Termination for Cause Provisions: Every Word Matters

Particularly with respect to executive employees, it is not unusual for an employment agreement to be used.  Those agreements tend to have detailed provisions regarding when the executive may be terminated and what happens if the termination is with or without cause.  A recent case decided by the Massachusetts Supreme Judicial Court addressed such provisions with a seemingly surprising outcome.  That decision underscores the carefulness with which such provisions should be drafted and followed.

In the case of Balles v. Babcock Power, Inc., the plaintiff executive and defendant employer had entered into two related agreements containing such provisions.  Six years into his employment, the plaintiff executive began an intimate affair with an undergraduate intern who he supervised, subsequently giving her two raises and a promotion, taking business trips together on the company dime, exchanging thousands of sexually explicit text messages and more than 100 photographs and falsifying travel reimbursements to conceal the affair.

Upon discovery two years later, the company investigated and summarily fired the executive for cause.

A “for cause” termination had significant consequences for the executive.  These included depriving him of any severance pay and obligating him to resell his stock in the company for fractions of cents on the dollar.

The agreements explicitly defined what constituted “cause” and a detailed protocol that must be followed where “cause” was the basis for termination.  Specifically, fraud or gross insubordination were types of “cause” that could result in immediate termination.  The Court rejected the company’s attempt to fit the executive’s conduct into either of those categories.

With respect to “fraud,” the Court applied the classic legal definition that required detrimental reliance by the employer and resulting damage.  The Court found that there had been no reliance on the executive’s false travel reimbursements and no financial harm.  With respect to “gross insubordination,” the Court found that this phrase meant more than just breaking rules.  Instead, “gross insubordination” would be found only if there was willful disregard of a direct order or disrespect directed at the executive’s supervisor.  The Court found neither was the case here.

The agreements also defined “cause” to include the executive’s breach or failure or refusal to perform and discharge his duties, responsibilities or obligations to the company.  The executive conceded that he had, in fact, failed to fulfill his obligations to the company by engaging in the affair with his subordinate and then attempting to conceal it.  That, however, was not the end of the story.

Unlike the fraud and insubordination provisions that permitted immediate termination, the agreement provided that in the event of a breach, the company was obligated to give a very specific written notice to the executive detailing that breach and giving him 30 days to correct.  Only if he failed to correct within that time frame could he then be terminated for cause.

Here, the company jumped the gun, terminating the executive without either providing the written notice to him or giving him an opportunity to cure.  In fact, the company’s board of directors  refused to meet with the executive despite his repeated requests and went so far as to tell his attorney not to bother with providing information regarding the allegations of misconduct.  In so doing, the company converted the termination into one without cause much to its detriment and the executive’s benefit.

The moral of the story?  Employers should be very careful in drafting employment agreements, particularly in detailing what will be required to constitute “cause” for termination.  And once drafted and signed, employers should carefully review those termination provisions and follow them to the letter.

Sloppy draftsmanship on the one hand, or sloppy execution on the other, can leave the employer in a very uncomfortable position at the end of the day.

About Rich Van Nostrand

Rich is a partner at the Firm. He has extensive experience in general civil trial work, with concentrations in business, commercial and employment litigation. He provides advice and representation in a variety of business and commercial litigation matters, including shareholder disputes, corporate dissolutions, intra- and inter-company disagreements, and intra-family business disputes. Rich also provides ongoing employment litigation and counseling services to numerous clients in the private, public and higher education sectors. In the private sector, Rich represents clients in a broad range of industries including health care, professional services, high technology, industrial and manufacturing. In addition, he is also frequently selected by litigants to assist in the resolution of their disputes as an independent arbitrator or mediator.
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