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When is an executive compensation agreement appropriate?
What are some pitfalls to watch out for in executive compensation agreements?
What information needs to be included in an executive compensation agreement?
Understanding Executive Contract Laws in California
In Southern California, the contracts provided to individuals for executive roles in your company must be drafted in such a manner that they avoid potential conflicts down the line. With so much at stake and so much money tied up in a key position, you as an employer or HR manager must be sure that your company is protected from lawsuits that may emerge as a result of the hire. The following are some key considerations for drafting executive contracts and what you should know prior to entering the process. Of course, we always recommend that you contact us for advice that’s specific to your situation.
Executive Misclassification: What is That?
Just like independent contractors and employees, executives are considered their own category of employment under California law. Executives, unlike other employees of a company, are not entitled to overtime pay. For this reason, some California employers misclassify low-level supervisors or other employees as executives to skirt California’s wage and hour rules. This, of course, should be avoided. Any individual who is classified as an executive will have to meet specific standards under California law. In other words, a company cannot simply decide that an employee is an executive. The employee must substantially match the definition of executive under the law.
Drafting Executive Contracts: What are the Key Elements?
One of the things that makes drafting these contracts tricky is that templates simply do not work very well. Generally speaking, the needs of the employer are unique to their industry and the duties of their executives will be unique to the company. For that reason, it helps to have a Los Angeles executive contract lawyer draft these agreements for you. Having a detailed agreement in place that benefits the interests of the company and the executive is the key to preventing disputes down the road. Key elements involved in drafting a solid executive contract include:
- What is the applicable law? A contract should include the applicable California law so that all parties are aware of the law and act in accordance with the law.
- Identifying the parties – Defining your own company is important because companies may want to transfer the contract to a subsidiary or a parent corporation. Having a well-worded agreement in place avoids conflicts that could arise from this action.
- Length of contract – In some cases, state law may default on an automatic contract extension unless there are provisions in writing.
- Executive duties – Most companies want to afford themselves some flexibility because if an executive contract only specifies the duties required of the position, it may be considered a breach of contract to assign other duties as the need arises. Having the proper language in place in the contract is the key to avoiding conflict.
- Conflicts of interest – You will want some language that will avoid potential conflicts of interest for key executives.
- Compensation – You obviously want to detail compensation in the contract.
- Benefits – You need to have summary plan descriptions in place for stock options, severance benefits, disability insurance, health insurance, sick leave, and more. Any major benefit afforded to an executive employee should have a summary in place to avoid conflict down the road.
- Contract termination – You will want to be careful here, but if the individual fails to make best efforts or otherwise fails to perform their work as expected, your company will need the option to dissolve the contract for cause. Here, the language must be spelled out very carefully to avoid lawsuits.
Key Parts of an Executive Employment Contract
All employment contracts are divided into three essential elements — offer, acceptance, and consideration. While templates are best avoided for the purpose of drafting enforceable contracts, the basic structure of an executive agreement is relatively similar in all cases. It is the particulars that will change from case to case. The key elements of an executive contract include:
- The Preamble – The preamble is meant to define the parties engaging in the contract. Essentially, the preamble defines who is engaging in the agreement. The end of the preamble will generically define what the contract is all about. As an example: Acme Corp seeks to hire John Doe for Vice President of Operations.
- The Term – The length of the contract is defined here. Additionally, the terms of renewal should be laid out so that the contract does not automatically renew if that is not what your company wants.
- Rights reserved – You do not want to sign away your rights to terminate the contract for cause, reassign the executive as needed, or otherwise ensure that your high standards are met. It will be important for you to lay out the duties of the position. Noncompete and nondisclosure agreements would also be listed here.
- Conflicts of interest and best efforts – You are entitled to prevent an executive from activities that would create a conflict of interest. You may be entitled to terminate the contract. You are entitled to demand that your employee deliver his or her best efforts. Many contracts outline the fiduciary duty that an executive has to their company. The company may demand “exclusive services” from the executive.
- Compensation and benefits – Compensation, salary, benefits, disability policies, health insurance, spending accounts, bonuses, and more should all be detailed in this section.
- Termination of the employment contract – You will need to spell out what will happen if the employee dies or becomes disabled during the contract term. Likewise, the terms under which you are allowed to back out of the contract should be specified in writing. A typical at-will agreement affords either party the right to back out of the contract on 30 days notice.
- Post-employment duties – Any requirements you would like to add after the contract has been terminated should be placed here.
- Dispute resolution – Whereas once you were able to require employees to sign agreements to arbitrate disputes in court, California has placed severe restrictions on forum selection clauses in employment contracts. So, even if you include forum selection in the contract, it may not be enforceable. An employment lawyer can advise here.
Call a Los Angeles Executive Contract Lawyer Today
The Wright Law Firm Employment Lawyers help employers draft executive contract agreements that meet their individual needs. Call today to learn more.