Attracting and retaining top-flight executives may be the difference between success and failure for businesses, particularly fast-growing and dynamic companies. Companies often actively recruit executives seeking to lure them away from their present jobs -- often away from competing companies -- with sales pitches of more money, stock, or bonuses. Not surprisingly, recruiting, hiring, retaining and even terminating executives raise a host of legal issues -- issues that may be overlooked in the intensity of efforts to attract top flight executives. This article gives a brief overview of some of those legal issues, from the beginning of the executive recruitment process to the end of the employment relationship.
The At-Will Doctrine
The starting point for any discussion of the employment relationship is the "at-will" doctrine. Traditionally, at common law, the employer-employee relationship was understood to be one of employmentat-will.In Maryland, at-will employment is understood as an employment contract of indefinite duration which can be terminated at the pleasure of either party at any time.
While the at-will doctrine is a powerful, viable concept, there are many exceptions. Statutes, such as Title VII and other anti-discrimination laws, prohibit action based upon certain protected characteristics. Employers also can be held responsible for torts committed in the employment context. Moreover, the at-will doctrine can be modified by contract. Often, in hiring executives, companies knowingly will promise a fixed period of employment as well as many other terms and conditions of employment through the use of written employment agreements. It is also important to remember that other communications -- such as oral negotiations, representations, and offer letters -- may constitute contracts.
Tortious Interference with Contract or Business Relations
No company enjoys the departure of talented executives, and sometimes companies will fight the departure of an executive who they think has been improperly lured away. Under Maryland law, intentional or malicious interference with an existing or potential contractual relationship, including an employment relationship, may be grounds for legal action. When a business solicits the services of a prospective executive employed by another company, the soliciting company may be accused of interference with contract or business relations.
The hiring company's exposure to liability will vary depending upon the nature of the executive's relationship with his or her existing employer. Third parties usually will have a greater right to hire away an executive with an at-will employment contract as opposed to an executive in the pendency of a fixed-term employment contract.
To help reduce the risk of liability for this tort, the hiring business should ask the executive candidate whether he or she is working under a contract for a fixed term (and, if so, how it properly may be ended under its terms) and if there are any conditions in his or her present employment relationship (including any non-competition or other agreements) which would restrict the ability to leave and work for the hiring business. In addition, the hiring company should confirm this understanding by stating that the executive candidate is not restricted in leaving his or her present employment and joining the hiring business in either the written employment agreement, offer letter or other document signed by the executiveto be hired.
Avoiding Promises You May Have To Keep -- Negotiations, Interviews and Offer Letters
When recruiting a prospective executive, a company must strike a delicate balance between the desire to attract the executive candidate by referring to enticing salary and benefits, on the one hand, and the need to avoid the unwitting creation of an employment contract with terms of employment which the employer did not wish to include.
During the recruitment phase, both the recruiting company and the candidate usually envision a long, fruitful relationship. In this situation, it is easy to make representations which do not consider or reflect what is intended should the relationship not work out. Do not make promises you are not willing and able to keep.
Offer letters require particular care because they often contain only the terms of employment intended to attract the executive, but rarely any of the reservations, restrictions, and responsibilities that come with employment.
In addition, overly optimistic statements (oral or written) during the recruitment process can lead to liability arising out of a number of legal claims, including fraud and negligent misrepresentation. Such claims can arise when a recruiting employer creates a false impression to the recruited employee through either false or exaggerated assertions, or omitting information relevant to the prospective employment, and the employee relies on those assertions, accepts the job described and suffers some injury as a result.
Employers should take the following steps to reduce the risks from such claims: (1) ensure that the job duties stated in interviews or letters are accurate; (2) avoid predictions about the company's financialhealth; (3) make no promises regarding future career opportunities with the company; (4) maintain tight control over who communicates with the prospective hire, so that no representations will be made by unauthorized corporate employees.
Retaining the At-Will Defense. As discussed above, the at-will employment doctrine is both a viable and powerful defense for employers. In hiring executives, a company should carefully consider whether it wishes to retain an at-will status. If so, the company must be careful not to create a fixed term contract through statements, writings, or promises. These issues arise more readily in the executive recruitment context where long-term expectations are much more likely to be discussed during negotiations. The best means of preserving the at-will status is through an express statement that the employment is at-will.
