By Larry Schaefer, Owner and President
Schaefer Halleen often represents executive and officer-level employees. Unique and challenging employment issues can frequently arise for these high-level employees, whether in the contract formation, compensation or termination contexts. This post provides an overview of these issues.
The Duty of Loyalty
While all employees owe a “duty of loyalty” to their employer, this duty is more pronounced the higher up an employee is in the corporate hierarchy. The duty of loyalty generally means not ignoring or acting against the employer’s unless no other reasonable avenue is available. The scope of this duty of loyalty could be interpreted in some situations to potentially conflict with the acknowledged (and protected) right all employees have to raise legal claims and engage in litigation without suffering any adverse retaliatory consequence. This duty encompasses protecting employment data and communications, confidential documents, proprietary information or trade secrets, all of which executives have more ready access to than lower-level management or rank and file employees.
Fiduciary Duty
Executives also often owe a “fiduciary duty” to the corporation, and this duty supplements and often extends the obligations inherent in the duty of loyalty. This includes the obligation to exercise due care, good faith and loyalty whenever they communicate with shareholders about the corporations affairs, and in discussing these same matters with fellow officers or third parties. This includes a corresponding obligation to keep shareholders fully apprised of significant financial issues or concerns, and to be candid in that process.
Neither of these duties preclude an executive or officer from raising and even prosecuting legal claims arising from a violation of rights, whether this violation sounds in common law (often involving breach of contract or defamation) or statutory law (including discrimination and retaliation claims). These duties do require, however, that the process of raising these claims take place with due regard to these (sometimes) conflicting obligations.
Negotiating Executive Employment Contracts
In negotiating executive employment contracts, there are a number of basic terms which need to be drafted with care, and in a manner which will fully protect the executive’s interest throughout the employment term and in the event the employment ends. This includes not only clearly defining what constitutes termination events (and often fashioning appropriate “for cause” language in the event of an involuntary separation), but determining rights and benefits when a disability or “change of control” occurs, handling incentive-based and stock option compensation and other equity-based terms, and often pre-negotiating the terms of an appropriate severance when a non-cause based employment separation occurs (sometimes derisively referred to as a “golden parachute). Furthermore, because some of the benefits at issue may be provided through an employee benefit plan subject to ERISA, the scope of discretion can be is particularly constrained, and may be non-existent if not negotiated appropriately at the outset.
What to Do If you are Involuntarily Terminated
Prosecuting legal claims on behalf of executives or officers during employment or in the event of an involuntary termination can be especially challenging and need to be handled with appropriate discretion. For instance, executives often work closely with in-house or outside counsel, and the privilege attached to these communications is the corporation’s to waive as the client and not any individual executive. Therefore, an executive-level employee is not entitled to freely disclose the content of these past communications. There are, however, well-recognized exceptions to this privilege attaching in the first place, such as the frequently litigated crime fraud exception, which can arise in instances where executives are also “whistleblowers” and litigation concerns these kinds of allegations. Even in the absence of these circumstances, an executive-level litigant is usually permitted to disclose to his or her counsel communications which might otherwise be considered attorney-client privileged if those communications involve general business matters or evidence or statements which are directly relevant to his or her legal claim(s).
From Litigation to Settlement
Finally, potential claims on behalf of executive or officer-level employees are very difficult for a company to choose to litigate, as this litigation will not only likely involve the depositions of many fellow officers and senior corporate leadership, but also typically involve potential damage exposure far in excess of what could be awarded to a lower to mid-level employee, given the significantly higher compensation at these positions. Therefore, every effort should be made to discreetly approach the company well before any litigation is initiated, to seek reasonable and confidential resolution terms. Given the significant “leverage” created by these potential claims, early settlement overtures will often find a very receptive audience, and favorable terms can often be negotiated early in the process. Any advocate who ignores this “window of opportunity” for settlement is not serving his or her client well.
Retaining legal counsel with knowledge of all of the above potential obstacles and experience in navigating through them is thus essential for any executive or officer-level employee contemplating legal action.
