Donahue Gallagher Woods LLP Experts Connection Presents: “Hot Button” Issues for Executive Level Recruiting William R. Hill Rock@donahue.com Donahue Gallagher Woods LLP www.donahue.com

In This Webinar You Will Learn: The “Bear Traps” in Recruiting: What to Avoid in Sourcing Candidates and Conducting Background Checks The Application of Anti-Discrimination Laws to Recruiters What to Do and Avoid in Recruiting Foreign Nationals “We found him/her!” The Essentials of the Executive Employment Agreement What is “Say on Pay” and Why It Matters to Recruiters Key Elements of Some Executive Compensation Packages, such as Deferred Compensation and Performance-Based Compensation Independent Contractor vs. Employee: Why it Matters to Recruiters

THE CANDIDATES

Photo Credit: images.forbes.com THE FORMER CEO Martin J. Sullivan President & CEO of AIG, Inc. from March 2005 to June 2008 Mr. Sullivan replaced Maurice “Hank” Greenberg as President and CEO of AIG, Inc. in March 2005. He served in that position until Summer 2008, when he was ousted by the Board of Directors in the wake of AIG’s rapidly falling stock price. He ranked #168 on Forbes’ CEO Compensation list. A link to Mr. Sullivan’s contract can be found on our website: http://www.donahue.com/EL-martin.htm Photo Credit: images.forbes.com

THE FORMER GENERAL COUNSEL Anastasia Kelly General Counsel of AIG, Inc., from September 2006 to December 31, 2009. Currently unemployed. Reported to 4 different CEO’s during her term at AIG, including Mr. Sullivan. According to Fortune Magazine, she earned $900,000 in 2009; left AIG when it became clear that Pay Czar was going to reduce her salary to $500,000 in 2010. (Fortune March 1, 2010 Edition.) Quote: “For someone to say, “…the American people hate you and therefore we think you should make no more than $500,000 a year” – there’s no logic to that. It wasn’t something I could live with.”

Searching for Godot The Do’s and Don’ts in Sourcing Candidates.

Anti-Discrimination Laws Their Application to Recruiters

Federal and State Laws Certain advertising and recruiting practices are illegal or questionable under Federal and state laws because of their tendency to screen out candidates from certain protected groups. Title VII of the Civil Rights Act of 1964 (Title VII), which prohibits employment discrimination based on race, color, religion, sex, or national origin. 42 USC §2000e, www.eeoc.gov/abouteeo/overview_laws.html Equal Pay Act of 1963, which protects men and women who perform substantially equal work in the same establishment from sex-based wage discrimination. 29 USC §206(d), www.eeoc.gov/policy/epa.html. Age Discrimination in Employment Act of 1967 (ADEA), which protects individuals who are 40 years of age or older. 29 USC §621, www.eeoc.gov/policy/adea.html. Americans with Disabilities Act of 1990 (ADA), which prohibits employment discrimination against qualified individuals with disabilities in the private sector, and in state and local governments. 42 USC §12101, www.eeoc.gov/policy/ada.html

Advertising Available Positions Title VII expressly prohibits employers and recruiting agencies from printing or publishing any notice or advertisement for employment indicating a preference, limitation, specification, or discrimination based on race, color, religion, sex, or national origin. Except for jobs where such a classification is a bona fide occupational qualification. ADEA prohibits indicating an age preference Certain “trigger words” are unacceptable because they indicate age. “Age 40 to 50”, “recent graduate”, “retired person”, “supplement your pension”

Personal Inquiries In the hiring process, inquiries of a personal nature may run afoul of federal and state anti-discrimination laws. In particular, some common kinds of inquiries that should be avoided include: Direct inquiries as to race, sex, religion, national origin, age, sexual orientation, etc. Marital status, child care responsibilities, intentions as to pregnancy, or birth control. Economic status, such as credit information, prior bankruptcy. Political or religious views, associations or practices. Personal matters such as sexual habits or preferences.

Avoid Disability Discrimination The following are examples of questions one should never ask an Applicant:  Have you ever been hospitalized? Have you ever been treated for any mental condition? Do you suffer from any health-related condition that might prevent you from performing the job? How many days were you absent from work due to illness last year? Do you have any disabilities or impairments that might affect your ability to do the job? Are you taking any prescribed drugs? Have you ever been treated for drug addiction or alcoholism? 

Avoid Disability Discrimination - Cont. Examples of Questions one may ask an Applicant:  Can you perform all the job functions? Can you meet the attendance requirements? What are your professional certifications and licenses? Do you currently use illegal drugs?  Source:  The U.S. Equal Employment Opportunity Commission

The “Bear Traps” in Sourcing Candidates and Conducting Background Checks

Sourcing Candidates Many executive level recruiters focus a lot of energy on “sourcing” executive talent and locating passive candidates. Techniques may include: Prowling the internet Signing up for social or professional networking sites Utilizing meta-search services that draw information from social and professional networking sites Digging up “background intel” Contacting executives by personal email or home telephone Recruiters may be trying to do more these days than just pitch a position, but to impress candidates with their knowledge about their background.

Are any of these practices considered an invasion of privacy? Many states are starting to regulate the employer’s use of online, user-generated information. For example, the following states include a right to privacy in their constitution: Arizona, Alaska, California, Florida, Hawaii, Illinois, Louisiana, Montana, South Carolina, and Washington.

State and Common Law Causes of Action Intrusion Upon Seclusion Intentional intrusion upon solitude that would be highly offensive to a reasonable person. Publicity to Private Life The publicizing of a private matter (not of legitimate concern to the public) that would be highly offensive to a reasonable person. Both require a reasonable expectation of privacy and a serious invasion to be “highly offensive.” Still, prudent recruiters should be careful with any use of personal information that the candidate does not make available to the public at large.

Candidate Confidentiality By becoming an executive search candidate, employees take on a certain amount of risk with their current employers. Recruiters should protect candidate’s confidentiality by: Obtaining client authorization before submitting a client’s name to a company Contact the client directly rather than through client’s assistant or anyone else at the client’s current employer Not contact references without client permission Not discuss client with anyone outside the search firm Caution the potential new employer also to safeguard candidate confidentiality. Failure to take proper precautions could result in liability for interference with business relations.

