Termination for Cause Provisions in Employment Contracts

Employment agreements for executives and other key employees typically address issues such as compensation and benefits, equity grants, length or term of employment and termination. The termination provisions, especially those dealing with termination for cause and the resulting forfeiture of severance benefits, may be the single greatest source of disputes between employers and executives whose employment is defined under the terms of a negotiated contract.

Even boilerplate termination for cause provisions, which allow the employer to terminate an executive’s employment early if he or she engages in certain acts or omissions against the employer’s interest, can erupt into hot legal controversy when dollars and reputation are on the line. It only gets worse when economic conditions or business conditions force tough decisions about downsizing.

Our Texas Employment Lawyers Help Executives and Employees with Employment Contracts, Negotiations, and Termination Disputes

If you are an executive anticipating the opportunity to work under a negotiated employment agreement, the Texas employment lawyers at Kilgore & Kilgore can help bargain for the best possible arrangement. Remember that problems, including termination issues, are best prevented. If, however, that opportunity has come and gone, our attorneys can help you and your employer resolve disputes. Click this link to learn more about our Executive Compensation law practice. Use this link to get the conversation started about your own compensation Contact Kilgore & Kilgore.

Termination for Cause Provisions in Employment Contracts

There are variations, of course, but a typical termination for cause clause in an employment contract might read something like this:

“Termination by the Company for Cause. The Company may, at any time and without notice, terminate the Executive “for cause.” Termination by the Company of the Executive “for cause” shall include but not be limited to termination based on any of the following grounds: (a) failure to perform the duties of the Employee’s position in a satisfactory manner; (b) fraud, misappropriation, embezzlement or acts of similar dishonesty; (c) conviction of a felony involving moral turpitude; (d) illegal use of drugs or excessive use of alcohol in the workplace; (e) intentional and willful misconduct that may subject the Company to criminal or civil liability; (f) breach of the Employee’s duty of loyalty, including the diversion or usurpation of corporate opportunities properly belonging to the Company; (g) willful disregard of Company policies and procedures; (h) breach of any of the material terms of this Agreement; and (i) insubordination or deliberate refusal to follow the instructions of the President of the Company.”

Undefined Terms in Employment Contracts That Can Help an Executive or Employee

Some of the triggering causes mentioned, like “conviction of a felony” are clearly identifiable. Others are far more subject to interpretation. Does “refusal to follow instructions” include refusal to commit an illegal act or refusal to commit an act that is unethical, for instance? What about retaliation against a whistleblower? What about termination that follows a pattern of conduct that is arguably discriminatory or harassing? What about the fallout from an office romance gone toxic?

The net effect is the same, however. Usually, no severance is payable to the executive when he or she is terminated for cause. The severance provisions in an employment contract are often key elements of the negotiation, particularly if the executive left a secure position to join a new organization. The damage to an executive’s professional reputation by a termination for cause can also have considerable impact as the executive finds himself or herself back on the job market.

Getting an Employment Contract into a Defensible Posture

It is best to prevent a dispute before one arises. The best opportunity is at the initial negotiation of the employment contract. The executive or employee should seek to have the termination for cause provisions drafted as narrowly as possible, to reduce the risk of undefined terms that could be interpreted expansively against the interests of the employee.

Another possible approach is to seek to include an “indemnity clause” in the employment contract. Indemnification is a legal concept in which one party is contractually obligated to compensate and defend the other party for any damage or liability incurred due to certain acts. Indemnity clauses are a way to shift financial liability. For example, an employer who agrees to indemnify an individual who is wrongly accused of breaching the terms of an employment contract might be required to pay the costs, expenses, and fees (including legal fees) incurred by the executive or employee. At best, an executive or employee should negotiate for advancement of attorney fees rather than reimbursement of expenses. Advancement is indemnification up-front for expenses incurred, with a promise to repay the amounts advanced if it is judicially determined that the executive or employee was not entitled to be indemnified.

A third defensive approach is to resist a growing trend among employers to contractually require that all disputes be submitted to arbitration. Although arbitration on its face seems to be a relatively neutral method of reducing the costs and time that employment disputes can cause, it may work against the complaining party. Arbitrators are often chosen by defendant employers. Their neutrality may be implicitly compromised by an understandable desire to be hired again in the future by that employer. Arbitration proceedings create no precedent. There is often little if any record of the proceedings and the decision of an arbitrator is difficult to appeal.

Of course, none of these approaches is foolproof and the suggestions may come too late for those already engaged in a dispute about for cause termination. Sometimes aggressive legal representation is the best, and perhaps only, remaining alternative.

Our Employment Lawyers Can Help You Craft and Negotiate a Mutually Acceptable Employment Contract or Deal with the Consequences of a For Cause Termination

Executives and employees whose compensation is determined on a negotiated contract basis may face unique challenges. For an evaluation of your situation, help in crafting the best possible employment contract, effective legal representation, and negotiation coaching, should you wish to handle you own negotiation, click this link to reach out to our employment lawyers at contact Kilgore & Kilgore.

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