978-1133019145 Chapter 15 Solution Manual

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CHAPTER 15

Employee Benefits and Employment Agreements

THEME

Chapter 15 introduces the student to employee

benefits and employment agreements. The focus

here is on executive compensation, employee

benefits, and the employment agreements that

are often entered into between corporations and

their key employees.

CHAPTER GOAL

The goal of this chapter is for students to

become familiar with the following terms

and topics concerning employee benefits

and employment agreements:

• Equity compensation, employee benefit

plans, and qualified plans

• Elements of executive compensation

• Elements of a qualified employee benefit

plan

• Requirements for all qualified plans under

the Employee Retirement Income Security

Act of 1974 (ERISA) and the Internal

Revenue Code (IRC)

• Types of qualified plans and the proce-

dures for adopting qualified plans

• Benefits to employment agreements and

special considerations for entering into an

employment agreement from both the em-

ployer’s and the employee’s perspectives

• Elements of an employment agreement

• Covenant not to compete and the condi-

tions under which such an agreement may

be valid

• The role of corporate paralegals assisting

with employee benefit plans and employ-

ment agreements

• Resources available to corporate parale-

gals who may be assisting with employee

benefit plans and employment agreements

SUGGESTED APPROACH

Students who have some work experience may

also have experience with employee benefit

plans and employment agreements. It may be

interesting to analyze a summary plan descrip-

tion from a typical pension plan to determine

how the provisions affect the employees and

how the plan works to comply with ERISA. Ex-

ecutive compensation may also be an interesting

topic for class discussion. Students may bring in

newspaper clippings of stories concerning execu-

tive compensation.

LECTURE NOTES

Executive Compensation

1. Compensation paid to corporate executives

may include salaries, bonuses, stock bo-

nuses, stock options, and several other

types of benefits.

2. Section 162(m) of the Internal Revenue

Code disallows the deductibility of cer-

tain corporate executive compensation

that exceeds $1 million per year, unless

the compensation in excess of $1 million

is part of a performance-based plan that

meets certain criteria.

3. Executive compensation often includes

stock options that give the holder of the

option the right to buy shares of stock at

a specific price within a specified period

of time.

4. Corporate executive compensation pack-

ages often include golden parachutes—

agreements to protect the executive with

a severance bonus under certain circum-

stances, including a corporate takeover.

Employee Benefits and Qualified Plans

5. Employers may elect to adopt a variety of

employee benefit plans, including pen-

sion plans and welfare benefit plans.

CHAPTER 15 Employee Benefits and Employment Agreements 105

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6. Plans that meet certain requirements of

the Internal Revenue Code and qualify

for special tax treatment are referred to as

qualified plans.

7. Employers are allowed a tax deduction

for their contributions to qualified plans.

8. Investment income earned on contribu-

tions to qualified plans is generally tax

free until distributed to plan participants.

9. Participants of qualified plans can defer

their income tax liability on the amount

of their contributions until they receive

the benefit from the plan in the future.

10. Qualified plans are subject to provisions

of the IRC and ERISA.

11. To receive the tax incentives provided for

in the IRC, corporations must comply

with IRC provisions that establish rules

for the following:

• Plan participation

• Plan coverage

• Vesting of plan contributions

• Other provisions regarding the fund-

ing and administration of the employ-

ee benefit plan

Qualified Pension Plans

12. Qualified pension plans are qualified

plans that are designed to provide retire-

ment income to participants in either a

lump sum or in the form of an annuity.

13. Contributions made to a qualified pen-

sion plan are held in a trust, where they

are managed until fully distributed.

14. Qualified plans must meet certain vesting

requirements set forth in ERISA.

15. Employees are always 100 percent vested

in any contribution they make to quali-

fied plans.

16. ERISA provides that any employee who

has at least five years of service with an

employer must have a nonforfeitable

right to 100 percent of his or her accrued

benefits under qualified plans, unless the

plan provides for gradual vesting that be-

gins after three years of service and in-

cludes 100 percent vesting after seven

years of service.

17. Defined benefit pension plans are those in

which the benefit payable to the participant

or the participant’s beneficiaries is definite-

ly determinable from a benefit formula set

forth in the plan.