Interference With Business Relations Interference with contract If there is a contract for a specified term and you induce a recruit to break that contract, you may be liable for interference. No additional element of wrongful conduct required. Interference with prospective economic advantage If there is no contract or the contract is at-will, you may be liable for interference with prospective economic advantage. The conduct must be “wrongful by some legal measure other than by the fact of interference itself.” E.g., the recruiting involves breaches of fiduciary duty, misappropriation of trade secrets, defamation, or any conduct constituting unfair competition.

Unfair Competition Recruiters should take steps to avoid potential liability for soliciting or hiring another company’s employees. Confidential Information and Trade Secrets Advise candidates not to disclose any confidential or trade secret information to their prospective employer. Also be careful how much information you disclose to a potential candidate so as not to compromise the hiring company’s trade secrets! The Uniform Trade Secrets Act prohibits not only absconding with documents or copying electronic files, but prohibits former employees from using the contents of their memories to disclose trade secrets. Restrictive Covenants Recruiters should determine if the candidate is bound by any non-compete agreement or customer non-solicitation agreement with current or prior employers. Potential employer will want to determine whether they are able to comply with restrictions before they hire the candidate.

Background Checks An ever-increasing number of employers are conducting background checks on candidates. Background checks reveal that nearly half of all employees have some discrepancy in information they report to their employers. Some employers are required to conduct background checks. Publicly traded companies under Sarbanes-Oxley Companies involved in child care, health care, elder care, or education under some state laws.

Collecting Personal Data DMV Records --  Except for confidential information including physical/mental health information, residence address and Social Security Number, the information contained in these records is considered public record.   Medical Records -- In many states medical records are confidential. There are only a few instances when a medical record can be released without the individual's authorization. The federal Fair Credit Reporting Act (FCRA) requires an individual's specific permission for the release of medical records. If employers require physical examinations after they make a job offer, they will have access to the results.  15 U.S.C. §1681.  Under the Americans with Disabilities Act, or ADA (42 U.S.C. §12101 and following), employers may inquire only about an applicant's ability to perform specific job duties--they may NOT request an employee's medical records.  An employer may not make a hiring decision based on the candidate's disability, as long as the employee can do the job with a reasonable accommodation. 

Collecting Personal Data – Cont. The federal Health Insurance Portability and Accountability Act (HIPAA) sets a national standard for privacy of health information. It was implemented in 2003.  HIPAA only applies to medical records maintained by health care providers, health plans, and health clearinghouses - and only if the facility maintains and transmits records in electronic form.  Worker's Compensation Records --  an employer may consider information contained in the public record from a workers' compensation appeal in making a job decision only if the applicant's injury may interfere with the applicant's ability to perform required duties.  Education Records Under The Family Educational Rights and Privacy Act (FERPA) (20 U.S.C. § 1232g; 34 CFR Part 99) -- education records such as transcripts, recommendations and financial information, are confidential.  Most schools will not release records without the consent of the student, and some schools will only release records directly to the student.  However, a school may release "directory information," which can include name, address, dates of attendance, degrees earned, and activities, unless the student has given written notice otherwise.       

Limitations On the Use of Criminal Records Some states limit how criminal background information can be used. For example, Pennsylvania only allows employer to consider convictions as they relate to the applicant’s suitability for a specific position. Also under Federal anti-discrimination law, employers need to balance legitimate liability concerns with the goals of Title VII. The EEOC regularly invalidates employment policies that create a blanket exclusion for persons with arrest records.

Employee Consent for Background Checks Some state laws require employers to obtain a Candidate’s consent prior to conducting background checks. For example, New Jersey mandates that employers obtain signatures of prospective employees prior to background checks and provide adequate notice and opportunity for the candidate to confirm or deny the accuracy of the information. Pennsylvania requires employers to notify applicants if the decision not to hire was based at all on criminal history.

Fair Credit Reporting Act The federal FCRA also regulates the use of background checks prepared by consumer reporting agencies, including: Consumer reports (background information, credit history checks, DMV records) Investigative consumer reports (details regarding candidate’s character, general reputation or mode of living—obtained through personal interviews with friends, neighbors and business associates, as well as through employment verification with previous employer) FCRA Compliance requires employers to: Provide written notice to the candidate Secure the employee’s signed consent in a document separate from an employment application or employee handbook Certify to the consumer reporting agency that the above steps have been followed and the company is complying with the FCRA Provide advance notice to the candidate of any adverse action, along with a copy of the report and a summary of the candidates rights Upon taking adverse action, supplying the candidate with a copy of the report, summary of rights, and the contact information for the consumer reporting agency that prepared the report. An employer’s failure to comply with the FCRA may give rise to liability for damages and fines.

The Impact of Sarbanes-Oxley on Executive Selection When recruiting and hiring at an executive level, companies and recruiters must be aware of the impact of SOX. § 404 requires companies to establish and maintain internal financial controls and processes. Background checks should be conducted on any individuals being considered for employment or promotion to enter positions of trust within an organization. All persons in accounting or financial reporting oversight roles Officers with direct access to company assets or information systems Scope of the background check Educational background Employment history Criminal record Credit History

Issues in Immigration What to Do and Avoid in Recruiting Foreign Nationals

Questions You May and May Not Ask Never ask about foreign nationality or visa status. Such questions may result in a discrimination claim. Exception: If your company has a defense contract or other government contract that requires you to hire only citizens, in which case you may ask about visa status. The only allowable question is, “Are you authorized to work in the United States?”

Sponsorship Employers should decide in advance whether they are willing to sponsor a qualified foreign national or will accept only applicants who are already authorized to work in the U.S. Employers cannot pass on the costs involved in sponsoring the applicant. Attorneys’ fees Recruitment costs Any other costs associated with the preparation and filing of labor certification. If an employer is unwilling to sponsor an applicant, it is acceptable to say this in your recruitment. However, never say “We will only hire citizens” or “We will hire only citizens or green card holders.” These statements are illegal.

Background Checks Background checks may be more complex and time-consuming for foreign nationals. If you are performing background checks (as discussed earlier), establish what checks will be made for which types of positions and apply those standards consistently for all candidates. A decision to forego consistent policies to expedite hiring can leave your company open to risk and potential civil liability.

