Image shows an example of a Good Reason Clause in an employment contract

Do You Have a “Good Reason” Clause in Your Employment Contract?

Did you know that you can terminate your employment contract without repercussions? You must have a “good reason” to do so. What does “good reason” mean in the legal sense?

With a Good Reason clause in your employment contract, you retain protections against employer abuse, such as a new CEO trying to drive you out.  At Gardner Employment Law, we can help you secure the protections you deserve. Give us a call if you want to know more about “Good Reason.”

What is a Good Reason Clause?

Having a Good Reason clause in your employment contract gives you the ability to end your contract voluntarily, usually with substantial severance benefits.  Employees at the level of an executive’s employment likely will have an employment contract.  Sometimes mid-level managers negotiate and obtain an employment agreement.

The purposes of this agreement are to ensure that there are clear expectations and protections for both sides. A Good Reason clause can be added to that agreement which lists the reasons why you can end the contract.  It is the flip side of “Good Cause,” which is the section in the contract giving the employer the right to end the contract.

Various situations could arise where you may want to terminate for good reason. Imagine your employment with the company did not go the way you envisioned it. Your employer could decrease your base compensation or remove important benefits. Or the employer could move the geographic location of your office to a distant site.  The company might change your overall authority, duties, or responsibilities, or require you to report to someone who is less qualified than you are. These are examples of what lawyers call “material diminution.” All of these actions could be an employer’s attempt to drive you out or otherwise avoid giving you the treatment you deserve.

As we discuss in “Employment Contracts,” certain aspects of your employment agreement can “protect you in other ways that you might not have considered.” A Good Reason clause is one of those provisions you definitely want in your toolbelt.

I once represented a Vice President who had been employed by a company for years before a new CEO came on board.  Despite my client’s terrific job performance, the new CEO did not like him.  The CEO began to alter the executive’s employment by taking job responsibilities from him and assigning them to others less qualified.  The CEO even moved the VP’s office to the basement, away from the other executives on the 38th floor. My client kept up with his excellent work, and the CEO ultimately fired the VP over something trivial. I was able to obtain a settlement for my client. While this may seem like an extreme example, it certainly does happen.  But this executive did not have a Good Reason clause.

What Constitutes as Good Reason?

Law Insider outlines an example of what a Good Reason clause contains. Examples of adverse actions to include in the list that you want to prevent include:

  • A significant reduction in your responsibilities or authority as an executive
  • A decrease in your material benefits or compensation
  • Relocation of your office more than 50 miles away from your present location

Typically, the clause will also outline the period of time you have to report an adverse event, sometimes up to 90 days.   Typically a Good Reason clause also requires you to give prior written notice before terminating your contract for good reason, usually around 30 days.

Sometimes the situation will not be as obvious as a decrease in salary or benefits. The employer might take other adverse measures to drive you out, such as moving your office far from everyone else or moving you across the country. A robust Good Reason clause outlines these situations in your employment agreement so you have protection to submit your resignation for good reason.

A Good Reason clause can serve as a deterrent to adverse actions.  When you’re negotiating your employment contract at the time you’re hired and everyone has great expectations, that is the time to request the Good Reason clause.  The Good Reason clause should contain a substantial amount of severance pay that you will be paid on your departure, should any of the adverse actions on the list occur in the future.  Having that large number in your employment contract can deter the other party from taking any adverse action against you.

Why Do I Need a Good Reason Clause?

A Good Reason clause gives you protection when an employment situation turns hostile or unforeseeable events occur.  Say you take a leap of faith and switch jobs, only to find that either upper management or board members make impossible demands or ask you to take unethical action.  Or, as in the example of my VP client, you may encounter new management that just does not like you or how you do your job.  As we explain in more detail in “Corporate Politics,” sometimes your adversary can be your direct supervisor.

Without the Good Reason clause, if you resign you may face a threat of breach of contract from the company. It is important to have contractual protection in your agreement.  A Good Reason clause can give you that.  You might think of the Good Reason clause as insurance against unexpected adversity.

Good Reason also gives you the benefit of deterring adverse treatment.  If the Company knows that it will be on the hook for a substantial amount of money, should any event on your list become a reality, the would-be culprit likely will think twice before engaging in that punitive behavior.

What is the Difference Between Termination for Cause and Good Reason?

Good Reason termination clauses exist for your benefit. “Cause,” sometimes stated as “Good Cause,” termination clauses, on the other hand, exist for the company’s benefit. A Cause termination clause outlines specific instances in which an employer can terminate the employment arrangement and the executive’s employment agreement. This could include events such as a continual failure to perform duties, or conviction of a felony or misdemeanor of moral turpitude, or wrongful conduct that benefits the employee at the expense of the company.

While in layman’s terms any of these reasons would be a “good reason” for a company to fire someone, that is not the legal meaning of a Good Reason clause. A Cause termination clause protects the company, and a Good Reason clause protects you.

Contact Us

If you want to have a beneficial exit strategy in place in the unlikely event that your employer tries to drive you out, you should highly consider a Good Reason clause. At Gardner Employment Law, we can help. Give us a call.

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