18. Defined contribution plans establish indi-

vidual accounts for each participant and

provide benefits based solely on the amount

contributed to the participant’s account.

19. Profit-sharing plans are the most com-

mon type of defined contribution plan.

20. A 401(k) plan allows employees to elect

to defer a certain percentage of their

compensation each year to provide for

their own retirement benefits. Contribu-

tions may be made by both the employer

and employee.

21. An employee stock ownership plan

(ESOP) is a type of qualified plan that

gives partial ownership of the corporation

to the corporation’s employees. Distribu-

tions may be made to participants in the

form of stock or cash.

22. A Keogh is a type of qualified plan avail-

able to self-employed individuals.

23. Sponsors of employee benefit plans may

request favorable determination letters from

the Internal Revenue Service to ensure that

their plans will be considered qualified

plans by the IRS.

24. Employers can also elect to adopt non-

qualified plans, plans that are not required

to comply with all the rules established

for qualified plans. Plan sponsors who

wish to discriminate in favor of highly

compensated employees often choose to

adopt a nonqualified plan because non-

qualified plans are not subject to the non-

discrimination, funding, participation,

and vesting requirements of qualified

plans.

106 PART I Guide for Instructors and Answers to Chapter Review Questions

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Employee Welfare Benefit Plans

25. Employee welfare benefit plans are plans

designed to provide participants and their

beneficiaries with medical, dental, disa-

bility, and/or life insurance, and similar

benefits.

Employment Agreements

26. Most employees are employees at will.

That means they are hired for an agreed-

upon compensation, and they can be dis-

missed at the employer’s discretion—

with or without cause.

27. An employment agreement sets forth the

rights and obligations of the employer

and employee.

28. Some of the benefits for employers enter-

ing into an employment agreement in-

clude the following:

• The employer can be reasonably as-

sured of hiring and retaining the ser-

vices of the individual for a specific

period of time.

• An employment agreement with a

specialized, valued employee will en-

sure that the employee will not be

working for the competition during

the specified time period.

• The employment agreement can help

to ensure the employee’s confidenti-

ality with regard to trade secrets,

work products, and business strate-

gies.

• The employer can be reasonably cer-

tain of the cost for hiring and retain-

ing the employee for the time period

specified in the employment agree-

ment.

29. Disadvantages to the employer entering

into an employment agreement include the

following:

• It may be difficult to dismiss an em-

ployee who has an employment

agreement.

• The compensation agreed to in the

employment agreement may become

a financial burden if the employee

and the employer’s business do not

generate expected profits.

30. Employees can benefit from an employ-

ment agreement because of the follow-

ing:

• An employment agreement assures the

employee of continued employment

for a definite time period at a definite

rate of compensation.

• The employment agreement can for-

malize promised benefits, incentives, or

rewards.

31. Disadvantages to employees entering into

employment agreements include the fol-

lowing:

• An employee may be committed to a

position that does not meet his or her

expectations.

• Within certain limitations, an em-

ployment agreement may restrict the

employee’s actions with regard to fu-

ture employment.

Drafting the Employment Agreement

32. An employment agreement is considered

a binding contract on both the employer

and employee, and must therefore in-

clude all elements of a contract.

33. A covenant not to compete restricts the

future employment and actions of the

employee. Covenants not to compete are

only enforceable if they are considered

reasonable.

34. The following information is usually in-

cluded in an employment agreement:

• The name and address of the employer

• The name and address of the employee

• The date the agreement is entered in-

to and the length of the agreement

• The duties of the employee

• The promise of the employee to

maintain trade secrets

CHAPTER 15 Employee Benefits and Employment Agreements 107

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• The agreement of the parties with re-

gard to ownership of inventions made

by the employee during the course of

employment

• The agreement of the parties with re-

gard to applying for and owning any

patents that may be obtained as a re-

sult of the employee’s work

• The agreed-upon compensation to be

paid to the employee

• The general terms of any special

compensation plans that may be

available to the employee, including

pension plans, deferred compensation

plans, incentive bonus plans, and

stock options

• Terms of the employee’s expense ac-

count and covered travel expenses

• The terms of a covenant not to com-

pete

• A description of the welfare benefits

offered to the employee, including

life and disability insurance, medical

insurance, dental insurance, and

workers’ compensation

• Vacation time granted to the employ-

• Holidays that the employee will have

off work

• The terms under which the contract

may be assigned by the employer or

employee

• Conditions for termination of em-

ployment

• The right of either party to terminate

the agreement with proper notice

• Remedies for breach of the contract

• Arbitration or mediation of disputes

The Paralegal’s Role

35. Paralegals are often involved in drafting

qualified plans and supplementary docu-

ments and in submitting the application

for a determination letter to the IRS. Par-

alegals also assist with researching em-

ployment matters and drafting employ-

ment agreements.

