Give a Little, Take a Little.

Pocket your pen until key employment contract provisions are covered.

AN EMPLOYMENT CONTRACT CAN BE compared to a prenuptial agreement, says Diane J. Fuchs, member of the law firm Womble Carlyle Sandridge & Rice, PLLC, Washington, D.C. "Just as a prenuptial is more about what happens during your divorce than about what happens during your marriage, an employment agreements basic purpose is to assure that when your employment terminates, you are treated fairly."

A member of ASAE's Legal Section Council, Fuchs recently spoke to ASSOCIATION MANAGEMENT about negotiating an executive employment contract and the key issues that must be addressed.

ASSOCIATION MANAGEMENT: What should an executive look for in an employment contract?

Fuchs: Your employment contract should cover all the bases -- the terms of your duties and responsibilities, standards for performance evaluation, compensation, vacation and sick leave, insurance, retirement benefits, expense reimbursement, nondisclosure and noncompete agreements, indemnification, reasons for termination, and severance. Everything should be in writing and be very specific.

ASSOCIATION MANAGEMENT: Let's look at each of those individually, starting with the term of the contract.

Fuchs: The key issues concern the circumstances in which your employment can be terminated and the specific consequences of that termination. Typically, association executives do nut want an open-ended agreement. They prefer a fixed-term agreement since they are making a major job transition and, consequently--unless they do something outrageous or clearly against the interests of their associations--they want to make sure that for a specified period of time they will have jobs. They also want to be evaluated according to the objective criteria set forth in their employment agreements.

With regard to the length of the contract, I usually see two- or three-year terms with renewal or evergreen provisions. The latter allows the contract to continue year to year, provided neither party gives the other a preestablished notice, say 90 days, prior to the end of the term.

ASSOCIATICN MANAGEMENT: What details about job responsibilities should be outlined in the contract?

Fuchs: An executive contract should identify the job responsibilities with as much specificity as possible. Include a comprehensive description of duties, responsibilities, and authorities that go with the job; the name (or position) to whom the executive reports--even the location where the executive will work. For example, some associations may have an Indiana office and a Washington, D.C., office. The contract should specify in which office the executive will work.

I recommend this level of detail because if the association significantly changes the employee's duties, responsibilities, or authority, the executive may have good cause to terminate the agreement without breaching it. The more specific the job description, the better the chance of establishing that the employer has breached the contract or that the employee has grounds to resign without breaching the contract.

The executive should always have the opportunity to terminate the agreement for good reason before the end of its term. For example, if the executive was asked to move from Washington to Indiana, that could totally disrupt the person's life and represent a significant change in what he or she had signed on to do. If a major event like that occurred, the executive would not want to be tied into the contract.

ASSOCIATION MANAGEMENT: What do you advise executives to request in the area of compensation?

Fuchs: I like to see a base salary subject to periodic reviews, perhaps with built-in increases for cost of living, and provision stating the salary cannot be decreased below a certain base amount. The contract should also clearly specify whether built in increases are based on the starting year's pay or each year's incremental pay.

It's not uncommon these days for association executives to ask for bonus based on meeting certain individual or association golas. I suggest spelling out with clear, objective criteria the standards for earning a bonus. Don't leave that totally in the discretion of the board. If objective criteria cannot be established at the time the contract is executed then the goals need to be addressed in the agreement by including a phrase such as, "The association and the executive will agree on objective goals before--or early in--the employment period."

Consideration for partial years [of service] can also be written into the contract. If employment is terminated without good cause (or for good reason on the part of the executive), the contract can establish eligibility for a prorated--or even a full--bonus. After all, the employee may have already achieved the goals for that period.

Depending on the organization and the executive's responsibilities, a car, country club membership, or moving allowance may be included in the compensation package--and hence should he listed in the contract and considered forms of compensation. All forms of compensation and fringe benefits should be acknowledged up front and reviewed and approved by the hoard of directors. In the case of 501(c)(3) and 501(c)(4) organizations this is necessary to gain the safe-harbor protection provided under recently approved inter- mediate sanction rules. Although trade associations are not subject to the intermediate sanction excise taxes, they are prohibited from haying their net earnings inure to the benefit of a private person or shareholder.

Board review and approval of compensation provide a level of protection to the executive and the organization.

ASSOCIATION MANAGEMENT: Do executives typically receive employee benefits that are over and above the standard employee packages?

Fuchs: It's not unreasonable to expect that. A phrase in the contract can be written to say that the executive is eligible to participate in all of the retirement, health insurance, disability insurance, and life insurance plans that are otherwise offered to employees. Above and beyond those, the employee may want to consider seeking additional life insurance protection or a supplemental executive retirement plan.

A note of caution is in order. An association, charity, or any other organization that is exempt from federal income tax has limits under Section 457 of the Internal Revenue Code on how much can go into these nonqualified arrangements. In structuring these supplemental nonqualified deferred compensation arrangements, careful attention must be paid to such Internal Revenue Code rules.

ASSOCIATION MANAGEMENT: What about directors and officers insurance?

