How Mage Found Material Contract Breaches in Employment Agreements

A strategic buyer was acquiring a professional services firm with 85 employees. The employment agreements appeared standard, but when Mage compared contractual terms against actual compensation records, a pattern of material breaches emerged that the seller had not disclosed—and may not have known about.

The Situation

The target company was a regional consulting firm specializing in financial services advisory. It had grown from a founder-led boutique to an 85-person firm over 15 years, with a mix of senior professionals on negotiated employment agreements and junior staff on standard offer letters.

The buyer, a larger national consulting firm, was acquiring the target to expand its geographic footprint and add specialized capabilities. The transaction value was tied primarily to the team—their client relationships, expertise, and ability to generate ongoing revenue.

Employment diligence was therefore critical. The buyer needed to understand compensation structures, retention risks, and any issues that could affect team stability post-closing.

The Discovery

The deal team deployed Mage to analyze all employment-related documents, including:

• 32 negotiated employment agreements (senior professionals)
• 53 standard offer letters (junior and administrative staff)
• 12 months of payroll records
• Bonus payment history for the prior 3 years
• Benefits enrollment documentation

Mage extracted specific compensation terms from each document and compared them against the payroll and bonus data. The analysis revealed three categories of breach:

Finding 1: Base Salary Shortfalls

Twelve senior employees had employment agreements specifying minimum base salaries with guaranteed annual increases. Mage's comparison revealed:

| Employee | Contracted Minimum | Actual Salary | Annual Shortfall | |----------|-------------------|---------------|------------------| | Employee A | $285,000 | $265,000 | $20,000 | | Employee B | $240,000 | $228,000 | $12,000 | | Employee C | $225,000 | $210,000 | $15,000 | | ... (9 more) | ... | ... | ... | | Total | | | $142,000/year |

The salary shortfalls had accumulated over 2-3 years as the company navigated a cash-constrained period. Management had quietly reduced scheduled increases without formally amending employment agreements.

Finding 2: Bonus Calculation Errors

Eight employment agreements contained specific bonus formulas tied to individual or practice area performance. Mage extracted the formulas and compared them against actual bonus payments:

| Issue | Employees Affected | Annual Impact | |-------|-------------------|---------------| | Wrong revenue attribution methodology | 4 | ~$180,000 underpaid | | Individual vs. practice area calculation | 2 | ~$85,000 underpaid | | Timing of measurement period | 2 | ~$40,000 underpaid | | Total | 8 | ~$305,000/year |

A CFO who joined 2 years earlier had implemented a new bonus calculation system without reviewing individual agreement terms. The system used practice-area averages rather than individual performance metrics specified in several agreements.

Finding 3: Benefits Discrepancies

Five employment agreements guaranteed specific benefits—car allowances, club memberships, or supplemental insurance—that were not reflected in current benefits administration:

| Benefit Type | Employees | Annual Value | |--------------|-----------|--------------| | Car allowance discontinued | 3 | $36,000 | | Club membership not paid | 1 | $15,000 | | Supplemental insurance lapsed | 1 | $8,000 | | Total | 5 | $59,000/year |

These benefits had been eliminated during a cost-cutting initiative without formal agreement amendments.

Quantifying the Exposure

The deal team worked with employment counsel to assess total exposure:

| Category | Annual Shortfall | Years Exposed | Total Exposure | |----------|-----------------|---------------|----------------| | Base salary | $142,000 | 2.5 | $355,000 | | Bonus calculation | $305,000 | 2 | $610,000 | | Benefits | $59,000 | 3 | $177,000 | | Subtotal | | | $1,142,000 | | Less: Likely claims | | | ($350,000) | | Realistic exposure | | | ~$800,000 |

Not all employees would assert claims—some had left the company, some might not pursue the issue, and statutes of limitations applied to some historical shortfalls. But the realistic exposure remained substantial.

The Negotiation

The buyer raised the findings with the seller, who was genuinely surprised. The company's management had not tracked individual agreement compliance systematically and had assumed general compensation practices satisfied contractual obligations.

After negotiation, the parties agreed to:

Purchase Price Adjustment: $400K

The purchase price was reduced by $400K to reflect a portion of the identified exposure that would likely crystallize.

Specific Indemnification

The seller agreed to indemnify the buyer for any employment-related claims arising from pre-closing compensation practices, with a separate basket and cap from the general indemnity.

Remediation Plan

The seller agreed to bring all identified employees into compliance before closing, eliminating go-forward exposure and reducing the likelihood of claims from current employees.

Post-Signing Resolution

Between signing and closing, the seller:

• Adjusted base salaries for the 12 underpaid employees
• Recalculated and paid bonus shortfalls for 6 of the 8 affected employees (2 had departed)
• Reinstated discontinued benefits with back-payment for the coverage gap

The total remediation cost was approximately $280K. Combined with the $400K price adjustment, the seller effectively bore the majority of the exposure the buyer would otherwise have inherited.

Key Metrics

| Metric | Value | |--------|-------| | Employment documents analyzed | 97 | | Employees with breach exposure | 20 (24% of total) | | Total identified exposure | $1.14M | | Realistic exposure | ~$800K | | Purchase price adjustment | $400K | | Pre-closing remediation | $280K |

Lessons Learned

Employment agreements must be compared against actual practice. Reviewing agreement terms in isolation is insufficient. The breaches only became visible when contractual terms were compared against actual payroll and benefits data.

Compensation systems can drift from contractual requirements. New systems, new personnel, and cost pressures all create opportunities for divergence between what agreements require and what companies actually pay. Without systematic tracking, these gaps accumulate.

Historical breaches create continuing exposure. The statute of limitations for employment claims can extend for years. Employees who were underpaid in 2022 can still assert claims in 2025. Buyers inherit this latent exposure unless it is identified and addressed.

AI finds patterns across document sets. Identifying that 12 employees were underpaid required comparing 32 employment agreements against 12 months of payroll data. Mage's extraction and comparison capabilities made this analysis practical within hours rather than weeks.