The Office of General Counsel issued the following opinion on February 18, 2005, representing the position of the New York State Insurance Department.
Re: Employment Agreement and N.Y. Ins. Law § 4312
This is in response to the inquirers inquiry and the inquirers last letter on the above-captioned topic, which contained the inquirers analysis as to why the provision contained in the employment agreement (the "Contract") under consideration that extends a terminated employees health coverage is not prohibited by N.Y. Ins. Law § 4312(b) (McKinney 2000). That section of the law provides, in relevant part, as follows:
No corporation subject to the provisions of this article shall hereafter enter into any agreement, directly or indirectly, with an officer, director or salaried employee of such corporation whereby it agrees that for any services rendered or to be rendered he shall receive any salary, compensation or emolument that will extend beyond a period of thirty-six months from the date of such agreement
N.Y. Ins. Law § 4312(b) (McKinney 2000).
The inquirers analysis as to the applicability of § 4312(b) to that instant case stated in part as follows:
The contractual commitment in Section 17(a) of the employment agreement is to provide health insurance and life insurance coverage for a maximum period of two years after the date of the termination of the executives employment. The period of this contractual commitment is within the thirty-six month statutory maximum prescribed by section 4312(b).
Section 15 of the employment agreement permits the Corporation to terminate the agreement and the employees employment at any time with or without cause. Therefore, the terms and conditions of the employment agreement do not provide a contractual commitment that the employee will be employed, and receive any salary, compensation or emolument during employment, for any period.
The inquirers argument is essentially that reading sections 15 and 17(a) of the Contract in conjunction should make it clear that N.Y. Ins. Law § 4312(b)s prohibition on a contractual commitment to pay any salary, compensation or emolument that extends past thirty-six months beyond the date of the agreement is not violated because the Contract allows the Corporation to terminate the Contract at any time, at which point the twenty-four month commitment to provide health care and life insurance coverage commences. Thus, in the inquirers reading, the facts that (1) the Contract does not guarantee employment for any length of time and (2) the benefits provided upon termination only last for twenty-four months result in the Contract being in compliance with § 4312(b).
However, it is this Offices view that Section 17(a) of the Contract is not consistent with § 4312(b). Although the Contract does not guarantee employment for any period, it is entirely possible (and indeed likely) that the actual operation of Section 17(a) will result in the payment of an "emolument" (health and life insurance) to the executive beyond a period of thirty-six months. This can be illustrated as follows: Assuming an agreement and commencement date of January 1, 2005, the Contract would be in effect until December 31, 2006 (twenty-four months). Assume further that an executive covered by the Contract is terminated in December, 2006. Pursuant to Section 17(a), that executive would be entitled to health and life insurance coverage through December, 2008, which would result in the payment of a benefit up to forty-eight months past the date of the Contract. This would violate § 4312(b), which prohibits the payment of any emolument beyond a period of thirty-six months. The insertion of a provision which allows termination at any time with or without cause cannot be used to circumvent the statute.
With respect to the inquirers initial inquiry, regarding the permissibility under § 4312(b) of employment contracts containing an "evergreen" clause,1 it is the position of this Office that such provisions are not allowable in agreements subject to the statute. Allowing the inclusion of an evergreen clause would necessitate accepting the argument that the statute would not be violated because there would not be a single, continuing contract, but rather, successively renewed contracts. The simple inclusion of an evergreen provision in the agreement, which provides that the agreement renews automatically each year, should not suffice to permit a company to circumvent the purpose of the statute, which is to prevent imprudent acts by management with respect to employment contracts and retirement benefits for officers and employees. Permitting this interpretation would make the statutory prohibition meaningless.
For further information one may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 A contract clause that provides for an automatic renewal of the contract or a portion thereof is known as an evergreen clause.