Good Reason Termination

Navigating the Issues of a Good Reason Termination

Fulcrum Partners Executive Benefits News

We focus so much on attracting and retaining key talent here, on Deferred Compensation News and Updates, that we rarely talk about issues of termination. Last month, Michael Melbinger Partner Chicago, Winston & Strawn, addressed this issue in a two-part blog post that examines the facts of Barney v. Zimmer Biomet Holdings, a case involving an executive’s efforts to exit her employment in the face of what she considered to be “intolerable conditions.”

Part I. Triggering a Good Reason Termination

It has been a long time since I wrote about some of the traps an executive may face when preparing to trigger termination for Good Reason. However, the recent federal case of Barney v. Zimmer Biomet Holdings (Dist. Court, ND Indiana 2018), made me think that a reminder might be in order. Barney was a senior vice president for operations for Biomet, Inc. when it merged with Zimmer Holdings, Inc., to become Zimmer Biomet Holdings, Inc., in 2015. As a result of the merger, Barney became Zimmer’s senior vice president of global operations and logistics, where she served until her resignation in late 2016.

According to Barney, several distinct incidents precipitated her resignation. First, around August 2016, Zimmer informed Barney that her position would be moved from Indiana to Switzerland by the end of 2017, and that this would require her to relocate. Barney informed Zimmer that she did not wish to relocate with the position. Second, Barney alleged that around October 2016, “Zimmer’s CFO demanded that she concoct a story to mislead Zimmer’s investors about the cause of recent quarterly shortfalls.” She further alleged that, also in October 2016, Zimmer’s CEO ordered her to make organizational changes that included terminating employees under a false pretext. Barney refused to comply with orders of the CFO and the CEO. Instead, she submitted her resignation.

Barney’s Employment Agreement provided enhanced payments if she terminated employment for “Good Reason” following a “Change of Control.” Following her resignation, Barney requested severance benefits in accordance with her Employment Agreement. Zimmer refused to pay severance arguing that Barney’s resignation did not fall under any of the “Good Reason” provisions of her Agreement. Barney sued, claiming that she had no choice but to resign in the face of these incidents. She alleged that, together, they constituted intolerable conditions, and she further wished to extricate herself from the potential securities fraud being committed by other executives.

Among the Good Reasons in the Agreement was the relocation of “Executive’s primary work location more than 50 miles from the Executive’s work location on the Effective Date, without the Executive’s prior written consent.” Around August 2016, Barney alleged that Zimmer’s vice president of human resources informed her that her job would be moved from Warsaw, Indiana to Switzerland, requiring her relocation by the end of 2017. Barney argues that this sufficiently invokes the Agreement’s definition of “Good Reason.” The Court noted, however, that while this might have been sufficient to constitute Good Reason, the Agreement required Barney to “provide written notice to the Company of her intention to terminate her employment for Good Reason,” specifying in reasonable detail the claimed circumstances giving rise to her decision, “within 30 days following the occurrence of any of the events set forth herein.”

The court found this to be a simple case of contract interpretation and enforcement. Since the Agreement unambiguously required Barney to “provide written notice to the Company of her intention to terminate her employment for Good Reason,” and she failed to do so, she was not entitled to severance for a Good Reason termination.

Lessons Learned

Executives, lawyers, and compensation professionals can learn at least three important lessons from the Barney case. First, an executive must follow whatever procedural steps are set forth for good reason termination in the governing employment or severance agreement. Nearly all good reason termination provisions (and the safe harbor provisions of Code Section 409A) require the executive to:

  • give written notice to the company within a specified period of time, usually 30 – 90 days after the initial occurrence of the actions or events alleged to constitute good reason;
  • give the company a period of time, usually 30 – 90 days, to cure or remedy the actions or omissions alleged to constitute good reason; and
  • actually terminate employment within a specified period of time, usually 30 – 90 days after the lapse of the company’s “cure period.”

The plan or agreement also will likely require the executive to sign and not revoke a broad release and waiver of claims against the company in order to receive severance.

As a practical matter, an executive is almost always best served by giving written notice to the company of his or her intent to terminate for good reason. In addition to giving the company an opportunity to cure inadvertent or unintended actions or omissions that would constitute good reason, written notice also allows the company to express its belief that such actions or omissions do not amount to good reason under the governing provisions or documents. At this point, the parties can resolve the issue or begin to negotiate an amicable departure before the executive has taken the (often) irrevocable step of voluntarily terminating his or her employment.

