separation from service as payment event & termination for cause

[Gudgergirl]

I think I am probably overthinking this but it never hurts to get a second (and third and fourth) opinion.

I am designing a NQDC which has fairly simple terms.

All contributions are by employer (i.e., no employee deferrals).

There is a 10 year vesting schedule wiht immediate vesting for death and disability.

Payment events will be separation from service, death and disability.

In addition, all amounts will be forfeited if a participant is terminated for cause (as defined in the participant's employment agreement).

Does anyone see any inconsistency between separation from service (which includes termination for cause) as a payment event and termination for cause as a forfeiture event?

[david rigby]

Just make sure the document carefully defines both, without any overlap?

BTW, another payment event could be plan termination (with proper 409A deferral).

[ForksnKnives]

Putting the NQDC benefits on the line in a for cause termination increases the probability that the terminated employee is going to hire counsel and contest every termination in every way imaginable. It's too much money on the line to let it go easily.

"For cause" could be a very nuanced term and establishing reasons for a for cause termination could cause a lot of problems. If your NQ participants are directors or other participants who work under contract, their contract likely defines what conditions permit termination by the employer and those may include more or less terms than what you are drafting into the contract. Do existing contracts invalidate the use of "for cause" determinations? For those who are at-will employees, there may be some concerns that the plan indicating specific reasons for termination is contrary to the at-will relationship and contrary to the likely disclaimer of contract in the employment handbook. Any constructive discharge claim on the basis of discrimination is going to include litigation over plan benefits.

If a discharged employee can disprove cause and win benefits then every employee discharged for cause that forfeits benefits is going to file suit to try to recover the plan benefits. That's a lot of potential litigation. There's a lot of issues with that. What standards are used to determine cause? Who determines cause? Is that a plan administrator decision or a company decision? What standard of review can we apply to that decision? How much state employment law will be fit into litigating the plan? How much does the employee have to disprove the legitimacy of the cause finding? If the employees work under contract, what happens if some or all of the contract is invalidated? If the company has made employees sign an acknowledgement of a handbook that indicates employment is at-will, can that invalidate the forfeiture? Once you get through all those legal issues, then you still have to put the facts in front of a factfinder. That means each of these employment decisions is going to turn into an opportunity for judicial review of employment decisions. There's further complication if the employee brings multiple claims against the employer and the employer tries to argue employment is at-will but then these plan benefits are based on some "good cause" or "just cause" standard. The employer might prevail on all those issues but the cost of litigation and the potential judicial review of plan and employer decisions may collectively be more burdensome than paying benefits to employees terminated with cause.

Some of these issues may be more broad than the terms you are drafting or the terms of the employment agreement some or all participants operate under. You may not have any at-will employees participating at any point under this plan, but there may be situations where an employee's contract term expires but work continues or the employee is terminated but later a court determines parts of the contract are invalid. The concerns raised above were intentionally broad to raise issues against the limited set of facts provided. Just some things to think about from an employee-side litigator.

[jpod]

Gudgergirl: What you are doing seems perfectly fine to me, and typical. My only caution (as with all NQDC), is to think about whether the plan satisfies the top hat group exemption from ERISA.

My response to Forksnknives' comment is that it is quite common, if not the norm, to have a for cause forfeiture, although clearly "cause" should be stealing, drugs, and other bad stuff, not poor performance. The discussion concerning cost and risk of litigation is a bit dramatic. If employer wishes to pull the "cause" card, obviously it must realize that it may have to negotiate a settlement, but the deferred compensation will be a bargaining chip which wouldn't be available absent the for cause forfeiture provision.