Ponder

  • The principal benefit for the company is reasonable protection against diversion of clients' business and raiding key employees.
  • Restrictions on soliciting clients.
  • Restrictions on providing services to clients.
  • Restrictions on soliciting employees.
  • Restrictions on employing or going into business with employees.
  • Reasonable periods of time; Enforceability issues.

DISTRESSED EMPLOYERS - Special Cases

  • How can an executive minimize the risk?
  • Protections if the company fails:
    • Signing bonus.
    • Advance against future bonus.
    • Guarantees.

Author: Gavin McElroy