Change in Executive’s Reporting Relationship Considered a Breach of Contract by Employer

Many executive employment agreements provide that an executive can only be terminated “for cause.” In addition, those agreements sometimes provide that the executive can terminate the employment relationship for “good reason.” A resignation for “good reason” results in it being treated as a termination without cause by the employer. This is significant, because the employee will then be entitled to damages, i.e., whatever the employee would have received under the agreement had he or she either remained employed or terminated without cause.

Recently, in Stafford v. Scientia Health Group (Supreme County, New York County), the court determined that because the executive terminated the employment relationship based upon the fact that his reporting relationship had changed, he was entitled to damages. Under the employment agreement, Stafford was to “report to the Chairman of the Company.” In addition, the agreement provided that he would receive, among other things, a base salary of $250,000 and a bonus in the amount of $75,000 annually. The agreement provided that if Stafford were terminated for cause, the employer would have no obligation to pay him his bonus or his salary for the remainder of the agreement’s term. This provision also applied if Stafford terminated his employment without “good reason.”
During Stafford’s employment, the employer’s chairman of the board resigned and was not replaced. Consequently, Stafford was required to report to the employer’s board of directors, including its “sort of de facto chairman.”
Subsequently, Stafford resigned and sued for his lost pay and bonus. The employer countered, asserting several defenses to payment, all of which the court rejected. Ultimately, the court based its decision on the terms of the employment agreement, which required that during Stafford’s employment, he was to report to the chairman of the board, and no one else.
This case highlights the significance of such “reporting” clauses, which are common in many executive employment contracts. Generally, such a clause is important to an executive, and employers will agree to those clauses where the executive is sought for his or her skills and ability to manage. This case emphasizes that such clauses are material to an agreement, and a change in reporting relationship will constitute a breach by the employer, or good reason for the executive’s resignation.

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