July 10, 2017
Authored by: Bill Wortel
Tip No. 1: Define “Cause” Broadly
Executives and other high-level employees often negotiate a contractual provision requiring the payment of severance if terminated without “Cause” prior to the expiration of a term agreement. While the definition of Cause often depends on the parties’ respective bargaining power (highly sought talent typically has considerable leverage), the employer should attempt to negotiate as broad a definition of Cause as possible. Too often, employers limit the definition of Cause to intentional misconduct that harms the company, criminal behavior, or the executive’s death. Such a narrow definition ties the employer’s hands when an executive is not making a good-faith effort to perform well or is performing very poorly despite reasonable efforts. Under these circumstances, the employer’s options are limited to continuing to employ the underperforming executive or terminating the executive and paying out severance.
It is also fairly common for Cause definitions to include a cure period in the event of a breach by the executive – e.g., “a material breach by the Employee of any of the terms of this Agreement and failure to correct such breach within twenty (20) days after notice from the Company”). By providing the executive the right to breach the Agreement and then cure the breach (if the Company learns of the breach, which it may not), the Company is limiting its options and ability to hold the executive accountable for his/her performance. Moreover, depending on the nature of the breach and its impact on the Company’s operations, an