Fuchs: Look at the nature of the responsibilities. If job responsibilities will put the executive in a situation where he or she will be making subjective judgments that influence major players in the industry or involve setting industry standards, for example, he or she will want to make sure to be held harmless if pulled into a lawsuit and not negligent. As far as the amount of coverage, each organization goes through risk assessments to determine levels of coverage and the executive is well advised to ask what that coverage is.

Obviously, if the position places the executive at great risk, supplemental coverage is in order. The contract can call for the organization to indemnify the executive and to pay for legal costs associated with the case in the event of a lawsuit.

ASSOCIATION MANAGEMENT: What termination provisions do you recommend?

Fuchs: I consider termination and severance provisions to be the most important provisions in the employment agreement. The severance provisions govern what the executive will receive under various scenarios of termination of employment. Typically, the employer's proposed agreement sets out several grounds for termination--death, retirement, disability, and termination for cause. I would add to the list "termination by the employee for good reason."

It's important to try to obtain a continuation of benefits, particularly health insurance at the employer's expense, for some time after termination due to disability. I also recommend narrowly defining disability so the association cannot terminate too easily. A typical definition might be, "The executive is deemed disabled after 120 days of inability to perform the job during a one-year period."

If the association gives notice that the executive is being terminated for cause, it should allow the person the opportunity to correct the problem. For-cause terminations can be very harmful to an employment record. It's very important to make the definition of a for-cause termination as narrow as possible. Keep it to a conviction of a felony or other crime involving moral turpitude, a loss of a necessary license, a material breach of clearly articulated association policies, or an outright failure or refusal to perform the duties.

In the contract, insert the words "material," "substantial," "willful," or "intentional" before words like "breach" or "failure." No one wants to be terminated for an accidental breach. Resist vigorously an employer's attempt to include words and phrases like "in the employer's discretion" or "to the satisfaction of the employer." Such language gives too much room for subjective decision making.

Two final points on termination: 1) negotiate a severance benefits package in the event of termination without good cause or of the executive leaving for good reason, and 2) resist provisions that allow, in the event of a merger with another organization, the employment agreement to be assignable without the executive's consent.

That said, I don't see many executives terminated unfairly. For one, federal laws protect workers age 40 and older. In certain circumstances, an executive might have a cause of action if he or she is terminated and can show that a younger person was put in the position. The association then would have to prove that it had a good business reason for the termination and replacement.

ASSOCIATION MANAGEMENT: How should executives address noncompete, nondisclosure, and confidentiality agreements?

Fuchs: Keep them narrow and reasonable such that they do not seriously limit the ability to make a living after leaving the association. Courts, particularly in California, have really clamped down on noncompete clauses.

Keep in mind too, that most employment agreements provide for dispute resolution. Nonbinding mediation as a precursor to litigation or binding arbitration is frequently a way disputes can be resolved. References to mandatory arbitration of all employment disputes, which would include statutory discrimination such as age discrimination, should be avoided. On the other hand, as a condition of employment, some employers will ask the executive to sign a release indicating that he or she won't sue the employer for any claims that arise from the terms or conditions of employment. Avoid anything similar to this that may take away federal or state employment discrimination protection. Avoid anything similar to this that may take away statutory rights.

ASSOCIATION MANAGEMENT: Are Certain benefits getting harder to negotiate?

Fuchs: I see increased concern right now about recently approved Intermediate sanction rules. They apply to charitable organizations but the underlying inurement principles also apply to other exempt organizations, such as trade associations. Association boards will be challenged to be very careful about the types and amounts of benefits they provide executives to ensure the compensation package is considered reasonable. Documentation that the board has reviewed compensation for comparable individuals and organizations to determine that a comprehensive compensation package is reasonable is one way of approaching this issue.

At the same time, I am seeing a lot of signing bonuses. Of course, that benefit depends greatly on the circumstances of the association. Small organizations may not be able to afford a signing bonus. A large association with global corporations as members, however, may pay a premium to attract high profile people, such as former legislators or members of the executive branch.

ASSOCIATION MANAGEMENT: What other advice do you have for executives who are negotiating employment contracts?

Fuchs: Come to the negotiation with a sense of the value you bring to the association. The association's board members want you. Because they want you, they will try to accommodate you to the extent that they can. You can push a little bit. You don't have to accept their contract as is.

Once you have been selected for the job, you're in a position to negotiate well for yourself. Here's where you give a little and take a little. Both sides need to feel they are walking away with a sound, advantageous agreement.

When it comes to renewing the contract, the process can be very simple if the contract contains a provision for automatic renewal. As long as escalators have been built in, the terms don't have to be renegotiated. If the agreement actually terminates but both parties want to continue the employment, then everything is up for grabs again.

While it depends on your experience, confidence, and knowledge of legal detail, you may benefit from working with a lawyer when negotiating a contract. In this case, I find it best for the lawyer to coach you behind the scenes before each negotiation session with the association. Once the deal is worked our, your lawyer can memorialize the business principles and employment agreement principles that have been agreed to. It is a good idea to keep the lawyer out of the picture in the beginning to reduce potential friction.

Margo Vanover Porter is a freelance writer based in Locust Grove, Virginia. E-mail: [e-mail].