Good reason: Overview, definition, and example
What is good reason?
Good reason refers to a legally or contractually defined term that allows an employee to resign from their position while retaining certain benefits, such as severance pay or stock vesting, when specific adverse circumstances occur. These circumstances are typically outlined in an employment agreement and may include significant changes to the employee’s role, a reduction in compensation, or a forced relocation.
For example, an executive employment agreement might state that a reduction in base salary by more than 20% constitutes "good reason" for resignation.
Why is good reason important?
Good reason is important because it provides employees with protection and flexibility in situations where their working conditions are significantly altered in ways they did not agree to. For businesses, including a clear definition of good reason ensures transparency and minimizes disputes related to resignations and severance benefits.
Defining good reason in contracts establishes mutual understanding between employers and employees, protecting the rights of both parties while maintaining fairness.
Understanding good reason through an example
Imagine a senior executive has an employment agreement that defines good reason as a "material reduction in base salary, significant demotion in responsibilities, or a relocation of more than 50 miles without consent." If the company reduces the executive’s salary by 30% without prior agreement, the executive can resign for good reason and still receive severance benefits as outlined in the agreement.
In another example, a software engineer’s contract states that good reason includes being reassigned to a role significantly different from their original job description. If the engineer is reassigned to a non-technical role without their consent, they may resign and claim good reason, entitling them to benefits under the agreement.
An example of a good reason clause
Here’s how a good reason clause might appear in an agreement:
“For the purposes of this Agreement, ‘Good Reason’ shall mean (i) a material reduction in the Employee’s base salary or target bonus; (ii) a material diminution of the Employee’s job responsibilities; or (iii) a relocation of the Employee’s primary workplace by more than 50 miles without the Employee’s prior written consent. The Employee must provide written notice to the Employer within 30 days of the event constituting Good Reason and allow the Employer 30 days to remedy the condition before resignation.”
Conclusion
Good reason clauses provide employees with protection against significant adverse changes to their employment conditions while ensuring fairness and transparency for employers. It offers a structured approach for resignations under specific circumstances, balancing the rights and responsibilities of both parties.
By including a clear definition of good reason in employment agreements, businesses can build trust, reduce disputes, and ensure that both parties understand their rights and obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.