Employment contracts outline an employee and an employer's terms and conditions of employment, usually, at the very least, by including such clauses as remuneration and termination provisions. However, it is a best practice for both parties, especially at the executive level, to include more than just remuneration and termination in the employment contract.
Executive employment contracts are usually different from non-executive employment contracts in that they generally include terms and conditions that the parties do not typically contemplate in a non-executive employment contract. In the case of executive employment contracts, both employer and employee are desirous of certain protections, and quite unlike a non-executive employment contract, both parties have much bargaining power.
Common Executive Employment Contract Terms and Conditions
Accordingly, over time, executive employment contracts have come to include the following standard terms and conditions not always found in a non-executive employment contract:
- Change of Control clause;
- Good Reason clause;
- Disability clause;
- Well-defined bonus clause (which also contemplates termination payment);
- Equity incentive clause (which also contemplates termination vesting);
- Well-defined expenses clause, often including vehicle, residence, social club, professional fees and business class travel contemplations;
- Benefits clause, often including expanded benefits such as executive health care (i.e. Medcan), Directors and Officers (D&O) insurance and life insurance;
- Fiduciary obligation clause;
- Loan clause;
- Well-defined resignation notice clause;
- Without cause termination clause that far exceeds the rights of a non-executive (minimum of 9-24 months' payment in place of working notice even after a short period);
- Termination for misconduct clause;
- Death clause;
- More onerous non-competition clause;
- More onerous non-solicitation clause;
- More onerous confidentiality clause;
- Intellectual property clause;
- Liability and indemnification clause;
- Arbitration clause; and
- Various attached schedules, defining key issues.
Most disputes concerning executive employment contracts concern the payment of salary or bonuses or the vesting of equity after the employment relationship ends, whether by termination or resignation for "good reason". In that regard, the executive employment contract must do a good job defining the payment of salary and bonus and the vesting of equity after the executive employment contract is terminated for whatever reason. In many cases, ultra-expensive lawsuits turn on such clauses' wording or even grammar.
Good Reason Clause
It follows that "Good reason" is thus a critical clause in the executive employment contract not usually found in a non-executive employment contract. A "good reason" clause defines if the executive has been constructively dismissed per se and can therefore obtain their very generous without cause termination clause payment. Most "good reason" clauses contemplate a constructive dismissal when:
- Remuneration is reduced;
- The employer materially breaches the employment contract;
- The employer changes the executive's reporting structure;
- A majority of the board of directors changes; and
- A majority of the shares of the employer change hands.
It follows that executive employment contracts are drafted, unusually, in favour of the employee, rather than the employer, as is the case in 99% of all non-executive employment contracts. This is reasonable, however. Competent executives are in high demand, and employers must attract them by offering them friendly employment contracts with generous compensation. That said, an employer can fairly and reasonably protect itself even in an employee-friendly executive employment contract by defining the executive's duties, obligations, restrictive covenants and crystal-clear termination expectations well.
Finally, we have seen that arbitration provisions are more likely to appear in executive employment contracts than non-executive employment contracts. We believe this is happening because both parties are desirous of keeping litigation a secret and because arbitration is much cheaper than executive wrongful dismissal litigation through the courts, where some lawsuits cost, as we have seen, a million dollars or more (combined by both parties' cost submissions). One key concern here, however, is to make sure to never to contract out the right to local minimum employment standards, including the right to make an employment standards complaint via traditional methods. Otherwise, an arbitration clause could be found to be unenforceable.