Many companies cover up for high-level employees who sexually harass others. When things get really bad, as with the flood of stories about Harvey Weinstein, there's always the choice to fire someone, as The Weinstein Company just did to its co-founder.

But there's a new twist: the move may have given Weinstein the opening to sue his eponymous company. His employment contract reportedly permits him to survive any changes of unallowed behavior, like sexual harassment, so long as he pays a fine and any costs the company incurs.

[UPDATE 13-October-2017 2:51pm: TMZ reports that Weinstein will contest his termination as CEO at a board meeting.]

According to the website TMZ, Weinstein's 2015 employment contract stated that if he "treated someone improperly in violation of the company's Code of Conduct," he would have to pay any judgments the company faced as a result as well as a fine: "$250,000 for the first such instance, $500,000 for the second such instance, $750,000 for the third such instance, and $1,000,000 for each additional instance."

The contract says as long as Weinstein pays, it constitutes a "cure" for the misconduct and no further action can be taken. Translation -- Weinstein could be sued over and over and as long as he wrote a check, he keeps his job. The contract has specific language as to when the Board of Directors can fire Weinstein -- if he's indicted or convicted of a crime, but that doesn't apply here.

If correct -- The Weinstein Company has not yet responded to email and telephone requests for comment -- the clause would be extraordinary in two of ways.

Undoing the morals clause

The reported provision would read as almost the inverse of the "morals clause" found in many employment contracts, especially in the entertainment and sports fields.

These clauses, which first became popular when movie star Roscoe "Fatty" Arbuckle was arrested, although not convicted, for rape and murder, are an attempt to walk a fine line. On one hand, entertainment companies want to benefit from the personal reputation of people. At the same time, they don't want to be penalized by bad publicity.

The alleged clause in Weinstein's contract would be nearly an inverse of the morals clause. The latter protects the employer by allowing it to single-handedly dismiss someone when the heat of a continued association became a liability. The former would put the employee, Weinstein, in the driver's seat with the ability to pay a way out of any consequences.

"It's an incredibly odd, particularly if it's reported correctly that there's this escalating amount of damages for instances," said Jamie Prenkert, a professor of business law at the Indiana University Kelley School of Business, in a phone interview. "It runs afoul of how federal law and many state laws incentivizes companies to take action to avoid the issue and avoid the repetition of the issue. Particularly in these amount, when someone with the means Weinstein has, if reported correctly, are probably not that much of a disincentive."

When did the company know?

The second extraordinary point has to do with what the company knew and when it learned of sexual harassment claims. A third of the company's board resigned when the New York Times story about Weinstein broke. The remainder issued a statement that said the allegations were an "utter surprise to the Board."

However, if the clause does indeed exist, its highly unusual nature, particularly with the provision for multiple cases of unwanted behavior, raises the question of whether the board actually was unaware. Why would directors agree to a clause that could allow a CEO to be implicated in multiple alleged episodes of something like sexual harassment and not be forced out of the job?

Could Weinstein have a case to sue?

Such a clause would have interesting implications for Weinstein, both man and company. If he were fired but had not been given a chance to pay the price for any previously unknown incidents, the man might have grounds to sue the company.

Weinstein could supposedly be fired for material fraud, but according to TMZ, the board had known about previous incidents and the settlement of lawsuits, which would undercut a claim of fraud. Even if there had been, apparently Weinstein was entitled to, first, mediation and, if that failed to work, arbitration before termination. He plans to challenge his termination.

The concept is baffling and also disturbing. You might understand how a company, which thought its biggest asset was one person, might agree to unusual measures. However, such a clause would be the managerial equivalent of a "get out of jail almost free" card. It would enable ugly behavior insofar as someone wasn't charged with a crime and had the money to pay the fines. It's a window into how entrenched protection for alleged predatory behavior can become.

Published on: Oct 13, 2017