Recent developments in the employment law arena should inform the drafting of employment contracts. Here are the lessons that can be
learned from those events.
1. Include clawback provisions in executives’ employment contracts.
Employers that are serious about enforcing a clawback of contingent payments from misbehaving executives should make sure the employment agreements they enter into with executives include clawback language, not just references to the company’s clawback policy.
U.S. District Judge Evelyn Padin’s opinion in Hertz Corp. v. Frissora1 suggests this conclusion. The opinion rejected the enforceability of a company clawback policy incorporated by reference in an executive’s separation and employment agreements.
The opinion advances the concept that obligations holding executives personally liable for clawback payments must be expressed as contract provisions. The clawback policy that the car rental company Hertz sought to enforce stated that the company could rescind pay based on its business standards, which included:
- speaking up if improper practices are suspected
- leading by positive example
- refraining from acting “illegally or unethically”
- maintaining accurate records.
Judge Padin held that these provisions contained only “broad, aspirational language” that “offers no yardstick by which to ascertain performance…”
“No reasonable juror could find that [the clawback policy] constitutes a contract,” Judge Padin held. “[R]ather, the clawback policies are mechanisms by which Hertz would enter future contracts incorporating these policies.” (emphasis in original)
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