Executive and many key senior employee positions are accompanied by a number of unique legal considerations in the negotiation and preparation of employment contracts.
In contrast to non-executive employees, an executive employment contract will often differ significantly with respect to provisions for:
- Termination and Severance;
- Fiduciary duties imposed on the employee at common law; and
- Restrictive covenants: non-competition and non-solicitation agreements.
Compensation for executives typically involves a combination of a number of different forms of remuneration, including a base salary, bonuses (such as short-term and long-term incentive plans and performance bonuses), stock options and other benefits for the executive, among others. Executive compensation is a specialized and multidisciplinary area of law and can include legal considerations relating to employment law, securities law, pensions and benefits and corporate governance law.
Termination and severance considerations
Termination and severance provisions in executive employment contracts also differ from non-executive employees. Typically, an executive employment contract will include provisions for termination and severance that are more generous for the executive than the minimum standards established in employment standards legislation and the provisions in a non-executive employment contract.
Other legal considerations that can be particularly important for executives include such issues as:
- ensuring the definition of “just cause” for termination is not overly broad;
- ensuring the “reasonable notice” period for termination is sufficient;
- negotiating a no “mitigation” provision upon termination of employment by the employer;
- ensuring that severance provisions address all areas of compensation including base salary, bonuses and other incentives, allowance for lost benefits and stock options (often the options are addressed in a separate agreement);
- considering lump sum vs. salary continuance provisions upon termination of employment by the employer; and
- considering the termination rights of employees upon a change of control of the employer.
Common law duties imposed on executives and key employees
Unlike non-executive employees, executives and key employees can owe certain common law duties to the company employing them based on their unique positions of power and trust within the employer’s organization.
An employee is considered a “key” employee when they are in a fiduciary relationship with their employer. Some of the non-exhaustive factors considered by the courts in making this determination include: discretion, influence, vulnerability and trust.
The essential duty of a fiduciary at common law is to act in the principal’s best interest and to not put themselves in a position where their own interests would conflict with those of their principal. These duties exist not only while the fiduciary is employed, but can also continue even after the employment relationship is over.
Once the employment relationship ends, a key/fiduciary employee differs from a non-fiduciary employee in three main ways. The fiduciary employee:
- Cannot take advantage of business opportunities they learned of through their employment;
- This may include opportunities rejected by the employer; and
- This obligation may extend indefinitely;
- Cannot directly solicit the former employer’s other employees away for a reasonable period of time; and
- Cannot directly solicit the former employer’s customers away for a reasonable period of time.
Executives and key employees, by virtue of their positions of power, trust and influence within an organization, may also have restrictive covenant provisions contained in their employment agreements, such for non-competition and non-solicitation. Such provisions should be carefully reviewed by legal counsel to help ensure they are reasonable and enforceable.
Non-competition covenants prevent an employee from competing with their former employer upon termination of employment.
- These covenants are binding only where temporal and geographic limits are reasonable and the terms are unambiguous.
- These are generally difficult to enforce, but may be valid where confidentiality of information, trade secrets or goodwill developed by an employer are at risk.
Non-solicitation covenants can prevent a former employee from soliciting employees, contractors, customers and/or suppliers of the employer for a period of time after the employment relationship ends.
- These covenants are enforced more regularly by the courts than non-competition agreements.
- They are binding only where the terms are not overly broad or ambiguous.
Carscallen LLP’s employment expertise
Whether you are an executive who has been presented with a written employment agreement, or a business making a job offer, Carscallen LLP’s experienced team of Employment, Labour and Human Rights lawyers can assist you. Our lawyers specialize in practical, individualized advice to help you understand your rights, duties and responsibilities as an employer or an employee.
Our team of lawyers provide tailored, proactive advice to help successfully navigate every stage of the employment relationship. We have the legal expertise to help minimize problems and disputes before they happen, as well as the ability to resolve conflict quickly and constructively when it arises.
Contact any member of our Employment, Labour and Human Rights team with any questions you may have about executive employment agreements, or any other personal or business employment-related issues.
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*This update is intended for general information only on the subject matter and is not to be taken as legal advice.