8/23/2017 Executive Employment Agreements John L. Knorek and Robert S. Katz Basics of Negotiating or Proposing an Employment Agreement Compensation/Bonuses/Incentive Benefits Deferred Compensation Scope of Duties Terms and Termination Change of Control Non-Compete/Restrictive Covenants Arbitration Agreement Notice Pros and Cons Pros: Executive /Shareholder Comfort/Protection, Incentive, Market Practice, Restrictive Covenants, Avoids renegotiations, Clarity Cons: Locked in, unable to change, create others’ expectations, creates non-uniform pay and separation packages, may move away from at- will, more legal compliance issues with 409A, 280G and 162(m) 1
8/23/2017 Warning! Beware of verbal promises not kept. Be specific and clear on expectations Ravelo v. County of Hawaii (1983): giving up other employment in reliance on a promise of certain hours or pay can be sued upon as if it were a written agreement Offer Letter Background checks and references Is Employment at will Signing bonus? TERM At-will? Duration? Automatic Renewal Fixed Term? Evergreen? 2
8/23/2017 Compensation: Base Salary • Base salary guaranteed without adjustment? • Are there objective goals to meet to obtain base comp? • Are there incentive bonuses that are keyed to measureables? Comp and bonuses Tax deductibility concerns under Code 162(m) for base salary in excess of $1 million paid to certain named executives of a public company Short term deferral or compliant with 409A (cash method employer) ? IRS Notice 2010-80 provides release cannot affect payment and timing of deferred comp under 409A. (no later than 2.5 months after year of vesting and not more than 2x annual comp) Code 457A applied to tax indifferent payors – LLCs and applies to both cash and accrual taxpayors. Is Comp all cash? Equity? Annual grats? Based on performance period/goals? Options (ISO, NSO, SARS, restricted stock, RSUs, Deferred stock… Valuation issues if LLC, other When payable? Must be employed? Benefits • Moving Allowance and Reimbursement Plan? • Conditions on reimbursement or repayment? • Typically separate written agreement • Leave: • Vacation, Sick, PTO, how accrued and how paid out, use it or lose it or accumulates • Perks: • Parking, club membership, expense allowance, phone, car, home internet… • Health Insurance • Mandated benefit in Hawaii for most employees not subject to collective bargaining • Spousal/family coverage is negotiable • Retiree health benefits 3
8/23/2017 Scope of Duties • Detail scope of duties: • Title? • Who assigns duties? Board, CEO, Supervisor… • Duties “commensurate with the position”? • Time Commitments • Outside businesses/investments/activities/conflict Termination • “Without cause” termination provisions • Typically requires written notice 30 to 90 days prior to termination • Termination for cause: • Specify what “cause” is • Provide written notice of cause • Opportunity to “fix” alleged deficiencies • Inability to work? – Death? Disability Law? • Severance Pay? Cause Failure to perform duties [“Gross”]Negligence or misconduct Dishonesty, fraud Violation of Company policy Breach of Contract Loss of Qualifications/Licensure “in the sole determination of the Employer”? Cure rights? 5-30 days Due Process: decision maker, appeal, … 4
8/23/2017 Termination, cont. An adverse employment action is not ok when based on*: Refusing to commit an unlawful act Performing an important public obligation (e.g., jury duty, whistle blowing, refusing to violate professional code of ethics) Exercising a statutory right or privilege Separating from your employer Separation agreement * Parnar v. Americana Hotels, Inc., Severance pay/Release Agreement 652 P .2d 625, 631 (Haw. 1982) Clawbacks Non-Compete/Restrictive Covenants • Why do Courts often hesitate to enforce restrictive covenants? • Because it restrains trade • Hawaii law states, “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce in the State, or in any section of this State is illegal.” Haw. Rev . Stat. §480-4(a) Non-Compete/Restrictive Covenants, cont. What kind of non-compete agreement is allowed • between an employer and its employee or agent? • “A covenant or agreement by an employee or agent not to use the trade secrets of the employer or principal in competition with the employee’s or agent’s employer or principal, during the term of the agency or thereafter, or after the termination of employment, within such time as may be reasonably necessary for the protection of the employer or principal, without imposing undue hardship on the employee or agent.” HRS §480-4(c)(4) 5
8/23/2017 Non-Compete/Restrictive Covenants, cont. • When enforcing restricted covenants, the Courts strive to balance: • Employer’s need to protect its interests and rebuild customer relationships • Whether undue hardship is imposed on the former employee • Whether the benefit to the employer outweighs injury to the public *Example of unreasonable restrictive covenant ARITRATION AGREEMENTS Pros: Typically less expensive •No jury •Proceedings generally more efficient and use informal procedures •Limited discovery •May choose arbitrator •Protects confidentiality of parties and award amount •Class action waivers Downsides of Arbitration •Summary judgment can be rare •No appeal, except in limited circumstances •Cost of compelling arbitration in court may be high •Cost of arbitrator •Complex issues may be difficult to resolve 6
8/23/2017 Thank you 7
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