I-9 Compliance All employers must fill out and keep a Form I-9 for every person hired to verify the identity and eligibility of each individual you hire. You only need to complete an I-9 for applicants you actually hire. Designed to determine who is authorized to work in the United States, not to determine who is and is not a citizen. You must complete an I-9 form for every employee, not just those who appear to be non-citizens. Employers should keep copies of documents presented for I-9 compliance. In the event that you are ever audited, these documents may prove invaluable. Source: Immigration Reform and Control Act of 1986 (IRCA), 8 U.S.C. § 132 et seq.

Site Visit Plan Employers should have a plan in place to deal with unannounced site visits, including: A single point of contact Protocols for file and document access so the right documents (and only the right documents) are shown, procedures for responding to requests to interview employees and when to involve legal counsel. Conduct an annual immigration compliance audit with the assistance of qualified immigration counsel. You will save money in the long run by protecting yourself against fines, penalties and potential civil liability.

The Executive Employment Contract WE FOUND HIM/HER! The Executive Employment Contract

The Employment Offer How you extend the offer Offer Letter: outlines basic job title, compensation, term of the agreement, and grounds for termination The letter may promise the opportunity to develop a comprehensive employment agreement with the Board of Directors For example, Mr. Sullivan’s offer letter read: In further consideration of you accepting this position, the Compensation Committee of the Board of Directors hereby agrees to work with you to develop a comprehensive three year employment agreement containing terms appropriately suited to the president and chief executive officer to the Corporation Comprehensive Employment Agreement: provisions will likely include salary, bonuses, severance in the event of termination, incentive compensation, retirement and stock-based compensation, intellectual property protections, & post-employment restrictive covenants

The Building Blocks of an Executive Employment Agreement -- Crucial Terms Scope of the Employment Term of the Agreement Grounds for Termination Executive Compensation, Benefits & Perquisites Change of Control Restrictive Covenants & Confidential Information Dispute Resolution

Scope of Employment

Why Are Scope of Employment Provisions Important? Every executive employment agreement should specify the scope of the executive’s employment Scope of employment provisions should be clear and fully expressed in order to: Formalize each party’s expectations Aid in determining later whether an executive was terminated for failure to perform his or her duties (for “good cause”) Other scope of employment clauses may include: What entity the executive reports to Whether the executive is a member of the Board of Directors Location of the executive’s primary workplace & travel expectations

For Example: Mr. Sullivan's scope of employment clause reads as follows: Executive shall serve as President & Chief Executive Officer of the Company. In such position, Executive shall have such duties and authority as are consistent therewith. Executive shall report to the Board. During the Employment Term, Executive will devote his full business time and best efforts to the performance of his duties . . .[Executive] will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services, either directly or indirectly, without the prior written consent of the Board . . .nothing herein shall preclude Executive, subject to prior approval of the Board, from . . . [serving] on any board of directors or trustees of any business corporation or any charitable or not-for-profit organization or from managing his personal, financial and legal affairs; provided . . . that such activities do not conflict or interfere with the performance of Executive’s duties

Term of the Agreement

“At-will” v. Contract Employment Employment agreements are usually “at-will” or for a term of years as specified in the contract In an at-will agreement, the employer or executive may terminate the relationship at any time for any reason In contrast, if the agreement is for a specified term of years, the contract may only be terminated for reasons stated in the agreement or for reasons permitted under state law Grounds for termination typically include: “Good Cause” (as defined in the agreement) Breach of fiduciary duties

Distinctions Between “At-Will” & Contract Employment Duration “At-will”: no set duration of time Contract: employment is specified for a number of years (typically 3 to 5) Termination “At-will” employees may be terminated for any non-discriminatory reason Contract employment agreements typically specify grounds for termination This offers better security to the parties because the consequences of early termination are harsher for the party in breach of the contract.

Grounds for Termination

Termination The typical executive employment agreement runs for a specified term of years Therefore, much of the negotiation effort will go into the length of the term and provisions that address how the executive’s employment may be terminated For example: Cause: what kinds of activities or events give the employer the right to terminate the employment agreement for cause? Good Reason: what kinds of activities or events give the executive the right to terminate the agreement? Severance: what are the economic consequences of termination? Specifying what constitutes “for cause” or “good reason” in the agreement helps to minimize disputes between the employer & executive upon termination Specified term agreements may also be terminated for reasons of death or disability In situations involving disability, the executive will typically be entitled to accrued salary and benefits, and continued medical and life insurance coverage

Termination For Cause Negotiating the definition of “for cause” termination in the employment agreement is advantageous to the employer The more discretion the employer has in determining whether the employee has breached his or her duties, the more likely it is that the executive can be terminated without the employer suffering economic consequences or fearing legal recourse A good “for cause” provision provides a clear and specific definition of termination “for cause” For example, Mr. Sullivan’s employment agreement provides that his employment may be terminated at any time “for cause.” Cause is defined as: (I) Executive’s willful and continued failure to perform substantially his duties with the Company . . . (ii) willful malfeasance or willful misconduct that results in substantial damage to the Company . . . (iii) willful and material violation of a material provision of the Company’s Code of Conduct or the Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics . . . (iv) conviction of, or entry of a plea of guilty or no contest by Executive with respect to, a felony or any lesser crime of which fraud or dishonesty is a material element, (v) any willful failure by Executive to comply with [restrictive covenants] . . . (vi) Executive’s breach of [representations and warranties] This is an example of a specific and objective definition of “for cause”

Consequences of Termination “For Cause” & Other “For Cause” Features Typical consequences of being terminated “for cause” include: Executive may only receive accrued salary and benefits No severance Mr. Sullivan’s contract reads: If Executive is terminated for Cause . . . he shall be entitled to receive only his Base Salary through the date of termination and reimbursement for any unreimbursed business expenses properly incurred by Executive . . . Through the date of Executive’s termination, and he shall have no further rights to any compensation . . . Or any other benefits under this Agreement. All other benefits, if any, due Executive following Executive’s termination of employment for Cause . . . Shall be determined in accordance with the plans, policies and practices of the Company; provided, however, that Executive shall not participate in any severance plan, policy or program of the Company. “For cause” provisions may require that the executive receive notice and an opportunity to correct the breaching behavior before being terminated Encourages communication between the executive and the employer Satisfies due process

