Most employees are not working under employment contracts. They have simply agreed to work at a business for an hourly wage. But they could be fired at any time, and they could also quit whenever they want.
In other cases, though, especially those involving executive employees, contracts will be used. These contracts can change how the working relationship looks. For instance, the contract may say that someone can only be fired for cause or that they have to give a two-month notice in advance of quitting their job.
Some of these contracts will have a clause that is often referred to as a “golden parachute”. What does this mean and why would it be used?
Providing lucrative compensation
These clauses often refer to what will happen to executives if there is a merger or if another company purchases that business. Mergers and acquisitions often lead to downsizing, so executives may be fired because there’s no need to have two people in the same position.
A golden parachute ensures that this won’t be too detrimental to their financial well-being. It may state that they get significant compensation if they get terminated, such as cash bonuses, severance pay, stock options and the like. For instance, someone losing their job because of a merger wouldn’t immediately have to look for a new position if they had a “golden parachute” giving them $10 million and stock in the company.
Although employment contracts are not used for all employees, it is important for those who do use them to understand how they work and what legal steps to take to set them up.