Article #1

Suggestions for Town and City Managers and Department Heads
on the Effective Negotiation of Executive Contracts
and Severance Agreements

I spend a fair amount of my time these days defending employers against employment discrimination and wrongful termination lawsuits and advising employers outside the courtroom on ways to prevent these types of lawsuits from happening in the first place. I also find myself spending more and more time these days representing management level employees both in lawsuits and in negotiations with their employers over the terms of their relationship and the termination of that relationship. It occurs to me that as managers you all lead something of a double life. On the one hand, your job calls upon you to promote and defend your employer's position in employment matters - you act as the employer. On the other hand, you are also an employee with your own rights and your own responsibilities to yourselves and to your families.

If public sector employment was a stock on the stock market it would probably be considered a speculative stock with a relatively high price/earnings ratio. As professionals, you invest a good deal in your careers both in terms of years of education and years of on the job training. Many of you have been required to pick up and move your families to a particular community because of residency requirements. As managers and administrators, you are often in the public eye and usually somebody's hobby horse.

And yet (for all you put into the job) you are still subject to the uncertain winds of local politics. Local politicians can be as arbitrary and mean-spirited as anyone else. The average work life expectancy of a public sector manager seems to me to be much shorter than a manager in the private sector. I am working on matters with several municipal managers who are now working in their second or third different community since I started practicing in this area of the country in 1986. Given the heavy investment you make in your job and the relatively weak job security that is offered to you, you do need to do what you can to protect yourself. There are several things you can try to do going into the employment relationship. There are also several things you can do to protect yourself coming out of the employment relationship.

Statutes and Charters

The first question you need to answer is what protections you have to work with apart from what you can negotiate in an employment contract.

City managers have a right by statute to a hearing but there is no just cause requirement - they serve at the will of a majority of councilors. (See R.S.A. 49-C:17). Town managers have a "cause" requirement but no statutory right to a hearing. (See R.S.A. 37:3). Fire chiefs and police officers have both a right to a hearing and a cause requirement for termination. (See R.S.A. 47:9 and 41:48). Town administrators seem to have no particular statutory protections at all. Charters and personnel rules often modify the statutory protections. For example, while the Concord and Franklin charters appear to add no additional protection, the charter adopted in Dover does add a "cause" requirement to termination of its city manager. Even where the statute or charger or rules have provided for just cause before termination, however, the "cause" requirement is often left vague or overbroad.

Negotiating Just Cause

It is an open question whether you can negotiate to supply a just cause requirement where none is provided by statute or charter (for example, the city manager model). My opinion is that you can. The legal question would be whether adding an impediment by contract to the city council's ability to vote a city manager out of office derogates the council's "legislative" authority. It seems to me that the way a city deals with its employees is no different in kind from the way a private employer does so. I believe that this type of action is more "proprietary" than "legislative" in nature so a negotiated just cause requirement should not be considered ultra vires or illegal. I am aware of no case law in New Hampshire which deals with this issue. There would be an even stronger argument for negotiating the terms of just cause where there is a just cause requirement already in place and you are simply adding substance and definition to the term in your contract.

My opinion is you should negotiate for a just cause requirement whatever the statutory framework and it should be a requirement with some substance. "Cause" should be defined to mean at a minimum "gross incompetence or gross neglect of duties or commission by the employee of a material act of dishonest or moral turpitude in connection with his/her employment".

A just cause requirement is probably only as good as the quality of the process for deciding whether it exists or not. The problem arises when, for example, the board of selectmen acts as both prosecutor and jury.

Parties to an employment contract should consider the use of private binding arbitration as an alternative to the traditional hearing model. One can today, quite literally, "rent a judge" to resolve disputes between parties to a contract. There are a number of retired state court judges who offer this service. Private arbitration has the advantage of eliminating the bias problem, it's faster and the quality of justice is as good as any other forum. Whether or not the parties can agree to private binding arbitration of potential disputes, you should also negotiate for important procedural rights and safeguards in whatever hearing process is available to you to contest your termination. These safeguards would include a right to written notice of the grounds for dismissal, the right to counsel, the right to contact witnesses and offer your own evidence.

As an alternative approach to negotiating for the protection of a just cause provision, you should consider whether you really want to be in a job where they don't want you. Is the problem a short term political one that's likely to change in the next election? Is it likely to be long term or endemic? An alternative to negotiating a "just cause" termination standard is to abandon it altogether in your contract and negotiate for a without cause termination right but with appropriate buy-out provisions. This avoids the "messy divorce" situation and provides you with at least an interim level of financial security. If the parachute is substantial enough it can actually be an economic deterrent to improvident action by the board. This option can be used either in combination with a just cause provision or you can abandon the just cause provision altogether.

There are a number of common formulas for the severance package in a "without cause" termination agreement. One month for every year of employment is a commonly used calculation of severance pay. Six months seems to be an alternative for those choosing fixed severance arrangements. Some contracts call for the employer to buy out the remainder of the contract term. Remember to be careful about end of term terminations and build in a renewal date of at least six months in advance.

