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104
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
• 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-
ee
• 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.
108 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
110 PART I Guide for Instructors and Answers to Chapter Review Questions
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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.
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The Practical Problems in this chapter ask stu-
dents to locate a case in their home state that
deals with covenants not to compete, and to
briefly discuss how the court in that case
views the reasonableness of the agreement.
EXERCISE IN CRITICAL
THINKING
The Exercise in Critical Thinking for this
chapter asks students to consider the often
compensation.
Exercise:
Many chief executive officers of
publicly held corporations are paid
annual salaries that most people
would consider excessive—even
CEOs of companies that are per-
they are reluctant to vote against
such high salaries for corporate of-
ficers?
SAMPLE DOCUMENTS FOR THE
WORKPLACE SCENARIO
The Workplace Scenario at the end of this
chapter asks students to assume that their ficti-
tious corporation, Cutting Edge Computer Re-
pair, Inc., is hiring a computer technician.
Students are asked to draft an employment
agreement between the corporation and its
new employee.
Students can use the sample agreement
in the text, and find other examples and forms in
the resources listed in the chapter. Appendix O is
a sample employment agreement.
