Deepak Chopra once said, “All great changes are preceded by chaos.” This seems to be more true now than ever, in the midst of a global pandemic, civil unrest and political turmoil. And, in some cases, the chaos may continue even after change occurs. Cautions for CEOs making employment decisions about high-level executives that existed prior to the current environment continue to apply, but are amplified in these unpredictable times. The following three cautions, in particular, should be kept front of mind:
1. Make employment decisions based on complete and accurate information. When facing hiring or termination decisions, CEOs frequently rely on information provided by their subordinate executives. Under the so-called “Cat’s paw” theory of liability, an unbiased CEO can become liable for the biases of a subordinate executive that are incorporated into the CEO’s decision. The name comes from an old fable about a monkey and a cat: the monkey convinced the cat to pull chestnuts out of a fire, so the cat would suffer burns from the fire, while the monkey reaped the benefit of eating the warm chestnuts. In the employment context, if you select a particular employee for layoff based on the urging of another executive, you may be liable for retaliation for selecting that employee, if it turns out that the executive was urging you to select the employee because the employee had accused the executive of sexual harassment—even if you had no knowledge of the accusation. Similarly, when making a hiring decision, if an executive argues against one finalist, be sure to understand the motivation for the executive’s position; if the motivation is based on unlawful discrimination, then you may be liable for the executive’s hidden discriminatory bias. Thus, you should be sure that any employment decision you make is based on a full understanding of actual facts, rather than the urgings of a subordinate executive who may be unlawfully biased.
2. Retain flexibility in rescinding a job offer. Changing times may require a sudden pivot in a business’s priorities, requiring you to rescind an executive’s job offer. For example, if, due to a business change, you rescind a job offer made to an executive who left an otherwise good job with significant long-term incentive compensation opportunities and moved his family across the country, the executive may have a claim against you and the company if you made assurances to the executive that the company was committed over the next two years to supporting the growth of the business line he was being hired to lead, and he relied on those assurances in accepting the position. One way to minimize the risk of a legal claim is not to overpromise and to acknowledge in any discussions with the executive, and preferably in writing in the job offer, that the company may change direction and the job offer may be rescinded in the event that the company changes direction. Also providing some compensation in the event of a sudden change often helps to mitigate the risk of a legal claim. One example is paying for relocation costs, not only to move to the new job, but also if the executive must move back because the offer is rescinded.
3. Have a safety net. In most instances, when a CEO is making any business decision, s/he is making the decision on behalf of and in the best interests of the company. As a result, in most legal actions challenging the business decision, the company and not the CEO, is named as a party and is liable for those decisions. However, in the employment context, many laws and regulations specifically state that the CEO or other executive may be individually liable for the employment decisions that s/he makes. Luckily, many employment practice liability insurance policies cover CEO conduct as long as it is not against company policy or not outside of the scope of his/her employment. Though not always the case, the company may also have agreed to indemnify the CEO either in its organizational documents, or in a separate contract for indemnification. Insurance policies and indemnification agreements usually cover any conduct in which the CEO engages in the ordinary course of carrying out his/her responsibilities. Nonetheless, certain matters are not insurable and may be outside the scope of insurance or indemnification.
For example, punitive damage awards cannot be covered by insurance in some states, like Massachusetts. In those cases, the CEO may need to rely on company indemnification. Also, claims that are made after employment ends may not be covered by insurance or indemnification. Without insurance or indemnification, the CEO could be at personal risk of large damages awards where liability is assigned to the CEO by statute or in cases where punitive damages are available. This may also be the case in situations where the CEO’s conduct may be outside the scope of his/her employment or done willfully or where s/he engaged in gross negligence. Thus, before any CEO makes potentially risky employment decisions, s/he is best served confirming the scope of insurance and/or indemnity protections in place for his/her conduct and whether such protections extend beyond his/her tenure with the company.
Although the current environment has caused chaos on the lives and livelihoods of many, just as in “normal” times, CEOs can still prevent and manage some uncertainties by anticipating potential legal pitfalls and relying on complete and accurate information.