Termination Without Cause or for Good Reason In contract employment, if the employer terminates the agreement without cause, then the executive is typically entitled to the remainder of the compensation and benefits owed under the contract On the other side of the equation, the agreement may specify what executive is entitled to if he or she should terminate his or her employment for “good reason” Mr. Sullivan’s contract provides that, if the executive is terminated without cause or by the executive for good reason, the executive is entitled to: (i) . . . a lump sum payment . . . [equal to the] Accrued obligations; (ii) the Pro-Rata Bonus . . .; (iii) subject to Executive’s continued compliance with [non-compete obligations], an amount equal to the greater of (A) $15,000,000, and (B) an amount equal to the sum of (I) three times the Base Salary . . . (II) three times the actual Annual Bonus paid with respect to the preceding fiscal year . . . (iv) continued health and life insurance Benefits for Executive . . . for a 36 month period. . . [unless the executive gets a new job] (v) 3 years of additional service credit and credit for 3 years of additional age under the Company’s employment pension plan . . . (vi) if, as of the date of such termination, (a) Executive is not eligible to participate in any retiree medical or life insurance program of the Company and (b) Executive would have at least 10 years service with the Company and reached at least age 55 if credited with three years of additional age and service, then the Company shall purchase for Executive a medical and/or life insurance policy

The Agreement Should Specify What Constitutes “Good Reason” by the Executive Typically, the definition of “good reason” is negotiated For example, in Mr. Sullivan’s contract, “good reason” is defined as: (i) any change in the duties or responsibilities . . . of the Executive that is inconsistent [with Executive’s current duties & responsibilities] (ii) a material and adverse change in Executive’s titles (iii) any material breach of this Agreement by the Company (iv) the failure of the Compensation Committee to adopt, by December 31, 2005 . . . An incentive compensation program . . . setting forth target awards that are . . . no less than $12,875,000 (v) within 30 days following notice by the Compensation Committee to Executive of adoption of an incentive compensation program in respect of each of the 2006 and 2007 fiscal years, Executive’s written notification to the Compensation Committee that such program is not acceptable to Executive; (vi) any failure of the shareholders to re-elect Executive as a member of the Board or any failure of the Board to re-nominate Executive for election to the Board (vii) any failure of the Board to consult with Executive prior to appointing a Chairman of the Board to replace the member of the Board holding such position on the Effective Date (viii) the relocation of Executive's primary office to a location that is more than 35 miles from both of (A) the Company’s headquarters in New York, New York, unless such office is moved closer to Executive’s primary residence at the time of such relocation, and (B) Executive’s residence at the time of such relocation Good reason may also include change-in-control of the company

Executive Compensation, Benefits & Perquisites

Components of Executive Compensation The components of an executive’s compensation package are varied and readily negotiable Typically, compensation components include: “Regular” compensation: includes annual salary with provisions for annual adjustments Deferred compensation: compensation payable in monthly sums commencing upon retirement Incentive compensation: can include provisions for annual cash profit-sharing bonuses tied to performance, stock bonuses, and stock option provisions Purpose: give the executive incentive to see that the corporation remains profitable Employee benefits, perquisites, & reimbursement of business expenses Pre-term compensation or signing bonuses are also options The new employer may compensate the executive for benefits that were forfeited as a result of the executive prematurely leaving the former employment Also consider cash signing bonuses & relocation expenses For example, Mr. Sullivan’s agreement reads: The Company shall pay Executive a transition bonus, in cash, in an amount equal to $4,875,000 . . . which shall be paid in four equal installments . . .

Executive Compensation: Tax Consequences Generally, a corporation may deduct the compensation paid to its employees However, 26 U.S.C. § 162(m) provides that corporate income tax deductions are not allowed for compensation to the CEO or the 4 highest compensated employees exceeding $1 million There are exceptions to the tax deduction limitation. These exceptions include: Performance-based compensation; remuneration paid on a commission basis; remuneration paid under binding contracts in effect on February 17, 1993; and income from certain pension plans, annuity plans, and trust funds The exception for performance based-compensation allows the company to compensate its executives in excess of the $1 million deduction limit using equity based compensation For example, stock options Also, beware of new federal legislation affecting executive compensation packages at entities receiving federal assistance Furthermore, if you are working for an international company note that the U.S. taxes all U.S. nationals on worldwide income. Double taxation can be avoided by: The foreign tax credit: intended to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived. U.S. Tax treaties: the U.S. has tax treaties with various countries that provide residents or citizens of the U.S. are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. For a list of countries the U.S. has treaties with see: http://www.irs.gov/businesses/international/article/0,,id=96739,00.html

Examples of Executive Compensation Mr. Sullivan’s contract provides for: Base Salary: During the Employment Term, the Company Shall pay Executive a base salary at the annual rate of $1,000,000, payable in regular installments in accordance with the Company’s usual payroll practices The Base Salary shall be be retroactive to the Effective Date. During the Employment Term, the Compensation committee of the Board shall review the Base Salary annually and may increase the Base Salary . . . Long-Term and Equity-Based Incentives: During the Employment Term, Executive shall be eligible to participate in any long-term incentive compensation plans or equity-based compensation plans maintained by the Company on such basis as may be determined by the Compensation Committee; provided that, as of a date that is not later than March 31, 2006, Executive shall be granted awards in respect of fiscal year 2005 having a value, determined at the date of grant, as reasonably determined by the Compensation Committee, of no less than . . . Annual Bonus: Executive may receive an additional annual cash bonus in respect of each full or partial fiscal year of the Company during the Employment Term, as determined in the sole discretion o the Compensation Committee based on its assessment of Company and individual performance in relation to performance targets, a subject evaluation of Executive’s performance and/or such other criteria as may be established by it. Notwithstanding the foregoing, during the Employment Term, Executive shall be eligible, with respect to each of fiscal years 2006 and 2007, for an annual cash bonus based on the attainment of targets established by the Compensation Committee, which, together with the target value of any long-term or equity-based award in respect of such year, shall have a total target value of $12,875,000.