Liability Insurance and Indemnification

An all too common area of municipal liability involves lawsuits for sexual harassment, discrimination and excessive use of police force. Under federal civil rights statutes such as 42 U.S.C. 1983 there may be individual liability imposed on public officials in such situations. The liability insurance currently available to municipalities usually covers the municipality itself in these cases but some policies do not cover the public official in his or her individual capacity. It is important to include a broad indemnification agreement in the employment contract so the individual official is protected by the municipality from exposure even if the official is not protected by the municipality's insurance carrier.

Separation Agreements

If you haven't been able to protect yourself going into the employment relationship, you may still be able to protect yourself as you come out of it.

There is an incentive for both private and public sector employers to negotiate mutually agreeable terms of separation to avoid the risk of litigation. Our recent study showed that the average cost to defend an employment case to conclusion is approximately $80,000 in this country. Million dollar verdicts are not uncommon in this country particularly in cases involving management level employees suing as plaintiffs. We saw our first $1,000,000 verdict in a New Hampshire employment case a few years ago. Even in New Hampshire, six figure verdicts are becoming common in employment cases.

The fact that you are a management level employee does not mean that you give up your civil rights to be free from discrimination or wrongful termination. There are a number of rights which exist whatever the terms of your employment contract or even in the absence of an employment contract.

One of the most commonly used exceptions to the employment at will doctrine is the theory of "wrongful termination". This theory permits a terminated employee to recover damages if the employee can show that his termination offends some public policy. An employer is liable for wrongful termination if its actions are taken in bad faith and if it terminates the employee for performing some act that public policy encourages or if it fires the employee for refusing to do some act that public policy condemns.

A variation on this theory has been codified in New Hampshire's whistleblower's statute which says that you cannot take adverse employment action against an employee who reports a violation of the law or who cooperates in an investigation of whether the employer has violated the law.

There are in addition to these theories, civil rights statutes, both under state and federal law which limit the employer in its hiring and firing decisions. There are several statutes governing discrimination in employment in this country. These statutes are not about affirmative action. They are not about the conferral of benefits but the denial of rights because of status. Among the statutes which provide rights to employees in this area are:

1. Title VII of the Civil Rights Act of 1964 as amended in 1991;
2. The Age Discrimination in Employment Act;
3. The Americans With Disabilities Act;
4. The functional equivalents of each of these federal statutes which exist under state law and which are in many cases even broader in their coverage than the federal statutes.

Procedural due process rights are frequently relied upon by management level public sector employees who wish to contest the grounds for their termination. The termination decision is often upset not because the underlying reasons for termination are contested but because the process used to reach the decision has been defective.

These are all tools in the employee's arsenal which can provide you with leverage to negotiate an effective separation agreement with a public sector employer. Separation agreements are being used by more and more employers. The employer obtains a release of potential claims. In exchange, the employer offers severance above and beyond what the employee would otherwise be entitled to.

One of the most important things you must do at the end of the employment relationship is preserve and protect the ability to obtain your next job. Among the things you need to consider in negotiating a separation agreement are the following:

1. At least a nondisparagement agreement
2. Preferably an agreed reason for the separation and a letter of recommendation
3. An agreement on who will respond to prospective employers and what they will say
4. Options for sealing of personnel files and
5. Confidentiality of the agreement

There are also a number of transitional concerns that you have as you exit the last job and before you reach the next one:

1. You will want to negotiate to keep your work product or copies of it
2. You will want to negotiate an agreement by the employer not to contest your eligibility for unemployment compensation
3. You will want to negotiate for secretarial assistance to help you during the job search
4. will want to negotiate an agreement on indemnification coverage of future liability claims
5. You will want to negotiate an agreement on compensation to you for assistance in defending future claims

There are also a number of tax and financial considerations you should be aware of:

1. Timing of payments: should the severance payments be staggered across tax years to minimize the tax rate applied to those dollars? Should the severance all be paid at year end when you have already "maxed out" on your FICA obligations, so the severance is not subject to FICA?
2. Continuation of health insurance at employer's expense - trade some taxable severance for this nontaxable benefit
3. An alternative is to trade your COBRA rights for more money if you can get on your spouse's coverage.
4. There are ways to use retirement funds and avoid the 10% withdrawal penalty through the use of some annuity arrangements.

So there are two contracts to keep in mind: the one you negotiate at the beginning of your relationship and the one you negotiate at the end of it. Both have important roles to play in your professional and personal planning and both are coming to be accepted as standard aspects of the employment relationship between managers and employers in both the private and public sectors.

About the Author

Craig L. Staples is a seasoned litigator and trial lawyer serving the legal needs of individuals and businesses throughout New Hampshire. Mr. Staples has handled over 500 civil litigation cases on behalf of institutions, businesses and individuals in 23 years of legal experience. He graduated with honors from the University of New Hampshire in 1976, receiving his J.D., cum laude, from Villanova University in 1979 where he as a member of the Villanova Law Review. He concentrates his practice in the areas of employment law, anti-discrimination law, civil rights and business law on behalf of public and private employers as well as management level employees. He has tried numerous jury and non-jury cases both in New Hampshire and Pennsylvania including the defense of a civil rights class action lawsuit involving a class of over 400 plaintiffs against a New Hampshire municipality and its officials. Mr. Staples also has substantial appellate advocacy experience having appeared and argued successfully before the appellate courts in Pennsylvania as well as the New Hampshire Supreme Court. He has frequently lectured to employers, public officials and to bar organizations in the areas of municipal liability, civil rights and employment law.