When to Hire a Lawyer to Review an Employment Contract
Executives are frequently asked by prospective employers to execute an employment contract. Not all of these employment contracts necessitate legal review, but when one’s career has reached a certain level, employment contracts can have financial and other terms warranting a closer look. Even sophisticated executives with ample negotiating experience will unknowingly agree to contract terms that are vague, overbroad, or unreasonable or miss an opportunity to obtain additional benefits. The unfortunate reality is that executives often realize the implications of what they agreed to only when something has already gone wrong.
So, when should a lawyer be retained to review an employment contract? Practically speaking, we recommend that executives with the stature to negotiate with the employer do so with the help of legal counsel. Further, if executives want to better understand the employment terms they are agreeing to, seeking legal counsel is a good first step. Other more specific scenarios that warrant obtaining a legal review include the following:
- The employment contract is for more than one year. The longer the employment term, the more forward-looking the provisions need to be to fairly contemplate and compensate changed circumstances in the years to come.
- A significant portion of the executive’s compensation is pursuant to an incentive plan. Incentive plans typically have terms covering vesting, forfeiture, and repurchase rights that can materially affect any incentive award granted. Incentive plans may also involve unfamiliar and complex tax issues.
- The executive is entitled to a change-in-control payment. Some employers provide that in the event the employer sells the company (i.e., a “change in control”), the executive will be entitled to a special payment. The issues around change-in-control payments are highly technical, and a few words can result in large differences in what is due to the executive.
- The executive is entitled to a potentially large severance payment. Severance payments are an area where even high-level executives rarely have the tax knowledge necessary to ensure that they are complying with often complex IRS regulations. Further, an executive’s right to a severance payment may be subject to the circumstances surrounding the termination (more on that next).
- The nature of the executive’s termination or resignation has a significant impact on the executive’s post-termination rights and benefits. Many employment contracts have termination or resignation provisions covering various circumstances (e.g., termination with or without “cause” or resignation with or without “good reason”), and each circumstance often leads to a very different result in connection with incentive awards, severance payments, and other rights and benefits.
- The executive engages in other business ventures. If the executive is involved in other business ventures that the executive desires to continue, those ventures should be expressly approved in the employment agreement and carved out of any non-compete, non-solicit, and intellectual property provisions.
- The executive is expecting certain credits in connection with the executive’s work. Often arising in the entertainment and media context, the terms around credits should be covered in the employment agreement before the executive starts producing work product and materials for the employer.
Along with the items just discussed, legal counsel can also help ensure that the customary provisions in an employment agreement, such as bonuses, vacation, sick and personal days, maternity and paternity leave, and medical benefits, are reasonable given the executive’s position and the employer’s industry.
Understandably, no one wants to incur legal costs in connection with negotiating their employment agreement, especially when the executive and employer are just entering the honeymoon phase. However, obtaining a legal review before executing an employment agreement can help save time and money down the line or, at the very least, allow the executive to enter the relationship with eyes wide open.
If you have questions about employment contracts or employment negotiations generally, please feel free to contact us.
Lawrence R. Barnett