Employment Law Update

If you have an employment agreement or other arrangement which requires an employee to take some action (such as execute a release or a non-compete agreement) as a condition to receiving a payment, such agreement or arrangement should be reviewed to avoid a potential problem under Section 409A of the Internal Revenue Code.
The Internal Revenue Service has given employers and employees until December 31, 2012 to make correcting amendments to non-compliant agreements and arrangements necessary to avoid potential adverse Section 409A tax consequences.
Here is a description of a typical provision that the IRS believes could violate Section 409A:

Company “X” and individual “N” are parties to an employment agreement pursuant to which X promises to make a cash severance payment to N upon termination of employment. The agreement states that the payment will be made once N signs and submits a release of claims and the applicable revocation period has expired. The agreement does not, however, specify a deadline by which N must submit the signed release.

In this example, the individual is required to take an action (i.e., sign and return the release) before the payment will be made. This type of provision has become common in employment agreements, severance policies, supplemental executive retirement plans, deferred bonus and other incentive plans, and change in control agreements. The Internal Revenue Service has stated that conditioning the payment on the employee’s action could allow the employee to manipulate the timing of the payment (i.e., by choosing when to sign and return the release), which is prohibited by Section 409A.
If your employment agreements or other separation or incentive arrangements condition payment on some action by the employee, you should contact us as soon as possible so that we can determine if corrective actions are appropriate. If you need more information contact:

Chuck Bacharach at 410-576-4169 or Bob Kellner at 410-576-4239 or John Paliga at 410-576-4166.