Good Leaver / Bad Leaver: Here's what you should know
When an employee leaves a startup, they are typically classified as either a "good leaver" or "bad leaver". Good leavers are those who leave under positive circumstances, such as retirement, resignation to take another job, or maternity/paternity leave. Bad leavers are those who are fired, laid off, or otherwise forced to leave the company.
The distinction between good and bad leavers is important, as it can affect things like severance pay, benefits, and pension rights. Good leavers typically receive more favorable treatment than bad leavers, who may not be entitled to any severance pay or other benefits.
In this blog, we will be discussing good leaver and bad leaver policies in more depth, so that you can be better informed about your rights and entitlements if you ever find yourself in this situation.
What is a leaver clause?
A leaver clause is a contractual agreement between an employer and employee that outlines what will happen to the employee's equity in the company if they leave their job. The clause is typically included in an employment contract and can be used to protect the company's interests in the event of an employee's departure.
Leaver clauses are important for startups to consider, as they can help protect the company's equity and ensure that it is distributed fairly among employees who remain with the company. Employees should also be aware of leaver clauses in their employment contracts so that they know what will happen to their equity if they leave their job.
Make sure to check out our guide about leaver clauses to learn more about this topic
What are the different types of leaver clauses?
There are two main types of leaver clauses: good leaver and bad leaver.
A good leaver clause typically applies in the event that an employee leaves the company for reasons beyond their control, such as illness or redundancy. The clause may entitle the employee to a pro-rated portion of their compensation, or allow them to keep certain company property.
A bad leaver clause, on the other hand, typically applies in the event that an employee quits voluntarily or is fired for cause. The clause may stipulate that the employee must forfeit their unvested stock options or may prohibit them from working for a competitor for a certain period of time.
What should I consider when drafting a leaver clause?
When drafting a leaver clause, it is important to consider the circumstances under which an employee may leave the company. For instance, you may want to include a good leaver clause that allows an employee to retain their equity if they leave the company due to performance issues. Alternatively, you may want to include a bad leaver clause that forfeits an employee's equity if they quit without notice.
It is also important to consider the vesting schedule of the equity when drafting a leaver clause. The vesting schedule is the timeline for when an employee will earn their equity in the company. For instance, you may want to include a clause that accelerates the vesting of an employee's equity if they leave the company under specific circumstances.
What are leaver provisions?
Leaver provisions are clauses in an employment contract that specify the circumstances under which an employee may leave the company and what will happen to their equity or compensation.
The purpose of leaver provisions is to protect the company from risks such as losing valuable company property or information, breach of contract, or wrongful termination.
Some leaver provisions may also provide for a grace period in which the employee can keep their equity or compensation, even if they leave the company. For example, an employee who leaves the company within two years of being granted stock options may still vest those options.
Leaver provisions can vary depending on the type of equity or compensation involved. For instance, restricted stock units (RSUs) typically have different leaver provisions than stock options.
Bad leaver provisions
Bad leaver provisions are clauses in an employment contract that specify the circumstances under which an employee may leave the company and what will happen to their equity or compensation. The purpose of bad leaver provisions is to protect the company from risks such as losing valuable company property or information, breach of contract, or wrongful termination.
Definitions of a bad leaver:
- Committing fraud within the company
- Dismissal for gross misconduct or any other reason that is not unfair or constructive
- Disqualification as a manager
- Breaching one or more agreements
Good leaver clauses
A good leaver clause typically applies in the event that an employee leaves the company for reasons beyond their control, such as illness or redundancy. The clause may entitle the employee to a pro-rated portion of their compensation, or allow them to keep certain company property.
A good leaver policy is typically enforced through a contract between the employer and employee. The contract will specify the circumstances under which an employee is considered a good leaver, and what benefits they are entitled to receive.
Examples of good leavers:
-An employee who is made redundant may be entitled to a pro-rated portion of their salary
-An employee who retires is entitled to all his shares that have been built up at a fair value
-An employee who leaves the company due to illness may be able to keep their health insurance benefits
-An employee whose function is not needed anymore
Conclusion
The decision of whether to include a good leaver or bad leaver clause in an employment contract is an important one that should not be taken lightly. Consider the risks and rewards of each type of clause before making a decision.
Bad leaver provisions are important for protecting the company against risks such as losing valuable company property or information, breach of contract, or wrongful termination. Good leaver clauses can also be beneficial for employees by entitling them to certain benefits if they leave the company under specific circumstances. Ultimately, the decision of which type of clause to include should be based on the needs of the company and the employees.
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