Broker Check

From "Golden Handcuffs" to a Golden Handshake

| November 07, 2017
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It’s common for businesses to court talented executives with a variety of perks, including signing bonuses, stock options, and nonqualified deferred compensation plans to supplement regular pensions and retirement savings. While it may be understandable that companies would like to “lock-in” valuable executives with “one-way” employment agreements (sometimes referred to as “golden handcuffs”), many top performers recognize that they may no longer be immune to corporate restructuring in a challenging economic climate. Consequently, key employees may be concerned that restrictive employment agreements may limit their future career mobility. 

Types of Restrictive Covenants  

Perhaps the most common restriction is a noncompeteclause, which typically bars an employee from going to work for a competitor for up to two years, depending on the particular agreement. A noncompete clause is generally valid whether an employee leaves voluntarily, a job is eliminated, or an employee is fired. 

A nondisclosure clause is typically intended to prohibit employees from divulging proprietary information (including trade secrets) to outsiders during their employment. However, some employers may tie a nondisclosure clause to a noncompete clause to protect sensitive company information for a period of time after a key employee leaves. For example, one could assume that, after one year, any marketing plan would be less useful to a competitor. But, in some situations, an employer might attempt to impose nondisclosure of client lists or a product development strategy for a longer period of time. 

A third type of restrictive covenant is a nonsolicitationclause. This restriction prevents a former employee from recruiting employees or clients away from a previous employer for a period of time, generally one to two years. 

Other less frequently used restrictions include a payback clause, which requires an employee to reimburse an employer for costs incurred by the employer to recruit and relocate the employee should he or she leave within a set period of time, and a matching clause, which ties an employee to his or her current employer if the employer decides to match an outside offer to recruit the employee. 

It’s natural for employers to want to protect their interests, especially if the employee will have access to proprietary material and the employer is offering generous perks. Although laws vary from state to state, restrictive employment clauses are generally enforceable as long as they are deemed to be reasonable in terms of the time limit and geographical area covered. 

Negotiations are Key 

Recognizing that loyalty is a two-way street, some employers may be willing to ease certain aspects of restrictive clauses. For example, while an employer may insist on a rigorous noncompete clause should an employee leave voluntarily, the company may not try to prevent an employee from working somewhere else if he or she is laid off or fired. Further, an employer may be amenable to limiting the definition of “the competition” by specifying competitors by name. Finally, in many cases, an employer may be generous with severance packages in the event of involuntary termination. 

The art of negotiating a satisfactory employment agreement involves striking a deal whereby both sides perceive value and protection. With effective planning, golden handcuffs can become a golden handshake.

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