More and more, morality clauses are becoming standard features in executive-level employment contracts. For decades, such clauses have been included as standard practice in sports, film, TV, and other types of celebrity employment contracts. Given how important reputation has become in modern business operations, morality clauses are now being added to employment contracts.

Typically, morality clauses give the employer — at its sole discretion — the right to terminate the employee’s employment if the employee behaves in some manner that causes damage to the reputation of the business or violates other listed offenses. Usually, the language includes behavior that is criminal, immoral, objectionable, or results in some disrepute attaching to the employee or the employer. A vintage example comes from this case — Loew’s, Inc. v. Cole, 185 F.2d 641, fn 6 (US Court of Appeals, 9th Cir. 1950) — involving a Hollywood employee:

“[Employee] … agrees that he will not do or commit any act or thing that will tend to degrade him in society or bring him into public hatred, contempt, scorn or ridicule, or that will tend to shock, insult or offend the community or ridicule public morals or decency, or prejudice the producer or the motion picture, theatrical or radio industry in general.”

Morality clauses in senior-level employment contracts must be reviewed and carefully negotiated. The worst-case scenario is an open-ended, vague clause where the employer has full and complete discretion. Remember that, by design, these clauses cover ALL behavior, not just workplace behavior. Since a very well-paying job is on the line, an executive will want as much due process as can be negotiated, along with definitions that are as tight as possible. Things to consider and negotiate:

• Who makes the decision to trigger the morality clause and the decision to terminate? — though the situation may differ, for an executive, for both questions, the answer should be the board; often, the more people that are involved, the more due process and the better the results
• What behavior will trigger the clause? — it is best to obtain the narrowest definition of what will trigger the clause; for example, if “dishonesty” is a trigger, then make it “willful commission of dishonest acts” and only those that are “demonstrably, materially, and financially injurious”; as another example, if “criminal conduct” will trigger the clause, then make it “felonious” criminal conduct
• Try and obtain some requirement of an internal review, investigation, and written report/findings before the clause can be triggered
• Obtain time for the employee to attempt a cure of the circumstances that triggered the clause
• Negotiate a requirement that a lesser penalty be imposed for the first breach
• Exclude certain behaviors, such as behaviors that were intended to be private but become public through accident or the malicious intent of others
• And more

Contact the Business Attorneys at Revision Legal

For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.

Modern Morality Clause Triggers: What Businesses Are Now Including

The categories of conduct that modern morality clauses cover have expanded significantly beyond the Hollywood model of the mid-twentieth century. Contemporary executive employment contracts now commonly include the following triggers:

• Social media conduct. Statements made on personal social media accounts that disparage the employer, its competitors, or its customers — or that express views the employer deems inconsistent with its brand values — are frequently included as morality clause triggers. Executives should negotiate specific, defined standards rather than open-ended “reputational damage” language that leaves complete discretion with the employer.
• Criminal conduct. The scope of criminal conduct that triggers the clause is important. Limiting the trigger to “felony convictions” rather than “criminal charges” or “arrests” protects against termination based on accusations that are never proven. Limiting it further to “felony convictions for crimes involving moral turpitude” or “felony convictions that materially damage the Company’s reputation” provides additional protection.
• Workplace misconduct. Sexual harassment, discrimination, financial fraud, and other serious workplace misconduct are commonly listed as specific triggers. These provisions should be paired with a requirement that the alleged conduct be substantiated by an independent investigation before the clause is invoked.
• Reputational damage. Many morality clauses include a catch-all provision authorizing termination if the executive’s conduct “damages the reputation” of the employer. This is the most dangerous provision from an executive’s perspective, because it is inherently subjective and gives the board nearly unlimited discretion to invoke termination. Negotiating this provision to require that damage be “material,” “demonstrable,” and “directly attributable to the executive’s intentional conduct” significantly narrows the employer’s discretion.

The Process Protections Executives Must Demand

Beyond the substantive definitions of triggering conduct, executives should negotiate robust procedural protections before any morality clause can be invoked to terminate employment or claw back compensation. The following process protections are reasonable requests that experienced employment attorneys regularly obtain:

• Independent investigation requirement. Before the morality clause can be invoked, the employer should be required to conduct — or commission from an independent outside firm — a bona fide investigation of the alleged conduct. The investigation should result in a written report with factual findings. Termination should not be authorized until the investigation is complete and the findings support the triggering conduct alleged.
• Notice and opportunity to respond. The executive should receive written notice of the alleged triggering conduct before termination, with a reasonable period (10 to 30 days is typical) to respond in writing and to present evidence or arguments in their defense.
• Board-level decision. The decision to invoke the morality clause should require approval by the full board of directors — not just the CEO, a committee, or a single officer. This distributes the decision-making and provides a check against a single individual using the clause as a tool for personal or political reasons.
• Supermajority vote requirement. For additional protection, the executive can negotiate a requirement that the board’s vote to invoke the clause exceed a simple majority — for example, two-thirds of the full board.

Compensation Consequences: Severance, Clawbacks, and Equity Vesting

When a morality clause is invoked, the compensation consequences can be severe. Employers typically structure morality clause terminations as terminations “for cause,” with significant financial implications:

• Forfeiture of severance. Most executive employment contracts provide for severance pay if the executive is terminated without cause. A termination triggered by a morality clause is typically classified as a termination for cause, which forfeits the severance entitlement. Executives should negotiate to narrow the circumstances under which a morality clause invocation constitutes “for cause” termination, and consider negotiating a minimum severance payment even in morality clause terminations where the alleged conduct has not been proven to a defined standard of evidence.
• Equity clawback provisions. Morality clause provisions frequently include clawback provisions that require the executive to forfeit and return previously vested equity — stock, options, or restricted stock units — if the morality clause is invoked. Dodd-Frank Act Section 954 requires that public companies adopt clawback policies for incentive-based compensation in the event of financial restatements, but executive morality clause clawbacks go beyond this statutory floor. Negotiating limits on the lookback period and the categories of compensation subject to clawback is essential.
• Acceleration and vesting. Where the executive holds unvested equity, negotiating for acceleration of vesting upon a morality clause invocation — particularly where the allegations are not proven — can protect against the loss of substantial compensation.

Employer-Side Considerations: Drafting Morality Clauses That Will Be Enforced

For employers, a poorly drafted morality clause creates legal and reputational risk. Employers that invoke morality clauses based on vague, subjective standards — or without following defined procedural requirements — expose themselves to breach of contract claims, wrongful termination litigation, and reputational damage from public disputes with departing executives. Morality clauses that are sufficiently specific, procedurally fair, and consistently applied are more likely to be enforced by courts and more likely to achieve the employer’s actual objectives.

Employers should also ensure that morality clause provisions comply with applicable state law. Some states have enacted statutes that limit employers’ ability to discipline or terminate employees based on lawful off-duty conduct — California, Colorado, New York, and North Dakota among them. A morality clause that purports to authorize termination based on legal activities the employee engages in outside of work may be void under these statutes.

Contact the Executive Employment Attorneys at Revision Legal

Whether you are an executive reviewing a proposed employment agreement that includes morality clause provisions or a business seeking to draft enforceable morality clauses that protect legitimate interests, the Executive Employment Attorneys at Revision Legal can help. We negotiate executive compensation packages, review and redline employment contracts, and advise on employment disputes involving morality clause invocations. Contact us through the form on this page or call (855) 473-8474.