Retention Agreement Defined
The retention agreement is a written contractual arrangement that helps define the terms of the relationship between an employer and its employee, or a consultant and its company. In the context of an acquisition or other strategic transaction, the retention agreement is used to define the relationship between a target company and its current management . It is anticipated that the retention agreement will be used when there is an acquisition or other strategic transaction so that the consummated agreement will govern the relationship between the new company and its employees and consultants.
Retention Agreement Template Building Blocks
Creating a retention agreement template is a careful balancing act. Such a template should include enough details to identify both the basic parameters of an individual relationship and the general guidelines for any additional, similar relationships. In a basic retention agreement template, it is critical to include the following components:
- Any necessary terms and conditions. This includes language that explains the period of time the client relationship will last, any restrictions on the period of time such as it terminating if business terminates between the firm and the client, and any qualifications for continuing the client relationship. It also includes language that identifies what services the firm has agreed to perform, whether the firm must have prior approval before performing additional work, and whether additional work will result in an additional fee.
- Payment details. This is essentially the skeleton of the agreement. The agreement should clearly state the payment arrangement between the client and the firm – a flat fee, hourly billing, additional costs, etc. It should also be clear when the fees are due.
- Confidentiality. There are a few important provisions to keep in mind when addressing confidentiality issues in a retention agreement template. First, the attorney/client privilege does not exist until the attorney has been officially retained by the client. Many states have the Mayton rule, which states that anything said between a potential client and an attorney is confidential until the attorney explicitly declines the potential client’s case. Once the privilege is created, it continues after the relationship is over. Writing a confidentiality provision into your retention agreement template helps preserve the attorney/client relationship and must follow suit with applicable state law.
Advantages Offered by Retention Agreement Templates
The use of retention agreement templates comes with various benefits for both the employer and the employee. They help bridge the gap between the two parties by providing a clear understanding of expectations and responsibilities. A few other advantages are:
Ensures Consistency Across Retention Agreements
When employers utilize a "template" form for retention agreements, it ensures that all employees working on a project will be treated the same when it comes to their retention. Employers are still free to negotiate with individuals and offer different retention terms based on the individual contribution, value to the project, or even personal negotiations. But when there is an industry standard practice for retention terms, it can help steer the conversation and make negotiations easier for both sides. It will also help ensure that everyone involved knows what the parameters are when it comes to the duration of their retention and the terms with which they can exit the retention agreement.
Ensures Legal Compliance
Using a template for retention agreements can also help keep employers out of court. It has been noted in various lawsuits concerning executive compensation arrangements, for example, that employers have lost due to vague contractual terms or unclear language. Having a template allows employers to spell out the terms of a retention agreement in clear language, which will reduce the risk of lawsuits due to misunderstandings. Employers should also consider including arbitration clauses into their retention agreements to avoid having to deal with the issue in a traditional court setting.
Saves Time for Legal Teams and HR Departments
Retention agreements can save a significant amount of time for legal counsel, as well as human resources teams. Using a template will speed along the process of getting an agreement in place, which can be vital for short-term retention agreements that have an expiration date of a few months or less. For example, if an employer is part of a bidding process to win a new project, it may not have much time to convince key team members to stay on and help out with the project. With a template on hand, an HR team could simply fill in the blanks with information about the new project, rather than spending extended periods of time drafting a brand-new agreement for each team member.
Modifying a Retention Agreement Template
A retention agreement template is a general framework for what a written retention agreement might look like under the appropriate circumstances. For example, if you are seeking a retention agreement with an executive during a sale of stock to a third party, you will likely have a different kind of retention agreement than a retention agreement in another setting. If you are using a retention agreement template, you will need to update the template to match your business scenario.
To update a retention agreement template, we recommend starting with the key aspects of a retention agreement:
Compensation – The first thing you will want to address in your retention agreement, after addressing the parties, is the compensation structure in the retention agreement. For example, if you are using an "upside shock" plan where the retention award is paid if the company receives a liquidation event above a certain value, then you will probably want to address the upside shock and how the payout is calculated. You may wish to change the payment structure at the time of the retention award by referencing the sign up sheet (a retention award election form where an employee indicates that they want to participate in the retention program). For example, a general retention award might state "if the value of the company is $250,000 or greater, and the employee signs up to participate, the retention award is paid out." Where as the upside shock element of the retention award might state "$1,000,000 to $1,249,999 = 25% of total retention award, $1,250,000 to $1,499,999 = 50% of the total retention award, etc." Another example of upside shock might be that a certain percentage of a liquidity event is received by the employee. Perhaps compared to salaries, because the retention award is usually a large capital event rather than a wage.
Event Trigger – Depending on whether employees vest or are paid the above trigger upon a liquidation event, the retention agreement should be customized to reflect either a vesting schedule, or a payout (for both). If the agreement calls for vesting, it should be to conclusions of the incentive period. For most incentive periods, the retention award application form should allow the employee to elect between a three or six-month waiting period. If the retention agreement calls for a payout, the agreement will address the process and timing of the payout.
Limitations – The template retention agreement can have a limitation provision, where a payout under the agreement is limited to a certain percentage of the value received in consideration for the transaction. For example, if the company sells for $10 million, the retention agreement could limit the award payout to "10% of the company value." Another example could be that the company sells for $10 million, and the employee’s stock is subject to an 8% retention award; the retention agreement could limit the award payout to "8% of the value received in connection with the transaction." The latter is an example of upside shock, where the employee may receive more than if the upside award is paid out upon the trigger.
