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► What Is "Good Reason" For Terminating An Employee?

It's common for executive and key employees to have contracts governing the terms and conditions of their employment with their employer. It’s also common for employment contracts to be negotiated and entered into in the context of a business sale transaction in which (1) the enterprise’s continued operation and success is largely dependent on the current management and owners remaining in place, or (2) future employment compensation, benefits, and incentives are a fundamental component of the decision to sell the business.

In either case, employers and employees should agree and have clarity about the conditions under which employment will terminate and what compensation, if any, will be paid at that time.

What Is ‘Good Reason’?

Generally, termination can be triggered through the death or disability of the employee, a voluntary termination by the employee, or an involuntary termination by the employer. Terminations can be voluntary without reason, voluntary for “good reason,” involuntary without “cause,” and involuntary for cause.

From employees’ perspective, the primary goal is to ensure that they can’t be arbitrarily terminated based on a new employer’s whims or subjected to conditions or circumstances that make the job unbearable.

That is especially true when an employee is leaving quality employment behind for a new opportunity or exiting a business and helping to transition customer relationships that he has built over multiple years. From the employers’ perspective, they need to retain their ability to offload nonperforming employees and adapt to fundamental changes in their business model and the role that their workers must play.

Based on those competing goals, a substantial part of negotiating employment contracts often centers on defining:

•    What constitutes “good reason” in the context of a voluntary termination;

•    What constitutes “cause” in the context of an involuntarily termination; and

•    What severance will be paid to an employee is terminated for either reason.

Since employees often demand to be paid severance equal to the remaining amount that they would have earned had the voluntary termination for “good reason” or involuntary termination without “cause” not occurred, very large sums are often at stake.

Unsurprisingly, during the negotiations, employees and their counsel will try to define “cause” as narrowly as possible and “good reason” as broadly as possible, whereas employers and their legal teams will take the opposite approach.

Generally, however, there are certain events whose objectiveness makes it relatively easy for the parties to agree, while others are so subjective that it’s extremely difficult for the two sides to find common ground.

For instance, when considering a voluntary termination for “good reason,” an employer’s decision to relocate an employee to an entirely different geographical location is something that is often relatively easy for the parties to agree would give the individual “good reason” to depart. Similarly, with regard to an involuntary termination for “cause,” there is rarely any pushback about including an employee’s conviction of, indictment for, or “guilty” or “no contest” plea to a felony.

On the other hand, consider whether a “diminution in employee’s duties, authority, or responsibilities” should give rise to “good reason” or whether an “employee’s failure to comply with the policies or directives of the employer” should give rise to “cause.” Either circumstance or event is clearly far more subjective than the previous examples.

Numerous other examples are equally confounding, including: the employee engaging in conduct that could have an adverse impact on the reputation of the business, misappropriating any of the employer’s assets, or refusing to perform her essential job functions; or the employer failing to promptly pay all earned compensation or benefits. Obviously, factual events could give rise to reasonable disagreements between the parties in each situation.

Importance of Being Objective

Therefore, the goal of the parties and their counsel should be to inject a level of objectiveness into what are otherwise subjective circumstances. For instance, with regard to conduct that could adversely an employer, it would be reasonable from the employee’s perspective to include the requirement that the activity must be reasonably expected to have a material (or significant) adverse impact on the employer.

The qualifying words have legal significance, and their inclusion helps to ensure that the employer retains its right to fire an employee for cause when she engages in egregious conduct that doesn’t rise to the level of criminality, while at the same time providing the individual with assurance that the language won’t be used as a pretext (or a cover-up) to justify an involuntary termination for any reason.

As another example, consider termination for "cause" based on an employee’s failure to follow the employer’s reasonable directives. What defines reasonable or unreasonable directives will likely depend on whether you are the employee or the employer.

In that situation, a way to make the definitions of reasonable or unreasonable directives more objective would be to qualify the language to apply only when an employee fails to follow an employer's written directives set forth in an employee handbook, after written notice by the employer and a reasonable opportunity for the employee to correct himself.

For conditions so subjective that not even qualifiers will suffice, or when the parties simply cannot agree, another option would be to provide for a dispute resolution mechanism. In that situation, a neutral party agreed upon by the employee and the employer would determine whether the occurrence of an event gives rise to good reason or cause.

Bottom Line

Employees and employers alike should contemplate and articulate what specific event or categories of happenings will provide a basis for terminating employment and what compensation or severance will be paid as a result. To do this effectively, both parties should focus and clearly agree on how the applicable employment contract defines “good reason” and “cause.”

By Clarke Sugar. Mr. Sugar is a partner with the law firm Axley Brynelson, LLP, and a co-chair of the Business Practice Group at Axley.

[11/2018]

 

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