A few weeks ago you may have read my article titled, "Nonprofit Executives — To Contract or Not to Contract." That piece examined the pros and cons of using an employment contract for a nonprofit executive director. This article will help you understand the important components of a contract as well as the emotional considerations. Even though working with an employment law attorney is always recommended, it’s still important for a board and the executive director to understand the basic anatomy of and rationale for a contract.
It can sometimes be emotionally challenging for the executive director or board to broach the topic of a contract. It’s almost like talking about a pre-nuptial agreement before you get married — uncomfortable at best. Throughout the hiring process, both board and the prospective candidate strive to appear at their best and make themselves attractive to the other. Typically, the major terms of employment are discussed, including salary, bonuses and benefits. Other details are often left for later discussion following an acceptance of an offer and the preparation of a written employment agreement.
During the courtship process, neither party, understandably, wishes to think about, much less talk about, the divorce. Sooner or (hopefully) later, the relationship between the executive and the organization will end. The interests of the parties can be very distinct; the executive is looking for as much security as s/he can get, and the organization wants to have as little expense as possible tied up in a person who is no longer performing services for the organization. The negotiations should find the right balance between the needs of the parties.
One executive candidate related to me her recent experience. She said the board seemed to want the best of both worlds: a contract that held the executive accountable to specific performance issues but also preserved an at will status. Even with an attorney on their board, the members of the personnel and executive committees struggled with understanding that a contract needed to, in some way, differ from the regular employee/employer relationship the nonprofit had established with all other exempt employees and, though a contract could preserve their right to terminate the executive at will, there would be financial consequences for doing so.
She reported, “I eventually had to weigh the desire to get what I felt was a solid, win-win contract with the desire not to appear too pushy in my very first dealings with the board. It’s tough when you’re actually in the situation and wanting to start off with a positive impression.”
Unfortunately, this is a common dilemma between boards and executive candidates. Executives, aware of their vulnerability, want to gain clarity and security through a contract; whereas boards often don’t understand the benefits or function of a contract. So, they try to avoid the subject — just glad they found a good candidate for the position.
Forbes Magazine tells us that despite claims to the contrary, non-profits and their executive directors both benefit from the existence of an employment contract. The employment agreement should clearly spell out the terms of the employment relationship and leave no surprises. The executive director’s salary should not be the determining factor in whether or not to enter into a contract. Rather, a desire to minimize and manage risk by both parties and to avoid a bitter and costly end, makes having an employment contract a smart idea.
For the protection of the organization, as well as in fairness to each party, a well-written contract is important. One function of the contract is to clarify the details about when and how the relationship can end, and what happens when it does end. Moreover, it is important that the executive candidate be presented with the material terms and conditions of their newly-offered employment prior to their acceptance of the offer and prior to the time they notify the existing employer that they are leaving or prior to the time they decline other offers.
While each contract is a bit different depending on the situation, the following are five components you will want to include in your contract:
Compensation and Authority. Salary, benefits and other compensation should be spelled out since the compensation of the executive director may be subject to excess benefit scrutiny from the IRS.
It is ordinarily in the best interests of both the organization and the executive director for the contract to provide for the executive’s exclusive authority over engaging, advancing, compensating, assigning, and terminating all other employees. The executive’s authority, however, will be limited by budgetary and legal constraints in addition to board oversight to the extent required to maintain tax-exempt status.
Term of Years and Frequency of Evaluations. While employment can be at-will (meaning that it can be ended at any time by either party without cause or notice), many candidates for high-level executive positions will not accept that sort of uncertainty when considering a position. Thus, most executive employment contracts include an express term of employment.
Therefore, the contract between the governing board and the executive director should include a term of years. Many organizations use a three to five year horizon. However, it should still stipulate action to be taken if the executive director is not performing to the stated standards. This segment of the contract should specify the frequency and criteria used for performance evaluations. Clear reasons for termination should be spelled out in this section. This approach allows the board to keep talent for a period of time and provides the executive director with a sense of job security.
Many agreements include both an initial term and a renewal term. Often the initial term is two or three years. Many candidates will not consider less security than two years; organizations should be very careful when considering terms longer than three years. The renewal term will specify what happens at the end of the initial term. There are several options.
» 1. Expire. The agreement could simply expire upon the end of the term; with no obligation on either party to continue employment (remember that parties are always free to negotiate extensions if both parties desire to continue the relationship).
» 2. Automatic Renewal. A common provision in executive agreements is an automatic renewal in the absence of some affirmative notice to the contrary. For example, if one party does not provide notice at least 180 days prior to the expiration of the initial term, the agreement might renew automatically for one year.
» 3. Extension. The automatic renewal provision could continue for each year of the extension as well (i.e., in the absence of notice during an extension year, the agreement automatically renews for another year). However, the automatic renewal need not continue; the agreement could contain a single renewal of one or two years. Whatever approach is adopted, the agreement should be very explicit as to what happens upon the end of the initial term or renewal term.
For Cause or Without Cause Termination. This section will clarify the expectations and relationship between the parties and define criteria for what the board considers “cause.” Provisions for termination without cause should specify the period of notice the board must give to the executive as well as the terms of severance payments, if any. Terms for this payment should be specifically stated. Of course, if the executive director is terminated for cause or if the contract is not renewed at the end of its term, severance is not payable.
Non-Disparagement Clause. A non-disparagement clause states that an executive director cannot say anything bad about the employer even if the commentary is true. While non-disparagement clauses are generally enforceable, they cannot prevent the executive director from responding to a subpoena or cooperating with any governmental investigation. In fact, the clause should specifically state that nothing in the non-disparagement provision will interfere with the executive’s right to cooperate and participate in an investigation or proceeding conducted by the EEOC or other federal or state regulatory or law enforcement agency. Likewise, this clause will state that the organization’s representatives cannot make any disparaging remarks about the executive director.
Confidentiality & Return of Property Clauses. In addition to a confidentiality clause, that would protect client and donor lists, you should add a clause requiring the executive director to return all property owned by the organization at the end of the executive’s employment term.
In summary, contracts for nonprofit executives provide significant benefits to the organization as well as the candidate. The process can be fraught with emotional challenges or it can be the first opportunity for the board and the executive to work on an important project as partners; creating a product that everyone feels good about. The important things are to approach the issue in a sensible, well-informed manner; to include all parties in the process; and to engage the services of an employment law attorney. The end result will add essential clarity and security for all concerned.
Nathan Rogers, a local attorney whose practice focuses on business transactions and litigation emphasizes the importance of a carefully written contract. “If a contract is going to be used, all of the contract terms should be carefully drafted. Often, a poorly written contract can be worse than no contract at all. Particular attention should be given to the contract terms related to the executive’s duties and compensation and the terms setting forth the circumstances under which the contract can be terminated, both with and without cause.”