Second, an executive’s fear or expectation of demotion or termination is not enough. A 1998 case held that an executive could not trigger a good reason termination solely on account of receiving a draft organizational chart that indicated a diminished reporting relationship. An expression of disappointment from the CEO or a request to take certain actions that the employee believes “are under a false pretext” may not be enough. In a case from 1998, Collins v. Ralston Purina Co., the Seventh Circuit held that, although the former employee anticipated his reassignment by an acquiring company to a less attractive position in another region, following the announcement of a change in control, he voluntarily left employment with the company before the time the acquirer actually made the reassignment, and thus, he was not entitled to payments under his retention/change in control agreement. Similarly, where a company offered the employee employment in the same position in another location to which the company was moving, and advised him that he would be entitled to change in control severance if he declined the offer, the employee was not entitled to payment where he resigned and took another job before the date of the relocation (Televantos v. Lyondell Chemical Company, 3d Cir. 2002).

Part II: Follow-Up on Triggering a Good Reason Termination

Earlier this month, I wrote on some of the traps an executive may face when preparing to trigger termination for good reason, describing a recent case that highlighted a few of those traps. Several readers commented on another aspect of the case that bears mentioning. Briefly, under the facts of Barney v. Zimmer Biomet Holdings, Barney was a senior vice president for operations for Biomet, Inc. when it merged with Zimmer Holdings, Inc., to become Zimmer Biomet Holdings, Inc., in 2015. As a result of the merger, Barney became Zimmer’s senior vice president of global operations and logistics. She resigned in 2016 after two incidents, which she alleged together constituted intolerable conditions, and put her at risk for potential securities fraud (and following the suggestion she would be required to move to Switzerland).

Barney’s Employment Agreement provided enhanced payments if she terminated employment for “good reason” following a “change of control.” Following her resignation, Barney requested severance benefits in accordance with her Employment Agreement. Zimmer refused to pay severance (and also terminated her stock options) arguing that her resignation had been voluntary. Zimmer argued that Barney’s resignation did not fall under any of the “good reason” provisions of her Agreement, and that she never executed the form of release required by the Agreement. Barney sued.

My previous blog focused on the Court’s decision that no good reason had occurred and she had not, in any event, followed the procedures set forth in the agreement for a good reason termination. Today, I will discuss two other interesting aspects of the decision.

CONSTRUCTIVE DISCHARGE

In addition to alleging a termination for good reason, Barney made a claim for wrongful constructive discharge. She alleged that she had no choice but to resign due to intolerable workplace conditions she experienced after refusing to mislead investors or to terminate employees under a false pretext. Barney also alleged that she had effectively been terminated when, after she refused to terminate employees, the CEO told her “he was not happy with her refusal to follow his instructions, and that they would talk further about it.”  As to this claim, the Court found the CEO’s “scant observations” insufficient to constitute an effective termination and stated that a constructive discharge only occurs when the plaintiff shows that he/she “was forced to resign because [her] working conditions, from the standpoint of the reasonable employee, had become unbearable.” The Court gave as examples recent cases with allegations of severe racial slurs and other incidents of harassment by coworkers, and “uniquely bad treatment” of an employee and her daughter based on their religion, including social shunning and being screamed at by co-workers.

FAILURE TO EXECUTE A RELEASE

The Court was not impressed by the company’s claim that Barney was not entitled to severance because she never executed a form of release, as required by the Agreement. Apparently, the company never provided Barney with a release agreement. (sounds like the definition of chutzpah, right?) However, it was surprising, at least to me, that the Court even took this claim seriously, suggesting that it also might have ruled in favor of the company due to Barney’s failure to execute the required release form.

Who would execute a release in favor of the company when claims were outstanding, and no cash was offered? On this point, long-time subscriber and friend Kevin Wiggins observed that at least one case has denied severance because the executive didn’t sign and return the lease when the time frame required. He also informs me that he had heard of arbitrators denying severance for the same reason. “The argument is the executive should sign the release and send it in even if the company is denying the payment. According to the arbitrator, that executive should have made his own release even if the company denied the claim and wouldn’t furnish him the release.”

LESSONS LEARNED

The legal standard for a constructive termination under most states’ laws is very high. A demotion or reduction in compensation generally would not be enough to trigger a constructive termination. Non-lawyers occasionally use the term “constructive termination” as a proxy for “good reason,” particularly where a severance plan or agreement does not include the concept or provide a clear definition of good reason (as in “I believe that I have been constructively terminated”). An employee must establish working conditions that are “even more egregious than the high standard for hostile work environment because, in the ordinary case, an employee is expected to remain employed while seeking redress.” Even if potential termination is a possible or likely outcome for an employee who does not accept a severance package, that situation does not create “intolerable conditions” equivalent to a constructive termination (Rowell v. BellSouth Corporation, 11th Cir. 2005).

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