Benefits & Perquisites The types of benefits available to employees are numerous Typically, benefits include executive pension & health plans, vacation, sick leave, Supplemental Executive Retirement Plans (SERPs), & sabbatical leave For example: Employee Benefits: During the Employment Term, Executive shall be entitled to participate in the Company’s employee benefit plan (other than any severance or change-in-control plan) as in effect from time to time on the same basis as those benefits are generally made available to other senior executives of the company. Vacation: Executive shall be entitled to four weeks annual paid vacation in accordance with the vacation policy of the Company. Perquisites: During the Employment Term, Executive shall be entitled to participate in all of the Company’s perquisite plans, programs and arrangements that are generally provided by the Company to other senior executives from time to time, including, without limitation, the provision of financial and tax planning assistance

Non-Compete Provisions, Non-Solicitation & Protection of Confidential Information

Restrictive Covenants: What do they entail and are they enforceable? This area of employment agreements has the potential for dispute between the employer and the employee The employer’s interest in having these provisions = restricting the executive’s behavior after the term of employment is over Don’t want the executive to disclose trade secrets or confidential information Don’t want the executive to join a competitor or steal employees from the employer Whether or not these provisions are enforceable depends on state law CA courts tend to uphold provisions protecting the employer’s trade secrets However, CA courts dislike non-compete provisions CA Business & Professions Code § 16600 states: Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. The Courts have held that under CA law, as a general proposition, individuals have the right to freely pursue the livelihood of their choice However, this freedom does have limits Under California law, employer may, under some circumstances, contractually prohibit employee from soliciting its clients or raiding its workforce for a limited period of time following termination of employment.

Sample Provisions Non-Competition/Non-Solicitation: While employed by the Company and for a period of 12 months (18 months in the event of termination by Executive for Good Reason . . .) following the date Executive ceases to be employed by the Company, if such termination occurs during the Employment Term . . ., Executive will not directly or indirectly, (w) engage in any “Competitive Business” for executive’s own account, (x) enter the employ of, or render any services to, any person engaged in any Competitive Business, (y) acquire a financial interest in, or otherwise become actively involved with, any person engaged in any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director , principal, agent, trustee or consultant, or (z) interfere with business relationships . . . Between the Company and customers or suppliers of, or consultants to the Company. Confidentiality: Executive shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity, any “Confidential Information” . . . except while employed by the Company, in furtherance of the business of and fort he benefit of the Company, or any “Personal Information” . . . ; provided that Executive may disclose such information when required to do so . . . Developments: All discoveries, inventions, ideas, technology, formulas, designs, software, programs, algorithms, products, systems, applications, processes, procedures, methods and improvements and enhancements conceived, developed or otherwise made or created or produced by Executive alone or with others, and in any way relating to the business or any proposed business of the Company of which Executive has been made aware, or the products or services of the company of which Executive has been made aware, whether or not subject to patent, copyrights or other protection and whether or not reduced to tangible form, at any time during the Employment, shall be the sole and exclusive property of the Company. Executive agrees to, and hereby does, assign to the Company, without any further consideration, all of Executive’s right, title and interest through in the world in and to all Developments.

Dispute Resolution

The Importance of Dispute Resolution Provisions Dispute resolution provisions specify the method for resolving disputes between the parties Litigation v. alternative dispute resolution Dispute resolution provisions are important for: Predictability Efficiency It is critical to specify the location of dispute resolution and the law governing disputes Also specify the scope of the dispute resolution provision Mr. Sullivan’s contract for provides for arbitration in the event of a dispute: Any dispute between the parties to this agreement in connection with, arising out of or asserting breach of this agreement or any statutory or common law claim by Executive relating to Executive’s employment under this Agreement or rights under this Agreement . . . Shall be exclusively resolved by binding statutory arbitration. Such dispute shall be submitted to arbitration in New York, New York, before a panel of three neutral arbitrators in accordance with the Commercial rules of the American Arbitration Association then in effect, and the arbitration determination resulting from any such submission shall be final and binding upon the parties. This agreement shall be governed by and construed in accordance with the laws of the State of New York Dispute resolution provisions may also include a provision for legal fees. For example: In the event of any contest or dispute relating to this Agreement or the termination of Executive’s employment hereunder, the Company shall reimburse 100% of Executive’s reasonable legal fees if Executive substantially prevails in such contest or dispute.

Independent Contractor vs. Employee Why It Matters

What is the difference? For employees, companies must withhold and pay certain work related taxes like income tax, social security, Medicare, and unemployment tax. Also, independent contractors are not entitled to protection under laws such as the Family and Medical Leave Act (FMLA), nor are they eligible for company-sponsored health insurance, workers’ compensation benefits, and others. Therefore, companies may be tempted to classify executives and other employees as independent contractors as they seek to cut costs

The High Cost of Misclassification Depending on the law in your jurisdiction, employers who misclassify employees as independent contractors may be liable for fines, substantial taxes, benefits such as vacation and holiday, and overtime -- even if you paid your “independent contractor” a higher rate of pay. Therefore, it is critical to properly classify executives and other workers.

Federal Law IRS Code § 3509 If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.

“Employee Misclassification Prevention Act” Bill proposed in Congress in 2008. If passed, would amend the Fair Labor Standards Act to: Impose penalties on employers for misclassification Require companies to keep personnel records of employee or independent contractor classifications Require companies to notify workers of their classification and their right to challenge that classification. Require state unemployment insurance agencies to conduct audits to identify employers No action was taken on the bill in the last session of Congress. However, in light of changes by the Obama Administration and the pro-union legislative efforts that we are already seeing, Congress may soon take a second look at the Employee Misclassification Prevention Act. Recruiters and Employers should keep their eyes open.

State Laws Vary from state to state. Mass: In 2009, in response to the common practice among employers of paying independent contractors a higher rate of pay than employees (based on the belief that this way they can avoid damages if they misclassify an employee as an independent contractor), the Supreme Judicial Court ruled in Somers v. Converged Access, Inc. that no safe harbor exists under MA state law. The employer has the burden of proving independent contractor status. Damages awarded: the employee could retain his independent contractor fees and recover the value of other benefits, such as vacation and holiday pay, and overtime. At least six states (Colorado, New Jersey, New York, Washington, Pennsylvania, and Maryland) recently enacted or are considering new legislation to halt independent contractor misclassifications. For example, Maryland’s “Workplace Fraud Act” imposes fines of up to $5,000 per employee on companies that knowingly misclassify workers as independent contractors.