CASE BRIEFS

Beckman v. Cox Broadcasting Corporation,

250 Ga. 127, 296 S.E.2d 566, 36 ALR4th

1132 (1981)

Purpose: This case demonstrates the enforce-

ability of a noncompetition clause in an em-

ployment agreement when the noncompetition

clause is limited as to time period and geo-

graphic location.

Cause of Action: This is a declaratory judg-

ment action to ascertain the validity of a re-

strictive covenant under Georgia law.

Facts: From 1962 until June 1982 plaintiff

Beckman was employed by Cox Broadcasting

Corporation as a meteorologist and “television

personality.” Beckman’s employment agree-

ment with Cox provided, among other things,

that the “Employee shall not, for a period of

one hundred-eighty (180) days after the end of

the Term of Employment, allow his/her voice

or image to be broadcast ‘on air’ by any com-

mercial television station whose broadcast

transmission tower is located within a radius

of thirty-five (35) miles from Company’s of-

fices, unless such broadcast is part of a nation-

ally broadcast program.”

On July 1, 1981, Beckman entered into

a five-year contractual agreement with WXIA-

TV, a competitor of Cox, to commence work-

ing for WXIA as a meteorologist and televi-

sion personality when his contract with Cox

expired on July 1, 1982.

Cox was made aware of Beckman’s

plans, and in July 1981, Cox filed a petition

for declaratory judgment, Ga. Code Ann. §

110-1101, seeking a determination that the

restriction against competition in its employ-

ment agreement with Beckman was valid.

Finding that there was no evidence to

conclude that WXIA-TV would require

Beckman to violate the restrictive covenant, or

that Beckman would violate the covenant, the

trial court dismissed the action.

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On June 16, 1982, Beckman formally

demanded to be released from the restrictive

covenant in his contract. When Cox refused,

Beckman filed a declaratory judgment action

to ascertain the validity of the restrictive cov-

enant under Georgia law. The trial court found

that the employment contract between Beck-

man and WXIA-TV did not require Beckman

to appear on the air during the first six months

of his employment. The court further found

that during the term of Beckman’s employ-

ment with Cox, WSB-TV spent in excess of a

million dollars promoting Beckman’s name,

voice, and image and that Beckman is one of

the most recognized television personalities in

the Atlanta area. The court also found that

WSB has instituted a transition plan to reduce

the impact of Beckman’s departure on the sta-

tion’s image and that to permit Beckman to

appear on air in the Atlanta area during the

first six months of his contract with WXIA-

TV would disrupt the plans and ability of

WSB-TV to adjust to the loss of Beckman.

The trial court ruled that the restrictive

covenant is valid under Georgia law. Beckman

appealed, arguing that the covenant was

broader than necessary for Cox’s protection.

Beckman also argued that the detrimental im-

pact of the restrictive covenant on him out-

weighs the need to protect the interests of

WSB-TV.

Issue: Given the foregoing facts, is the restric-

tive covenant found in the employment

agreement valid in the state of Georgia?

Holding: Yes

Reasoning: Because the restrictive covenant

is for a limited time and a narrowly restricted

area, defendant is entitled to enforce the re-

strictive covenant with the plaintiff.

Cubic Corporation v. Marty, 185 Cal. App. 3d

438, 229 Cal. Rptr. 828, 1 SUPQ2d 1709, 66

ALR4th 1115 (1986)

Purpose: This case demonstrates the validity

of an assignment of inventions found in an

employment agreement.

Cause of Action: Action for declaratory relief

as to ownership of a patent

Facts: When defendant William B. Marty Jr.

began employment with Cubic Corporation in

December 1976, he entered into an invention

and secrecy agreement that provided that he

would disclose all inventions coming within

the scope of Cubic’s business or related to Cu-

bic’s products or research or production work,

or to any problems specifically assigned to the

employee, whether or not conceived during

regular working hours. Under the agreement,

all such ideas and inventions became the sole

and exclusive property of Cubic.

