#MeToo Provisions In Executive Compensation: Is It Time to Redefine ‘Cause’ and Expand Clawbacks?

                                      Harvey Weinstein

Since Harvey Weinstein’s dismissal as co-chairman at Miramax in October 2017, the #MeToo movement has inspired millions to post, tweet, and speak out about sexual harassment and misconduct.  

The public outcry, coupled with revelations about executives going unchecked following incidents that resulted in quiet settlements, served as a wake-up call for corporate America, prompting a more proactive stance toward preventing and responding to sexual misconduct.

One of the ways companies can address the issue is to include terms in executive employment and compensation agreements that will hold executives accountable for this type of misconduct, according to a pair of attorneys who spoke June 14 in New York City at the American Law Institute’s annual executive compensation conference.

Forfeiture of Compensation for Sexual Misconduct

“By this time next year, I anticipate that we will see new corporate policies and executive employment agreements with sexual harassment provisions,” said John L. Utz of Utz & Lattan LLC. He was joined by Renata J. Ferrari, partner at Ropes & Gray LLP, in discussing the #MeToo movement’s influence on executive compensation arrangements. 

Weinstein’s employment agreement didn’t treat sexual misconduct as cause for termination or forfeiture of compensation. Rather, it included a clause that said Weinstein wouldn’t be in violation of the company’s code of conduct as long as he repaid the company for money spent on sexual harassment settlements and fines.  

Ferrari said provisions such as these fail to adequately protect victims of sexual misconduct and seemingly only protect the executive or the alleged assaulter.

Utz and Ferrari said companies should consider making specific reference to sexual harassment and misconduct when spelling out what constitutes “cause” for an executive’s termination.

For example, Parsley Energy Operations LLC expanded its definition of cause for termination as the “willful disobedience of lawful orders, policies, regulations, or directives issued to Employee by [the Company], including policies related to sexual harassment.”

Ferrari and Utz both emphasized the importance of drafting executive agreements to include sexual harassment alongside other wrongful actions as a way to protect employees and the brand of the organization when executives engage in the types of misconduct of which Weinstein and other prominent figures have been accused. 

They also said companies are considering the inclusion of clawbacks on the basis of sexual harassment.  

Traditionally, clawback provisions have been limited to financial misconduct, requiring executives to return money they were already paid if they have engaged in specified types of wrongdoing. 

Utz said redefining cause for termination and expanding clawback clauses “provides for the forfeiture of large components of compensation on cause, and provides for the clawback of already paid compensation in the event sexual harassment is discovered.”

Legislative Action From Congress

Congress has also taken action in response to the #MeToo movement, according to Ferrari and Utz. 

For example, lawmakers have added a provision to the Internal Revenue Code (Section 162(q)) that bars employers from deducting the costs of a settlement or payment related to sexual harassment or abuse, including legal fees, if “such payment or settlement is subject to a nondisclosure agreement.”   

This provision of the Tax Cuts and Jobs Act, widely referred to as the “Harvey Weinstein Tax,” took effect Jan. 1, 2018.  

In addition, Ferrari and Utz called attention to two pieces of proposed legislation currently pending in Congress. 

The Sunshine in Workplace Harassment Act would require public companies to disclose the total number and dollar amount of settlements related to sexual abuse, harassment, or discrimination. The Ending Forced Arbitration of Sexual Harassment Act would bar employers from enforcing arbitration agreements and instead allow workers to go to court with allegations of workplace sexual harassment or assault.   

For additional reading on related topics, see: Sexual Harassment Tax Change Puts Pinch on Confidential Settlements, #MeToo Movement Shines Spotlight on Pay Equity, and Anti-Whistleblower and #MeToo Provisions (subscription required).

Gain a deeper understanding of the legal complexities of employee benefits and executive compensation with a free trial to Bloomberg Law: Benefits and Executive Compensation .