Companies looking to cut costs will consider potential savings in all parts of their businesses, including at the top of the organization. But before proceeding with any proposals to trim the size of the leadership team or to reduce compensation costs, there are two key areas that every employer should consider first.
Review the agreements – It is critical to look carefully at all the relevant documents, including any employment agreements, severance plans, stock option or award agreements, or other documents that contain compensation or other applicable terms. Layoffs in the c-suite will usually involve employees who have severance rights that may be triggered in the event of termination. Similarly, when considering other cost-cutting measures, such as reducing pay or changing benefits or taking any other action that adversely affects an executive’s employment terms, bear in mind that those steps could result in a “Good Reason” event or other breach of contract that might give the executive the right to resign and still be eligible to receive severance benefits. It may have been years since the applicable documents were last looked at, so making sure the full set of agreements and plans are reviewed in detail before taking action will help avoid unforeseen costs.
Consider other areas of legal exposure – Being clear on the applicable contract terms is just part of the analysis. There are various other areas of potential legal exposure that employers should consider before moving ahead. In particular, think about whether there are any potential discrimination or whistleblowing claims when individual executives are being singled out for cost-cutting measure. When making layoffs, is there a risk that the executives selected for termination could claim that they were chosen because of their race, gender, disability or some other protected characteristic and, if so, does the employer have a legitimate non-discriminatory reason for the selection that it could prove in court if necessary? Or has the executive recently made any reports or disclosures that could form the basis of a whistleblowing or retaliation claim, and is the employer comfortable that it has a factual basis to defend against any such allegations?
Employers should assume that executives will know their contractual, statutory and other legal rights and they will lawyer up when they feel it’s necessary. Getting ahead of these issues by doing some legal analysis before the difficult conversations start with the executives will leave employers better prepared to deal with the issues when they arise, and avoid any unpleasant surprises.