Termination – Most retention agreements will have termination provisions, where a payout is forfeited if the executive is terminated without cause or for cause. Many times the retention agreement will state that a termination without cause by the company will allow the employee to have a payout, whereas a termination policy by the employee will not. This aligns an incentive for long-term retention, whereas a short-term termination by the employee will not give an employee a cash incentive to leave.
Common Retention Agreement Slip-ups to Avoid
The process of creating a retention agreement template, while important, can lead to a variety of common mistakes that businesses make while drafting them. For example, many businesses make vague terms that describe what will happen in a variety of scenarios. They will then end up including unclear provisions in the agreement. This can be preventable simply by making sure the provisions are clearly defined.
Another frequent omission is the failure to include payout options for the company’s equity. There are a few common methods used to do this . The first is by setting a valuation of the company ahead of time, usually using a formula. The second involves using different formulas that are triggered by the situation in which the employee was terminated, such as due to a sale of the company. The last option is to have a management review board that comes up with a fair price.
Other common errors include: All of these mistakes can make significant impacts on how effective the retention agreements are later. It’s crucial that businesses avoid these mistakes so that there aren’t problems later when it comes time to enforce the agreement.
Retention Agreement Legal Background
At the outset, candor is the best policy, and in this case, it means ensuring that your retention agreement can be reviewed by legal counsel. In fact, in order to avoid potential ethical pitfalls, legal ethics authorities have advised that lawyer-developed retention agreement templates should be made available to non-lawyer personnel on a need-to-know basis so that, for example, personnel responsible for recordkeeping and archival schedules can rely on the template in developing supporting implementation policies.
More generally, the retention agreement should be drafted with an eye towards ensuring compliance with applicable labor and employment laws. Federal law, including the Fair Labor Standards Act and Family and Medical Leave Act, impose duties on employers and affect how recordkeeping should be implemented in particular circumstances. State law may also require special handling of certain categories of records, such as medical, workers compensation, or employment discrimination-related records.
In addition, recordkeeping subject to the Federal Rules of Civil Procedure imposes specific obligations on data destruction that must be factored into a records retention schedule. When drafting a retention schedule, care must also be taken to accommodate requests for data production by federal and state regulatory bodies for various investigative purposes. Specific statutory regimes will impose a uniform data retention requirement across companies in the same regulated industry. For example, the Health Insurance Portability and Accountability Act, among other things, prevents disclosure of the contents of protected health information to third parties in the absence of consent, but also directly addresses the destruction of protected health information held or maintained by a covered entity or its business associates. Specific rules address storage and disposition of patient records, data destruction and disposal of electronic media, and employee training. Specific compliance dates within the rule must also be incorporated into a records retention schedule.
Retention Agreements Compared to Employment Agreements
While similar in some respects, retention agreements and employment contracts are not identical, and need to be approached and drafted with those differences in mind. The key question is this: can you unilaterally dismiss the employee without any liability? If so, that propensity should be reflected in the document. Where you do not need to have a retention agreement at all, you can simply issue an "at-will" notice to employees in reference to their employment. Are there circumstances when you would want to use a retention agreement over a severance package? Yes, but only where you can give it assurances beyond what typically is expected. You also have to be careful that you don’t promise more value than originally intended; a common tactic by departing executives is to claim that the retention agreement contained implied terms. You also need to consider if the retention policy for which you’re negotiating is part of your policy or plan. If it is, different considerations apply. Retention agreements should be unique to the situation in which they arose.
Frequently Asked Questions About Retention Agreements
In this section, we provide answers to frequently asked questions that you might hear from clients or prospective clients of the law firm.
Why do I need a retention agreement? To be enforceable, retainers and engagement letters must include the information required by your jurisdiction’s rules of professional conduct. But an attorney-fee agreement is not merely a contract. It is also a vehicle for communicating the ways in which you will represent the client, and a basic administrative tool. Therefore, a model retention agreement should also include sections for your general policies and procedures. Finally, some sections of a retention agreement are intended to protect you later, by minimizing your liability or protecting your ability to collect fees.
How long is the retention agreement enforceable? Most courts agree that a retention agreement only entitles you to fees for the tasks specifically mentioned in the agreement and no other legal work. If the retention letter says you’ll do three things on behalf of the client—but does not limit your scope of services to only those three things—it may not prohibit you from charging for any additional services you actually provide. In other words, it may be difficult for a client to argue that you can’t charge for additional work. But when it comes to fees for future services, you should never assume that the agreement covers them. Most cases say that the retention agreement may not be enforced after a year, unless both parties are still treating the lawyer-client relationship as ongoing (e.g., the client continues to send bills , and the lawyer continues to send status updates). Even then, the reasonable scope of future work that can fall under the original retainer agreement is likely fairly limited, though the law is unsettled. Check the law in your state to make sure you understand the statutes and case law. Also, be aware that many courts expressly prohibit lawyers from recovering attorneys’ fees that are created by extending a trial date and/or allowing another party to postpone discovery. So, whenever a client or law firm agrees to extend a trial date or to postpone discovery, be sure to get a new retention agreement.
What’s the difference between a retainer and an engagement agreement? Do they make sense for my law firm? A retainer is a smaller amount of money up front, to hold the client’s spot and cover the initial work. It can help you to minimize collection issues resulting from loss of contact with a client. An engagement agreement is when the full amount of the anticipated fees are agreed upon and paid up front. It is only appropriate when you are confident that there will be no issues about what the client is responsible for paying.
Why are my fees being disputed? What can I do? Mistakes happen, and miscommunication can be unavoidable. Or, the problem might be something simple, such as the client being surprised at something you considered obvious because it’s what you always do. Regardless of what the problem is, the solution in almost all cases is communication: A face-to-face meeting or phone call can go a long way toward resolving many misunderstandings.