Have a general question about employment law? Want to share a story? I welcome all comments and questions. I can't give legal advice here about specific situations but will be glad to discuss general issues and try to point you in the right direction. If you need legal advice, contact an employment lawyer in your state. Remember, anything you post here will be seen publicly, and I will comment publicly on it. It will not be confidential. Govern yourself accordingly. If you want to communicate with me confidentially as Donna Ballman, Florida lawyer rather than as Donna Ballman, blogger, my firm's website is here.

Friday, September 14, 2012

Why Did The Lawyer Put This In My Employment Contract?: The Termination Clause

In yet another attempt to explain the legalese that lurks in your employment contracts, today I'll talk about some of the language you might see in the contract you sign when you're first hired: the termination clause. It's something you don't really want to think about when you're all excited about a new job offer, but it's almost always in there.

You're most likely to see something like this, if not in a contract or offer letter, then in your handbook:

You agree and understand that your employment is at-will.

Your eyes probably glazed over and you didn't think about this. But the next time you are handed a contract to sign that says this, I suggest you think about it seriously. What this means is that you agree you can be terminated for any reason or no reason at all. If your new boss is in a bad mood three days after you start, even if you gave up a steady job of 5 or 10 years to take this new offer, you're out of there with no severance at all. Especially if you're moving, leaving another job, or are a hot commodity (you have an expertise, a degree, experience or something else that makes you able to pick and choose), I suggest you try to negotiate a better clause than this one.

A slightly more acceptable clause:

You agree that the Company may terminate your employment by giving 90 days' notice. If the termination is for cause, the Company may terminate your employment without notice.
 At least in this one, the company has to give you some notice, or pay out the notice period as severance. The clause might have more or less notice, depending on what you negotiated, but the notice is important. It's also important to define what "cause" for termination will be. If you leave it up to the company to determine whether or not your performance is up to par with no way to measure, then you might as well be at-will.

What's concerning about a clause like this one is sometimes people spend lots of time negotiating the length of the agreement. Say you negotiate a contract with a one year term, with automatic renewals at the end. You think you've assured you have something steady for at least a year. But this clause completely negates that one year. Whatever notice the company puts in here that they have to give, that's likely how much they'll have to pay out.

Even better would be:

This agreement may only be terminated for cause. In the event of termination for cause, the company shall give notice of the alleged cause and give you 30 days to cure the problem before termination.

You still need to worry about defining what constitutes cause, but with this clause you have a chance to fix things if the company thinks you're messing up. If they fire you for no cause, they have to pay out the rest of the contract. That's great if you have lots of time left on it, but if you don't, you might have been better off with the provision above. Still, if I have my druthers, I'll pick this one over that. At least you'll have time to prove yourself, so your move won't be a complete hardship.

If you have lots of leverage, or if the employer wants you bad enough, you might get lucky and get a clause like this:

In the event of termination, the company will pay you 6 months of severance.

Notice it says nothing about cause or no cause. With this one, it doesn't matter how much you mess up. As long as you haven't breached the contract in some way, the employer has to pay out your severance no matter the reason for termination. This kind of clause is especially good if you have a noncompete. If you have to stay out of the industry 6 months, they should pay you 6 months so you can survive. If they want you to stay out longer, you should try to negotiate a longer payout.

Even though you don't want to think about getting fired or laid off, you have to if you want to survive in this economy. If you have any leverage at all to negotiate a better contract, the termination clause is one of the most important clauses to get right.

6 comments:

  1. Donna, in my experience, employers will simply refuse to do this for most employees. (I know I would, except for the most hard-to-find roles.) Have you seen many people successfully do this, other than at very senior levels?

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  2. It depends, Alison. If you're, for instance, a top sales person or a sought-after doctor, have a rare degree or type of experience, or are in a market where employees are highly sought-after, then yes.

    If someone is moving across country or leaving another job, then they should try to get some written assurances. Sometimes, if the employer wants them badly enough, they'll put assurances in writing.

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  3. Donna, first let me say that I appreciate what you're doing here. However, I have to agree with Alison. For almost all employees, your advice here is simply a non-starter. In fact, I am not sure I even understand the reasoning behind sharing this information, at least without listing the limited audience. Additionally, in almost all cases, the employees this would pertain to will be enlisting counsel to review their contracts anyway.

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  4. Hi Jonathan. Most employees aren't going to be presented with contracts. If they are, then they need to read and understand them. I'm sharing the information because it might help them negotiate a better agreement. At least I hope I'm giving them food for thought. If more employees balk at signing ridiculous one-sided agreements, then maybe companies will lose enough prospective employees they want to make them change their evil ways. I run into people who move for jobs all the time, only to find that the job lasted a few weeks. Hopefully they'll think twice about doing this if the employer won't commit to giving them a fair chance and fair severance.

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  5. The only time I've ever seen is on the job application, which you MUST sign in order to apply for the job. Once you've done this, you're stuck.

    It's a good suggestion to check if you're moving for a job. Thank you for mentioning this; I would not have thought of it.

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  6. Hi Mabel. Yes, it's on lots of applications. That doesn't mean it couldn't be overridden in a contract signed after that. I'm glad you found it helpful.

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