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GOOD REASON CLAUSE in an EXECUTIVE EMPLOYMENT AGREEMENT

Experienced legal representation in reviewing, negotiating, drafting, improving executive employment agreements.

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Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A good reason clause in an executive employment agreement defines specific, pre-determined circumstances under which an executive can voluntarily resign and still receive the severance benefits the executive would have been entitled to if the corporation terminated the executive without cause. It is essentially a contractual protection that allows an executive to leave an unworkable situation without being penalized.

The good reason clause is the executive's counterpart to the company's for cause termination clause. While a for cause clause allows the corporation to fire an executive for misconduct or poor performance without paying severance, a good reason clause allows the executive to effectively fire the company and still collect severance if the company fundamentally breaches the terms of their employment.

Without a good reason clause, an executive who is subjected to adverse changes would have to resign, which would be considered a voluntary resignation and would typically forfeit any right to severance. The good reason clause mitigates this risk. It provides a crucial safety net, ensuring the executive is not forced to choose between staying in an unacceptable role and leaving without financial protection. This is particularly important because an executive's departure can be highly visible and may affect their future career prospects.

A good reason clause must be clearly and specifically defined in the employment agreement to be enforceable. Common triggers for a good reason termination often include:

  • Significant Reduction in Compensation: This includes a material decrease in base salary, bonus opportunities, or benefits.

  • Material Diminution of Duties or Responsibilities: This can be a demotion, a significant change in job title, or a reduction in authority that makes the role substantially less than what was originally agreed upon. For example, if a Chief Financial Officer is suddenly required to report to a subordinate.

  • Forced Relocation: A requirement to move to a new geographic location that is a significant distance from the executive's current workplace (often defined as being over a certain number of miles).

  • Material Breach of the Employment Agreement: This covers any failure by the company to uphold its obligations outlined in the contract, such as not paying the executive's salary or bonus on time.

  • Change in Reporting Structure: A requirement to report to a different person or entity than what was originally specified in the agreement, particularly if it represents a significant demotion.

The good reason clause almost always includes a process that the executive must follow to trigger the clause and receive severance. This typically involves:

  • Written Notice: The executive must provide a written notice to the company, detailing the specific event that constitutes good reason.

  • Cure Period: The company is given a specified period (e.g., 30 days) to cure or fix the issue.

  • Termination: If the company fails to remedy the situation within the cure period, the executive can then resign and receive their severance package.

Executive employment agreements deserve considerable scrutiny and legal analysis given the financial implications emanating from the legal employment contract not being consistent with the negotiated specifics of one's intended employment arrangement. The differences in executive employment agreements may not be readily apparent to most people (often being very subtle and driven by legal terminology), yet the long-term financial implications to the executive employee can be staggering. As such, it is important to properly understand all the contractual aspects pertaining to an executive employment and their compensation.

For knowledgeable and experienced legal representation with respect to executive employment agreements, and other legal matters pertaining to one's employment as an executive employee, contact our law firm by email at Chris@NeufeldLegal.com or by telephone at 403-400-4092 / 905-616-8864.

 

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