General Qualifications of Independent Contractors IRS focuses on the worker’s control and independence. All factors are weighed together with no one being determinative. Generally, the employer does not direct or control an independent contractor. The service the worker performs is outside the usual course of the employer’s business. The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature. Remember the following qualifications to help you stay out of trouble.

Independent Contractors Provide their own training. They are experienced in their field and require no specific training from employers. Have control over the means of accomplishing their work. They can decide when, where, and how the work is done. They don’t have to follow any instructions, and the only control the employer has over the work is the end result. Have control over their salaries. If you are paying on commission or by the job – something other than fixed, periodic pay – you are probably dealing with a contractor. Can only be fired for breach of contract. You cannot fire independent contractors for general cutbacks or poor work ethic like an employee, but only for breaking contractual conditions. Cannot terminate their relationships with employers at-will. Conversely, independent contractors are usually contractually obligated to finish a job and can be held liable for their failure to do so. Have their own tools. Especially if their equipment requires a significant investment and expensive maintenance. Continued . . .

Have to pay for all business and traveling costs. Run the chance of making a profit or incurring a loss. If the worker carries the risk, other than the employer, the worker is an independent contractor. He or she has the responsibility of balancing equipment costs, delays, operating costs, and the like. Their services are available to the public, and they usually have multiple clients. They are not bound to companies the way employees are. They may strive to get as much business as possible by taking on as many clients as they can. Your company has no control over the contractor’s assistants. If your company hires, pays, or supervises any assistants helping a worker, that worker is probably an employee. Oral and/or written reports are not required. Companies generally only exercise this control over employees. Their services are not completely integrated into your company. Chances are the work performed by an independent contractor will not be critical to your business as a whole. The more crucial the services are, the more likely workers are employees. Employers should check with their local employment counsel to be certain about their classification choices.

ADDENDUM:

The Impacts of New Federal Legislation More Traps for the Unwary

These Laws Include: Emergency Economic Stabilization Act of 2008 (EESA) Includes the Troubled Assets Relief Program (TARP) American Recovery and Reinvestment Act of 2009 (ARRA)

EESA was enacted in 2008 as a response to the global financial crisis EESA was enacted in 2008 as a response to the global financial crisis. It authorized the United States to spend money to purchase distressed assets and inject money into troubled financial institutions through TARP TARP set out important requirements regarding executive compensation for institutions that participate in the program The American Recovery and Reinvestment Act amended the provisions of TARP addressing executive compensation. TARP now directs the Secretary of the Treasury to establish standards regarding executive compensation. Those standards include: (a) Limits on compensation that exclude incentives for senior executive officers of the TARP recipient to take unnecessary and excessive risks that threaten the value of such recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding (b) A provision for the recovery by such TARP recipient of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of the next 20 most highly-compensated employees of the TARP recipient based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate

(c) A prohibition on such TARP recipient making any golden parachute payment to a senior executive officer or any of the next 5 most highly-compensated employees of the TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding A Golden Parachute Payment is defined as: any payment to a senior executive officer for departure from a company for any reason, except for payments for services performed or benefits accrued (d) A prohibition on such TARP recipient paying or accruing any bonus, retention award, or incentive compensation during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any prohibition developed under this paragraph shall not apply to the payment of long-term restricted stock by such TARP recipient, provided that such long-term restricted stock- (I) does not fully vest during the period in which any obligation arising from financial assistance provided to that TARP recipient remains outstanding; (II) has a value in an amount that is not greater than 1/3 of the total amount of annual compensation of the employee receiving the stock and (III) is subject to such other terms and conditions as the Secretary may determine is in the public interest (e) A prohibition on any compensation plan that would encourage manipulation of the reported earnings of such TARP recipient to enhance the compensation of any of its employees (f) A requirement for the establishment of a Board Compensation Committee that meets the requirements of subsection (c)

Industry Specific ESF’s Often times, the most important decision a Company can make in seeking to fill an Executive position is in deciding what search firm to employ. The industry is highly competitive, and in the present marketplace, fewer executive placements means that more ESF’s are competing for each retention.

Industry Specific ESF’s – Cont. Industry groups and word of mouth are often the best ways to begin the process of researching for the right ESF for your placement. In particular, many ESF’s focus on certain industries and/or certain kinds of placements and executive positions. For example, the National Association of Legal Search Consultants (NALSC) is the industry association for ESF’s focused on the legal industry. Their website is: NALSC.org

NALSC Code of Ethics The NALSC Code of Ethics can be found at: http://www.nalsc.org/about/ethics.cfm. We can safely assume that more than one member of NALSC is interested in placing Ms. Kelly assuming she is interested in re-entering the work force.

Recruiting Firm Dangers Stern's Department Stores Inc., an affiliate of Federated Department Stores Inc., filed a complaint against executive recruiting firm Herbert Mines Associates ("HMA") alleging tortious interference with contract and interference with business relationships.  According to the complaint: HMA induced Matthew Serra, CEO of Stern's, to breach his employment contract and take a position with Venator Group, a competitor of Stern's. HMA knew that Serra had an employment agreement with Stern's, that the agreement was in effect and contained a non-compete clause

Recruiting Firm Dangers – Cont. Stern's sought damages for: the original recruiting costs in hiring Serra, its anticipated recruiting costs in hiring his replacement and for lost revenue that would have been generated if Serra had remained at Stern's during the contract term, punitive damages and an injunction to prevent HMA from recruiting other employees from Stern's and Federated.  Case settled in 2001.  Terms of settlement were confidential. Source: New York Law Journal - March 29, 1999 

Recruiting Firm Dangers – Cont. HP Surveillance Scandal.  In 2006, members of the Hewlitt Packard Board of Directors were charged by federal prosecutors with violating several laws restricting unauthorized access to data, including using false identities in order to access private telephone records.  The probe included surveillance of HP's own board members  Knowing what is legal and what isn't is getting more complicated--in part because the sophistication of the technology for committing possible crimes and for investigating them is changing rapidly.  When hiring private investigators, be sure to provide them with guidance as to what constitutes legal and ethical behavior with respect to background checks and investigations.  Anthony Pellicano Anthony Pellicano, private investigator to the rich and famous, was convicted of wiretapping, racketeering and wire fraud.  Numerous civil suits have also been filed against him for invasion of privacy, negligence and infliction of emotional distress.