To avoid creating a fixed term contract, businesses should make clear to the prospective executive, by way of express language in writing,that the company's intent is that the employment agreement being entered is for an indefinite term and may be ended by either party at any time (or upon a certain notice period) for any reason or no reason. As discussed below, it is important for avoiding potential liability that these representations be made known to the candidate early on in the negotiations.
Beyond Contract and the At-Will Defense: -- Deceit and Misrepresentation. Even in at-will situations, businesses must be careful not to (intentionally or otherwise) mislead a candidate regarding the terms and conditions of employment or the business' health and prospects. Often executives are induced to leave secure jobs and homes, to move out of state and begin what they believe will be long and prosperous employment with a new company. If a company has been over-zealous in their boasts and salesmanship the employer could find itself facing a court battle. A recent Maryland case illustrates the dangers.
In Lubore v. RPM Associates, Inc., 109 Md. App. 312, 674 A.2d 547, cert denied, 343 Md. 565, 683 A.2d 177 (1996), according to the case allegations, the employee worked in a lucrative executive position when he entered into a lengthy negotiation with another company in the same industry for a high level executive position. After at least three meetings and additional telephone conversations during which the parties negotiated compensation and job responsibilities, the prospective executive accepted the offer of employment over the phone and resigned from his previous position. Later, the executive learned that he was required to sign a written employment agreement which he said contained several significant terms that were not previously discussed, including the employer's right to decrease his salary and a noncompetitionprovision. The employee refused to sign the written contract, and as a result his employment was terminated.
The employee then brought suit against the company alleging claims of fraud, deceit and negligent misrepresentation based upon his allegation that material terms of the employment were not disclosed to him until after he had resigned from his previous employment.
The Maryland appeals court concluded that the executive could sue the employer, even though his employment was at-will, based upon the purported misrepresentations and partial representations which omitted important terms of employment. The potential damage to the at-will employee was not the loss of his new employment, which the employer had the right to terminate, but the loss of his previous position based on the employer's negligent or fraudulentmisrepresentations during their important negotiations.
It is very difficult to cover all the detailed terms and conditions of employment during the recruitment phase. However, prior to the time the prospective executive changes his or her circumstances (such as resigning their existing position) it is important to make sure the recruit is aware of material terms and conditions and alerted if he or she will be required to sign employment agreements.
Defending Corporate Interests Through The Employment Contract
Under what conditions can the relationship with an executive be terminated? When the relationship ends, is the executive entitled to severance? What are the restrictions, if any, on the executive's rights to work for a competing business? How will disputes be resolved?
These questions are among the issues that arise when an executive departs. Employers should give careful consideration to addressing these questions and others, up front in an executive employment agreement.
Restrictive Covenants -- Covenants Not To Compete. One method by which the company may seek to protect its interests is through the inclusion of a restrictive covenant. These covenants may be made a part of a more comprehensive employment contract or may be used independently in an at-will employment situation.
Restrictive covenants may take a number of different forms. These include:
- Noncompetition clauses which prevent an employee from leaving the employer and starting or joining another business in direct competition with the former employer;
- Nonsolicitation clauses which prevent or at least limit the departed employee's access to former customers;
- Employee piracy clauses which keep employees from taking other of the company's employees with them or soliciting those employees to leave;
- Nondisclosure agreements to protect company trade secrets and other confidential information; and
- Intellectual property clauses which prevent departing employees from taking technology or information developed by the former employer and using it in competition or prevent present employees from using company resources to develop inventions for their own personal benefit.
In Maryland, the general rule is that non-compete agreements will be sustained "if the restraint is confined within limits which are not wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose an undue hardship on the employee or disregard the interest of the public." Silver v. Goldberger, 231 Md. 1, 6, 188 A.2d 155, 158 (1963). As discussed above, the inclusion of such covenants should be disclosed prior to the executive leaving his or her current position so there can be no claim of bad faith or fraudulent concealment on the part of the hiring company.
On the other hand, when recruiting or hiring an executive, a company ought to inquire as to whether or not an executive whom they are recruiting is presently working under a contract which contains a covenant not to compete. Injunctions have been obtained against employees whose activities violate such covenants _ thus, an employer may find that their newly hired executive is prevented from working for them. In addition, the hiring company may be indirectly liable in tort for inducing the executive to breach their contract.
Confidentiality Agreements. Executives are privy to the trade secrets and business strategies of their employers. Employees, including executives, have an implied duty to protect their employer's trade secrets even in the absence of any express contract to that effect. Nevertheless, a confidentiality provision should be included in all executive agreements.
