For executives in Houston, The Woodlands, and across the greater Houston metropolitan area, an employment contract is not just a document that sets salary. It is the source document for virtually every significant asset and obligation that will be divided in the divorce. The equity award terms, the severance provisions, the noncompete clauses, the clawback policies, the change-in-control benefits, and the deferred compensation arrangements all originate in or are referenced by the employment contract. A Houston divorce attorney handling an executive divorce who has not thoroughly analyzed the employment contract is working blind.
What to Look For in an Executive Employment Contract
A comprehensive employment contract review in the context of a Texas divorce should examine several categories of provisions.
Compensation structure. What are the base salary, target bonus, and maximum bonus? How are bonuses calculated and when are they paid? Are there guaranteed bonus minimums for a specified period?
Equity awards. What types of awards are granted, at what levels, and on what schedules? Are awards subject to a formal written equity plan? Are there provisions for accelerated or enhanced grants on promotion or renewal?
Vesting and forfeiture. What are the vesting schedules for each type of award? What events cause forfeiture of unvested awards, including voluntary resignation, termination for cause, and termination without cause?
Severance. What severance benefits are triggered on termination without cause, resignation for good reason, and death or disability? Are severance benefits enhanced in connection with a change of control?
Noncompete and nonsolicitation. What restrictions apply after departure, and for how long? These clauses affect the executive spouse’s ability to earn comparable compensation at another employer, which in turn affects child support and spousal maintenance calculations.
Clawback. What specific clawback policies apply, and under what circumstances can the company recover compensation already paid?
Noncompetes and Post-Divorce Earning Capacity
Texas courts consider earning capacity as a factor in the “just and right” property division analysis. An executive who is subject to a noncompete agreement that effectively prevents them from working in their industry for one or two years after departure may have reduced earning capacity during that period. This can affect both spousal maintenance and child support calculations.
Under Texas law, noncompete agreements are enforceable if they meet the requirements of the Texas Covenants Not to Compete Act (Business and Commerce Code section 15.50). A noncompete that is enforceable and genuinely limits the executive’s earning capacity is a real economic constraint that courts should acknowledge when assessing the executive’s ability to meet support obligations.
Severance as Community or Separate Property
Severance paid on termination is community property to the extent it compensates for services performed during the marriage and separate property to the extent it represents post-divorce earning capacity or compensation for non-competition during a period after the divorce. Courts analyze severance using the same “for what period” analysis applied to stock options: if the severance was earned by work during the marriage, it is community property; if it is entirely contingent on future conduct (staying away from competitors), it is separate property.
Using the Contract to Protect Both Spouses
The employment contract is also the most important document when planning a settlement that involves deferred compensation or equity awards that have not yet vested. The decree should include specific references to relevant plan documents, specific award letters, and specific sections of the employment agreement so that both parties and the plan administrators understand exactly what is covered. Vague references to “stock options” or “all equity awards” without specific identification create enforcement problems later.
For a broad treatment of executive compensation issues in divorce, see our comprehensive guide to executive compensation and stock options and our article on unvested stock options in high-net-worth divorce.