Helpful resources include: The Uniform Trade Secrets Act, available at: http://www.nccusl.org/Update/ActSearchResults.aspx?ActId=37 The Model Business Corporation Act, available at: http://www.abanet.org/buslaw/committees/CL270000pub/nosearch/mbca/assembled/20051201000001.pdf Data on Executive Pay, available at: http://www.aflcio.org/corporatewatch/paywatch/ SEC filing information, available at: http://www.sec.gov/edgar.shtml For additional information, you may consult your local legal library. Two helpful treatises on employment agreements include: Executive and Professional Employment Contracts, by L.J. Kutten & Bernard D. Reams, Jr Corporate Counsel's Guide to Employment Contracts, published by Thomson West

Additional Reading Laws on Background Checks Federal Fair Credit Reporting Act, 15 USC §1681, www.ftc.gov/os/statutes/fcra.htm California Investigative Consumer Reporting Agencies Act, California Civil Code §1786, www.leginfo.ca.gov California Consumer Credit Reporting Agencies Act, California Civil Code §1785 www.leginfo.ca.gov Laws on Workplace Discrimination Equal Employment Opportunity Commission (EEOC), www.eeoc.gov The EEOC was established by Title VII of the Civil Rights Act of 1964. It enforces the following laws: Title VII of the Civil Rights Act of 1964 (Title VII), which prohibits employment discrimination based on race, color, religion, sex, or national origin. 42 USC §2000e, www.eeoc.gov/abouteeo/overview_laws.html Equal Pay Act of 1963, which protects men and women who perform substantially equal work in the same establishment from sex-based wage discrimination. 29 USC §206(d), www.eeoc.gov/policy/epa.html.

Additional Reading - Cont. Age Discrimination in Employment Act of 1967 (ADEA), which protects individuals who are 40 years of age or older. 29 USC §621, www.eeoc.gov/policy/adea.html. Americans with Disabilities Act of 1990 (ADA), which prohibits employment discrimination against qualified individuals with disabilities in the private sector, and in state and local governments. 42 USC §12101, www.eeoc.gov/policy/ada.html. Contacting Government Agencies U.S. Equal Employment Opportunity Commission (EEOC) 1801 L Street, N.W. Washington, D.C. 20507 Phone: (202) 663-4900 TTY: (202) 663-4494 Web: www.eeoc.gov EEOC Field Offices To be automatically connected with the nearest EEOC field office, call: Phone: (800) 669-4000 TTY: (800) 669-6820

Additional Reading - Cont. Federal Trade Commission (FTC) Consumer Response Center, CRC-240 Washington, D.C. 20580 Phone: (877) FTC-HELP (877-382-4357) TTY: (866) 653-4261 Web: www.ftc.gov FTC Publications "Negative Credit Can Squeeze a Job Search," www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt053.shtm "Using Consumer Reports: What Employers Need to Know," www.ftc.gov/bcp/edu/pubs/business/credit/bus08.shtm California Department of Fair Employment and Housing The Department of Fair Employment and Housing does not currently accept complaints through the Internet or by mail. For information on how to file an employment-related complaint, call one of the numbers below. (800) 884-1684 (Within California) (916) 227-0551 (Outside California) Web site: www.dfeh.ca.gov

Additional Reading - Cont. Fair Employment Agencies in the 50 States The following web sites list fair employment agencies in the 50 states: http://www.state.hi.us/hcrc/OtherStates.htm Articles of Interest "Criminal Records and Getting Back into the Workforce: Six Critical Steps for Ex-offenders Trying to Get Back into the Workforce," by Les Rosen, Esq. -- September, 2003 www.privacyrights.org/ar/rosencrim.htm "Dealing with Your Digital Dirt," ExecuNet, www.abilitiesenhanced.com/digital-dirt.pdf For more information on background checks, see The Manager’s Legal Handboook, by Lisa Guerin & Amy DelPo (Nolo Press). Privacy of Medical Records http://www.privacyrights.org/fs/fs8-med.htm HP pretexting scandal raises issues for HR http://findarticles.com/p/articles/mi_m3495/is_12_51/ai_n27093626/ Anthony Pellicano sentenced to prison: http://www.huffingtonpost.com/2008/12/15/anthony-pellicano-sentenc_n_151272.html

Additional Limits on Executive Compensation & Recently Enacted Rules on TARP Standards of Executive Compensation The ARRA further requires that the Board Compensation Committee puts in place a company-wide policy regarding excessive or luxury expenditures, as identified by the Secretary, which may include excessive expenditures on entertainment or events, office & facility renovations, aviation or other transportation services, or other activities that are not reasonable expenditures Furthermore, the there must be annual shareholder approval of executive compensation Finally, on June 10, 2009, the Treasury Department released its Interim Final Rule on TARP standards for executive compensation A copy of the Interim Final Rule may be found at: http://www.ustreas.gov/press/releases/tg165.htm Importantly, the Interim Final Rule appointed Kenneth R. Feinberg as the Special Master to ensure compensation plans are consistent with the public interest Review payments & compensation plans for the executives and the 100 most highly compensated employees of TARP recipients that have received “exceptional” assistance from the federal government Make sure to stay tuned for further developments in this area, as it is likely that future legislation will designate “pay czars” to review executive compensation packages at other publicly traded companies, not just those that are receiving TARP money

Industry Groups For more information on the various types of searches and the ESF’s who undertake them, contact the various industry groups involved in the Executive Search business. For example, the Association of Executive Search Consultants (AESC) is a worldwide association of retained ESF’s. Their website is: AESC.org The National Association of Legal Search Consultants includes retained and contingency ESF’s. Their website is: NALSC.org

Industry Groups - Continued Both the AESC and the NALSC have a Code of Ethics and Professional Guidelines that apply to their ESF members. The link to AESC’s Professional Practice Guidelines is: https://members.aesc.org

Industry Groups - Continued The Codes and guidelines are important in case disputes that arise over the conduct of the ESF in completing its work. Whether the dispute arises over sourcing candidates or the terms involved in delivering qualified candidates to the Company, the ESF’s commitment to the industry’s ethical norms will be helpful in defending its practices in court.

