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Birmingham Bar Associations Bulletin Summer 2015

Employment Law Jackson M. Payne, Leitman, Siegal & Payne, P.C. plans. To protect against loss of benefi ts prior to vesting, the executive should negotiate terms that accelerate vesting in the event that the executive’s employment is terminated by the employer without cause, by the executive’s resignation for good reason, or upon a change of control of the employer. Important Tax Rules Governing Equity Compensation and Other Forms of Deferred Compensation Section 409A of the Internal Revenue Code of 1986 (§409A) imposes a set of very strict rules on equity compensation and other nonqualifi ed deferred compensation arrangements. Section 409A is extremely far-reaching, covering many arrangements that have not traditionally been considered to be deferred compensation plans and can aff ect even routine provisions in employment agreements such as those dealing with contract renewal, bonuses, reimbursement of expenses, and severance pay, in addition to those provisions that deal with more traditional forms of deferred compensation. Failure to spot and deal with issues raised by §409A could result in accelerated income taxes, interest, and penalties being imposed on the executive. Restrictive Covenants Understandably, the employer seeks to protect its trade secrets, confi dential information and goodwill and therefore the employer will want to secure the executive’s restrictive covenants in the form of nondisclosure, noncompetition and nonsolicitation clauses. Counsel for the executive should try to limit the scope of a noncompetition covenant as follows: fi rst, the post-termination period should only apply if the executive’s employment is terminated by either the employer for cause or the executive without good reason; second, the competitive activity should be narrowly defi ned and appropriate “carve outs” or permitted exceptions should be spelled out; third, the prohibited geographic area should be limited solely to those areas where the employer is engaged in business on the date of the executive’s termination; and fi nally, severance benefi ts for the executive should be sought during the posttermination period. Nonsolicitation covenants seek to restrict the executive’s recruitment of other of the employer’s employees and customers. Again, counsel for the executive should seek to limit the scope and duration of these restrictive covenants. For example, some employers may be willing to limit the restrictions to apply only to active recruitment, so that coworkers initiating contacts with the executive seeking employment are not covered. And, with respect to nonsolicitation of the employer’s customers, the scope of the covenant should be limited so as to restrict only direct solicitation by the executive himself. In addition, the category of customers that are off limits should be defi ned as narrowly as possible, for example, by limiting the clause so as to apply to those customers with whom the executive had a business relationship in the last year of employment. Th e confi dentiality and nondisclosure clauses in employer-provided employment agreements should be limited to take into account the information which is known outside the employer’s business, the extent to which the information is known within the employer, the measures taken by the employer to secure the secrecy of the information, and the value of the information to the employer and its competitors. Grounds for Termination Perhaps the most important provision of the employment agreement from the executive’s point of view is that which governs the grounds for termination. Most agreements routinely spell out the terms of payment in the event of the executive’s death, disability, and retirement. More critical are terms limiting the employer’s power to terminate the executive involuntarily “for good cause” and expanding the executive’s power to resign his employment “for good reason.” Typically, employment agreements allow employers to discharge the executive for “good cause,” defi ning such term simply as a “breach” or “failure to perform duties” or even worse as “in the employer’s discretion” or “lack of performance acceptable to the employer.” Th e goal of the executive’s attorney is to maximize the protections provided by the agreement against arbitrary or unfair terminations. With this goal in mind, the executive should seek to defi ne “good cause” as narrowly as possible to include a material breach of the employment agreement by the executive, willful failure to fulfi ll his duties, or gross negligence in the performance thereof and serious misconduct not related to the job. And, while the executive should attempt to craft a defi nition of “good cause” that is as narrow as possible, the executive should attempt to defi ne “good reason” for his own ability to terminate the employment relationship as broadly as possible. Severance Benefits In preparing the employment agreement, the executive’s attorney should keep Continued on page 38 16 Birmingham Bar Association


Birmingham Bar Associations Bulletin Summer 2015
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