For an employee, one of the most important elements of an employment contract is the provision which limits why you may be terminated, or in the alternative, what severance you get paid if you are terminated “without cause.” After all, unlike at-will employment, an employment contract should provide the employee with protections against an unwarranted termination. An employee should pay special attention to the definition of “for cause” in their employment contracts, as it will have a substantial effect on the employee’s rights at the end of employment.
In most employment contracts, and particularly executive or physician employment contracts, the contract provides for various scenarios where the contract may be terminated by the employer before the end of the term (the full length of the contract). A typical employment contract provides that employment may be terminated “without cause,” provided that the employer pays a substantial severance payment to the employee. That same contract provides that it may be terminated immediately and without notice “for cause,” with no amounts due to the employee. Alternatively, some contracts simply provide that an employee may not be terminated “without cause” during the term of the agreement, without spelling out any amounts to be paid if that promise is broken. In such a case, the employer would be liable for damages caused (a/k/a “the benefit of the bargain”) by terminating an employee without cause.
With this background in mind, here are a few basic ideas towards optimizing the “for cause” provisions in your employment contract:
1. Understand the Term of Your Contract and the Circumstances Under Which You Can Be Terminated “Without Cause”
First you need to understand how long your contract lasts and when you can be fired “without cause.” For example, if your contract is for a very short term or you can be terminated “without cause” with thirty days notice, there isn’t much point to negotiating a strong “for cause” section. In such a case, your employer will most likely just give you thirty days notice under the contract to end your employment. In such a contract, what you really have is a thirty day contract (even if the term is listed as 2 years), because they can simply end it with a short notice period. A “for cause” limitation in a contract is only meaningful if the term of the contract is significant and there are substantial limitations (including time limitations) on a termination “without cause.”
2. Narrow the Definition of “Cause” As Much as Possible
When a contract limits your termination to “for cause,” one of the key points of emphasis is the definition of “cause.” Unfortunately, many contracts presented to employees appear to help the employee by limiting terminations to “for cause,” but then undercut the entire purpose by defining “cause” to mean essentially anything the employer wants it to mean. For example, the definition of “cause” may include a “violation of company policies or procedures.” Such a vague definition may give the employer wide discretion in determining when an employee can be fired “for cause.” As an extreme example, could being late to work be a violation of company policy? To the contrary, you should negotiate for the narrowest definition of cause possible. For example, limit for cause to very specific and serious actions that any reasonable person would agree is grounds for immediate termination. This might include conviction of a felony, committing fraud or theft, gross misconduct which materially injures the company, or unauthorized use or disclosure of trade secrets. In other words, bad stuff, that if you do, you should be fired for immediately. Make sure to take out any ambiguities. The “for cause” section should be very limited, very specific, and not open to debate about what means what.
3. Take Out Discretion By The Employer
Many “for cause” sections in contracts I see define “cause” to include the discretion of the employer. For example, “conduct that harms the company as determined in the sole discretion of the employer.” This language which provides discretion to the employer can be very problematic, as the employer can argue, no matter what the evidence shows, that “in their sole discretion,” grounds exist “for cause.” I’ll save you the stories about the legal battles that are fought over “discretion” in “for cause” employment contracts. The point is: take out discretion from any determination of “for cause,” or at the least, limit the discretion as much as possible (i.e., “reasonable discretion”).
4. Add “Notice and Cure” Provisions Where Appropriate
Whenever a definition of “for cause” involves something you could correct, there should be a “notice and cure” provision. For example, if a contract provides that you may be terminated “for cause” for failing to perform duties, there should be a provisions that says “after written notice specifying the performance failure(s) and the opportunity of sixty (or more) days to correct the performance failure.” Or if a contract provides that you may be terminated “for cause” for refusing to follow instructions from the CEO or Board, there should be a provision stating “after written notice specifying the refusal and the opportunity of 10 days (or more) to cure the refusal.” Basically, the point of “notice and cure” provisions is to allow you to fix something that would otherwise get you terminated “for cause.”
5. Clarify What Happens If You Are Fired “Without Cause”
If you have negotiated a good contract and are fired “without cause,” you should be entitled to severance in the form of monetary compensation and other benefits. Again, clarity here is of paramount importance. The language should be straightforward and without any room for debate. Typically, this can be written easily for pure monetary compensation. It should simply state an amount of severance pay and when it should be paid. For other forms of compensation or benefits, it can be trickier. Again, the point is for as much clarity as possible on what you will receive and when it will be received.
6. Example of a Favorable “For Cause” Provision
The clause below is an example of a favorable “for cause” provision which provides protections for the employer and the employee. Reasonable clauses can include more favorable or less favorable provisions, depending on the situation.
In this Agreement, “cause” shall mean:
(i) Employee’s conviction of, or plea of no contest to, a felony or any crime involving fraud, embezzlement, or theft;
(ii) an intentional act of fraud, embezzlement, theft or any other material violation of law that occurs in the course of Employee’s employment with the Company;
(iii) gross misconduct which materially and demonstrably harms the Company;
(iv) intentional engagement in any competitive activity which is a breach of the duty of loyalty to the Company;
(v) unauthorized disclosure of trade secrets or proprietary information; and
(vi) willful and continued failure to substantially perform your duties for the Company after written notice specifying the performance failure(s) and the opportunity of sixty days to correct the performance failure.
Failure to meet performance standards or objectives, by itself, does not constitute “cause” under this Agreement.
7. Final Tip
Have an employment lawyer review your contract before you sign it. At the least it will give you peace of mind and more likely that attorney will help you secure important rights that may affect your future. The words matter significantly. I’ve been involved in lawsuits where a few words determined hundreds of thousands of dollars. Make sure your contract is the best for you.
To schedule a consultation with Scott Cook, click here.
Scott Cook is Scott Cook is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization. He has represented Texas employees regarding their contracts for more than 15 years, including in negotiation, litigation, and review. More information about that practice may be seen here.