Background: Executive Searches What are they? Retained Delimited Contingent

RETAINED SEARCH Executive Search Firm (“ESF”) is hired by Company to provide candidates for an executive position with the Company. Compensation for the ESF is often 1/3, 1/3, 1/3, usually (but not always) meaning that 1/3 of the payment is due on retention, 1/3 when the candidates are delivered for on-site interviewing with the Company and 1/3 when the Candidate is hired. Many variations in compensation, often depending on industry, but usually compensation is related to the salary for the position to be filled.

RETAINED SEARCH – Cont. Depending on the ESF involved, the total compensation to the ESF may be negotiable. Typically the first 1/3 is not refundable. If Candidate accepts the position but leaves within a certain time period (60 to 120 days would be typical), the ESF is required to provide additional candidates.

THE DELIMITED SEARCH Similar to Retained Search in that up front fee is usually required. The differences: No 1/3, 1/3, 1/3 breakdown; Final payment usually a percentage of Candidate’s Compensation; and Down payment is refunded if project not completed by due date.

THE CONTINGENT SEARCH Typically, the ESF conducting a contingency search will receive no up-front payment and instead is compensated only at the conclusion of the search process; i.e., when a Candidate is hired.

THE CONTRACT Important Issues to Consider Terms and Traps for the Unwary

Important issues to consider and language to include in the Executive Search Agreement.

Rule No. 1 – GET IT IN WRITING Although oral contracts are enforceable in all 50 states and the District of Columbia, it is important to everyone concerned to make sure the retention of the ESF is reduced to writing.

REASONS Clarity: Terms set down in a written document are always more reliable than memories of the various participants months (or even years) after the ESF is retained. Statue of Limitations: In every state, the limitations period is longer for written contracts as compared to oral contracts.

REASONS - Continued 3. Protection: Both parties should want a description in the underlying contract not only of what is to be done, but also what is not to be done. For ex., The Company should insist that the ESF not engage in unlawful discrimination in the selection of candidates. The ESF might want all disclosures – and perhaps even indemnification – from the employer if a limited search is requested.

REASONS - Continued 4. What’s Negotiable vs. What’s Not Negotiable: Getting both parties focused in a written description of their agreement will expose early on in the process which terms are negotiable and which are not. E.g., some ESF’s will only provide their services on a 1/3, 1/3, 1/3 retention based on the first year’s salary of the hired executive. This may be more than the Company is prepared to pay. E.g., Ms. Kelly’s placement under this arrangement would pay the ESF $900,000 and Mr. Lawrence’s more than $2 Million.

Recent Cases The disadvantages of proceeding with the retention without a signed agreement – both for the Company and the ESF – are exemplified by several recent high profile lawsuits. CB Legal Search LLC vs. Lewis Brisbois; Steven Douglas Associates vs. Orrick, Herrington & Sutcliffe;

Steven Douglas Associates (“SDA”) v. Orrick SDA alleges it contracted with Orrick to recruit attorneys for Orrick’s Frankfurt office SDA alleges that Orrick hired three attorneys that SDA had recruited on behalf of Orrick. SDA alleges Orrick denied any knowledge of the placement agreement. SDA sought $450,000 in placement fees. Orrick contends that that the contract in dispute was not applicable to Orrick. Confidential Settlement reached in September, 2009.

CB Legal Search LLC v. Lewis Brisbois Bisgaard & Smith LLP CB claims it set up meeting with Lewis Brisbois and Bollinger Ruberry attorneys ready to jump ship. CB claims it sent Lewis Brisbois financial information on the Bollinger Ruberry attorneys after Lewis Brisbois stated that they would sign an NDA and a placement agreement. Lewis Brisbois never signed the NDA or the placement agreement. Case still pending.

Rule No. 2: Cover the Basics As we’ll also see when we look at the Executive Employment Contract itself, there are certain basic terms that should be included in every ESF contract.

Compensation to the ESF How much is the ESF to be paid? When is payment due? Whether payment is to be refunded if search is unsuccessful or if Candidate leaves the position shortly after the hire date?

Compensation - Continued The more clarity that can be applied to these terms, the better. E.g, a provision like “1/3 payable on retention, 1/3 on submission of candidates, 1/3 on hiring,” is fraught with ambiguity unless the terms “retention,” “submission,” and “hiring” are precisely defined.

Scope of Retention Nail down precisely what the expectations are. E.g, if someone like a Martin Lawrence is being sought for a CEO position, make sure minimum qualifications are included in the retention.

Length of Time to Deliver Usually, the Company wants qualified applicants immediately and the ESF wants eternity and a day to deliver them. More disputes occur in this one area than any other.

Termination of the Retention If termination of the Agreement is to be allowed, set out reasons therefor and whether the ESF is entitled to any compensation upon termination.

“Off-Limits” Policy This refers to whether the ESF is restricted during the scope of the retention from recruiting from the hiring company. Among other things, the NAER surveys its members on whether such a term is included in their standard agreements. See their website at: www.naer.org

Exclusive vs. Non-Exclusive Is the retention exclusive, or does the Company have the ability to use multiple ESF’s in seeking qualified candidates? Many Retained Consultants will only accept exclusive retentions, whereas most Contingency Consultants will accept non-exclusive assignments.

Use and Return of Confidential Data and Materials Often the ESF is provided with sensitive and highly confidential information and materials in connection with the retention. In such cases, the Company should make sure that confidential information remains confidential and that sensitive materials are returned when the project is completed.

Dispute Resolution Whether arbitration or mediation – or both – are required; whether attorneys’ fees and costs are recoverable by the prevailing party.

Venue and Choice of Law Venue refers to the location for resolving disputes. E.g., if the ESF is located in NY and the hiring company is in SF, one of the parties will be seriously inconvenienced by the choice of locations in which to litigate. Similarly, it may be important to one side or the other that the law of a particular state be used to resolve the parties’ disputes.

Contingent Contract Example An example of a standard ESF contract is available at the following web address: http://www.abtechplacement.com/files/pdfs/Recruiter-Agreement-Full-Time.pdf