Such a provision should define what is considered to be confidential information. It also should prohibit disclosure of confidential information duringand after the executive's employment, and require the executive to return all documents and materials containing confidential information to the employer upon departure from the company. The terms also should provide for enforcement, including the right of the company to obtain injunctive relief.
Alternative Dispute Resolution/Arbitration Clauses. Seeking to avoid the multiple problems involved in resolving employment disputes through jury trials, employers increasingly are looking more predictable, efficient, and less costly alternatives. Chief among these alternatives is arbitration.
There are advantages and disadvantages to including arbitration clauses in executive contracts, and the decision of whether to include such a provision is one which the employer must make only after a review of all relevant circumstances and consultation with experienced counsel. Arbitration, to be enforceable, requires a written agreement to arbitrate.
Terminating The Employment Relationship
As noted in the introduction, an at-will employment contract is terminable at any time by either party. In contrast, a fixed term contract can be terminated prior to the date of conclusion only under the circumstances set forth in the agreement, or when the employee engages in conduct which violates the express or implied terms of the agreement.
Terminating Fixed-Term Employment Contracts. An executive employment agreement of a fixed term may provide specific causes for terminating the agreement and discharging the executive. It is impossible, however, to list all of the possible reasons for terminating the relationship, and employers should ensurethat the agreement provides sufficient leeway to end the relationship when it is in the company's interests to do so. Careful drafting and review by qualified counsel are essential. It is critical, as well, that employers follow precisely any procedural requirements (such as notice) in terminating an executive contract.
Good cause for discharge cannot be reduced to a definitive list; however, good cause usually includes acts of misconduct, such as disloyalty or insubordination, or any failure by the employee to competently perform the essential duties of his job. An agreement may list examples of good cause but should be careful to point out that the list is not exhaustive.
Termination Procedures. Once the determination is made to terminate an executive (or any employee) or when an executive tenders his or her resignation, the employer should consider conducting a formal "exit interview." A formal exit interview is an opportunity to obtain candid input from the departing executive regarding his or her impressions of various aspects of the company. It is also an excellent opportunity to remind the departing executive of his or her duty not to disclose confidential information and trade secrets, and not to take any employer or client property. The executive also should be reminded of (and given a copy of) any confidentiality agreements and any restrictive covenants or clauses which he or she has signed.
Releases
When an executive leaves a company, the company may wish to get a release of claims. In determining whether a release of claims is even necessary or advisable, an employer must weigh a number of factors. Among others, these factors include whether the executive is leaving under disputed circumstances, whether the executive has claimed some improper treatment or breach of an agreement, and whether the termination is supported by documentation and other evidence.
Once a decision to seek a release has been made, there are many important factors and legal issues to consider in preparing the release, and releases should be prepared only in consultation with counsel. The first critical factor is that the release must be given in return for something the executive was not already entitled to receive. Put simply, the company is purchasing a release and must give value to get it. If the executive is already entitled to severance under an employment agreement or policy, additional value will need to be given in return for the release. Possibilities include: severance pay or additional severance pay, a letter of reference (if the employer does not normally give such references), and outplacement services.
Since a release must be voluntary, the employer should do everything possible to ensure that the executive cannot later contend that he was forced or coerced into signing a release. Discussions with the executive about the release and settlement should be conducted under normal, business-like circumstances which could not later be perceived as inherently coercive, and the departing executive should be given a reasonable period of time to consider the agreement _ for executives, this period will usually be at least 21 days.
If the departing executive is 40 years of age or older, the company should specifically include in the release a release of any and all claims under the federal Age Discrimination in Employment Act (ADEA). There are special rules which apply to such releases and the rules must be followed to the letter, including providing advice to the employee to seek legal counsel, allowing a period of at least 21 days to consider whether to sign the agreement, and allowing a period of seven days in which the employee can revoke his or her signature.
If the termination is not an individual termination, but a group termination, additional special rules apply. It is important to consult with qualified counsel to assess the company's options and ensure compliance with applicable law. Companies should never try to obtain releases in cases of termination of more than one employee without consulting qualified counsel.
Conclusion
Executive hiring and termination is fraught with legal pitfalls. Be sure to tread carefully in this potential quagmire of legal issues, and remember there is no substitute for qualified legal counsel based upon the individual circumstances at hand.