In mid-May 1977, Marty came up with

an idea for an electronic warfare simulator for

training pilots. He developed a block diagram

in May 1977 and in June 1977 a manuscript

describing his invention. Marty submitted his

plan to his superiors at Cubic, one of whom

made some technical comments on Marty’s

manuscript. Cubic funded an internal project

to study Marty’s invention. Marty used a Cu-

bic computer programmer to help design nec-

essary circuitry because his background in mi-

croprocessors was weak.

On the basis of the developed inven-

tion, Cubic submitted a proposal to the Navy

for Marty’s invention under the name of one

of Marty’s superiors. Cubic received a gov-

ernment contract to study Marty’s invention,

and Marty was made program manager. Marty

was also given a higher-than-average pay

raise.

In June 1978, without telling Cubic,

Marty applied for a patent on his invention.

The patent was issued in December 1979.

Marty’s patent attorney forwarded a copy of

the patent to Cubic and offered to discuss giv-

ing Cubic a license under the patent. Cubic

took the position that the patent belonged to it

under the agreement Marty had signed. Cubic

offered to reimburse Marty’s expenses in ob-

taining the patent if he assigned it to Cubic.

When Marty refused and was told that his

continued employment at Cubic was contin-

CHAPTER 15 Employee Benefits and Employment Agreements 109

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gent on his assigning the patent, his employ-

ment was terminated in early 1980.

Cubic filed a complaint against Marty

seeking declaratory relief as to ownership of

the patent and alleging breach of contract,

interference with prospective economic ad-

vantage, and specific enforcement of the se-

crecy and invention agreement. Marty cross-

complained for wrongful discharge, breach of

of confidential disclosure, copyright infringe-

ment, defamation, and injunction.

The trial court awarded the patent to

(subject to a credit to Marty if and when the

amount was recovered from the government).

On appeal Marty contended, in part,

that the agreement was not enforceable be-

cause there was inadequate consideration to

support a promise to convey the invention to

Cubic. Marty also contended that the agree-

ment was an unconscionable adhesion contract

and therefore unenforceable.

Issue: Given the foregoing circumstances, is

an agreement for the assignment of inventions

between an employee and an employer en-

forceable?

Holding: Yes

Reasoning: The consideration given to Marty

was adequate, and though the agreement was

an adhesion contract, it was not unconsciona-

ble, and was therefore enforceable.

REVIEW QUESTIONS

1. How can an employer be certain that an

employee benefit plan will be considered

Code. In addition, the employer can

2. When is an employee’s contribution to a

plan considered to be fully vested?

Immediately—the employee’s right in

his or her accrued benefit derived

3. What are integrated plans?

Integrated plans are retirement plans

that are integrated with the employer’s

4. What unique benefit does an ESOP offer

to the employer?

5. If Andrews Electronics wants to adopt an

employee benefit plan that will pay its

employees a specific amount upon their

retirement, what type of plan would the

company most likely want to adopt?

6. The owners of Gabrielle Foods, Inc.

would like to adopt an employee benefit

plan that would encourage their employ-

ees to save money for retirement. They

are willing to pay up to a certain amount

per employee, per year, provided that the

employee invests an equal amount of his

or her pretax income. What type of plan

might the owners of Gabrielle Foods, Inc.

adopt?

A 401(k) savings plan

7. What is employment “at will”?

It is employment whereby the employ-

ee is hired by an employer for an

8. May an employee’s actions be restricted

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9. Why were covenants not to compete void

under the common law of England?

They were considered an agreement in

restraint of a person’s right to exercise

What is the modern view toward cove-

nants not to compete?

Anticompetitive covenants supported

by consideration are generally en-

forceable if they are reasonable and

consistent with the public interest. The

10. If an employment agreement remains si-

lent on the issue, is the employer neces-

sarily entitled to all inventions of the em-

ployee while the employee is working for

the employer?

No, unless inventions are assigned to

the employer by the employee, or some

special circumstances exist, the em-

ployer generally has no right to the

employee’s inventions.