An Executive Breached Their Employment Agreement. What Are the Company's Options?

First, identify the breach the agreement actually covers

Executive employment agreements are different from the at-will relationship most Texas employees have. They typically run for a term or require notice, define compensation in detail, condition bonuses and equity on continued service or performance, impose confidentiality, non-compete and non-solicitation obligations, and define what counts as “cause” and “good reason.” The company's options depend on which of those provisions the executive violated.

Common breaches, roughly in order of frequency: leaving before the term or notice period ends; working for or preparing to join a competitor in violation of a covenant; disclosing confidential information; misconduct that meets the contract's definition of cause, such as dishonesty, a policy violation or a failure to perform duties after notice; and disparagement. Each points toward different remedies, and several often occur together.

Option one: terminate for cause, correctly

If the executive is still employed, the first question is whether the breach allows termination for cause. The answer is in the contract's definition, not in what the board considers fair. Many agreements define cause narrowly, require written notice specifying the conduct, and give the executive a cure period of a set number of days before termination becomes effective. Some require a board vote or an opportunity to be heard.

Skipping those steps converts the situation. A termination that does not follow the contract's procedure can itself be a breach by the company, which then owes the severance the agreement provides for a termination without cause. A litigator's first task is to read the cause definition and procedure against the known facts and to document the process as it happens.

Option two: compensation the contract makes conditional

Executive pay is often structured so that part of it is earned only on conditions: equity that vests over time, a retention bonus repayable if the executive leaves within a period, a bonus payable only if employed on the payment date, severance conditioned on compliance with covenants. When the executive breaches, these conditions are the company's most direct remedy, because they require no lawsuit to apply. The company declines to pay what has not been earned, or demands repayment of what the agreement says must be returned.

Two cautions. First, the condition must actually be in the plan or agreement; a company cannot withhold earned compensation as a self-help remedy. The Texas Payday Law, Labor Code chapter 61, prohibits withholding or deducting from wages without a court order, statutory authority or the employee's written authorization for a lawful purpose, and a wage claim or a Payday Law lawsuit is a common counter-move by an executive who has been cut off. Second, clawback and forfeiture clauses are enforced as written, so their wording decides whether a particular bonus is recoverable.

Option three: enforce the restrictive covenants

If the breach involves competition or solicitation, the company can seek a temporary restraining order and temporary injunction enforcing the executive's non-compete or non-solicitation covenant, provided the covenant meets the Texas test in Business and Commerce Code section 15.50. Executive covenants tend to fare better than rank-and-file covenants because the consideration is clear (equity, access to strategy and financials) and the executive's role justifies a broader scope. The mechanics are covered in how to enforce a non-compete against a former employee.

Confidentiality obligations are enforced as ordinary contract terms and, where the information qualifies, under the Texas Uniform Trade Secrets Act. An executive's departure is one of the situations where a forensic review of the departing employee's devices and accounts is most likely to show what actually left.

Option four: sue for damages

Breach of an executive agreement is a breach of contract, and the company can recover the damages the breach caused. What those are depends on the breach:

• Early departure. The cost of replacing the executive above what the company would have paid, including search fees and any premium paid to the successor, and losses the agreement's notice period was meant to prevent. Texas does not let an employer recover the executive's future salary as a windfall; the measure is the company's loss.
• Competition or solicitation. Lost profits on diverted business, proven account by account, subject to the limits on pre-reformation damages if the covenant has to be narrowed.
• Misconduct. The direct cost of the misconduct, such as misappropriated funds or the expense of remediation.

Agreements sometimes include liquidated damages for early departure or covenant breaches. Texas enforces them only if the harm was difficult to estimate when the contract was signed and the amount was a reasonable forecast; a figure that operates as a penalty is struck. See whether liquidated damages clauses are enforceable in Texas.

The fiduciary duty overlay

Officers of a Texas corporation or managers of a Texas LLC owe fiduciary duties to the company, principally loyalty and care. An executive who diverted a corporate opportunity, dealt with the company on undisclosed terms, or used the position for personal gain has breached those duties regardless of the contract. Fiduciary claims widen the remedies: in addition to damages, Texas courts can order disgorgement of profits the fiduciary made from the breach and forfeiture of compensation earned during the period of disloyalty, and exemplary damages are available for intentional breaches. Who owes these duties and what they require is set out in when officers and directors are personally liable in Texas.

Example

Suppose a Dallas distribution company's chief operating officer, two years into a three-year agreement with a one-year non-compete and unvested equity, resigns with one week's notice instead of the ninety days the contract requires, and appears a month later as president of a competitor. The agreement conditions the equity on continued employment and provides that a breach of the notice or covenant provisions forfeits unpaid bonus.

The company does not pay the pending bonus, cancels the unvested equity under the plan's terms, and pays the final salary through the last day worked within six days, as the Payday Law requires for an involuntary separation and as good practice for any separation. It sends a letter to the executive and the competitor and, when he begins contacting the company's suppliers, files suit and obtains a temporary injunction enforcing the one-year non-compete and a six-month supplier non-solicit. The damages claim covers the recruiting fees and interim consultant costs caused by the missing notice period. The executive counterclaims that the company's failure to pay his bonus was itself a breach; the forfeiture clause, applied as written, defeats it.

What the executive will argue

• “The company breached first.” Unpaid compensation, a demotion, a change in reporting line or a relocation can be “good reason” under the agreement, which may excuse the executive's departure and trigger severance. The company's own compliance with the contract is the first thing the other side examines.
• “The cause definition was not met, or the procedure was not followed.” If correct, the termination becomes one without cause, with severance owed.
• “The withheld pay was earned.” A Payday Law claim or wage lawsuit, with the argument that forfeiture language is a penalty.
• “The covenant is unenforceable or overbroad.” The standard non-compete defenses.
• “The company's damages are speculative.” Replacement cost and lost profits have to be proven with records, not estimates.

Executive agreements frequently contain arbitration clauses, which move the dispute out of the courtroom and change the procedure and the appeal rights. Many carve out injunctive relief so that the covenants can still be enforced in court. The company should know which forum it is in before the first letter; see arbitration agreements with employees in Texas.

What the company should do now

1. Pull the agreement, every amendment, the equity plan and award agreements, the bonus plan and any separation terms already discussed.
2. Freeze the record: preserve the executive's email, devices and files, and the board or committee communications about the matter.
3. Document the breach with dates and sources, and record the executive's own explanation if still employed.
4. Pay everything that is unconditionally earned on time, and withhold only what the documents make conditional.
5. Have a litigator map each option against the contract's procedures before the board acts, and before anyone communicates with the executive, the successor or the market about why the executive left.

Tina Wysk represents companies and boards in disputes with departing executives in Dallas state and federal courts and in arbitration, including employment-related business disputes over compensation, covenants and fiduciary duties.