EMPLOYMENT AGREEMENT
                              (Dominick Felicetti)

         AGREEMENT, dated as of January 4, 1998, between The Leslie Fay Company,
Inc., a Delaware  corporation,  with its principal office at 1412 Broadway,  New
York, New York (the "Corporation"), and Dominick Felicetti, residing at 221 Penn
Estates, East Stroudsburg, Pennsylvania 18301 (the "Executive").

RECITALS

         A. The Executive has served as the Senior Vice President--Manufacturing
and Sourcing of the Corporation  since June 2, 1997, and prior thereto as Senior
Vice President of The Leslie Fay Companies, Inc., predecessor-in-interest to the
Corporation.

         B. The  Corporation  desires to secure the  continued  services  of the
Executive,  and the  Executive  desires to continue  to furnish  services to the
Corporation, on the terms and conditions hereinafter set forth.

                  NOW,  THEREFORE,  in  consideration  of the  premises  and the
mutual  agreements  hereinafter  contained,  the parties  hereto hereby agree as
follows:

         1. Definitions.  Unless otherwise  defined herein,  the following terms
shall have the respective  meanings specified below and be equally applicable to
the singular and plural of terms defined:

                  (a) "Adjusted  Incentive  EBITDA"  shall mean,  for any fiscal
year during the Term, the lesser of (i) Incentive  EBITDA and (ii) the projected
EBITDA for such fiscal year as set forth in the Corporation's  business plan for
such fiscal year approved by the Board.

                  (b) "Base  Salary" shall have the meaning set forth in Section
5 hereof.

                  (c)  "Board"   shall  mean  the  Board  of  Directors  of  the
Corporation.

                  (d)  "Bonus"  shall mean,  for any year  during the Term,  the
Executive's  allocable portion of the Cash Bonus Pool for such year,  determined
in accordance with Section 6 hereof.

                  (e) "Cash  Bonus  Pool"  shall have the  meaning  set forth in
Section 6 hereof.

                  (f) "Cause"  shall mean (i)  conviction  of the  Executive  in
respect of a felony,  (ii)  perpetration  by the Executive of (x) an illegal act
which causes significant  economic injury to the Corporation or (y) a common law
fraud against the  Corporation,  or (iii) willful  violation by the Executive (a
"Material  Insubordination")  of a  specific  written  direction  from the Board
concerning
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one or more matters of a material  nature for the Corporation or its business or
operations (following a warning in writing in respect thereto from the Board).

                  (g) "Change of Control"  shall mean the  occurrence  of any of
the following:

                  (i) any  person or  "group"  (within  the  meaning  of Section
         13(d)(3) of the Exchange  Act),  other than  Dickstein  Partners,  Inc.
         and/or  any of its  affiliates  (as  defined  in Rule  12b-2  under the
         Exchange  Act),  acquiring  "beneficial  ownership" (as defined in Rule
         13d-3 under the Exchange Act), directly or indirectly, of fifty percent
         (50%) or more of the aggregate voting power of the capital stock of the
         Corporation; or

                  (ii) the sale of all or substantially all of the Corporation's
         assets in one or more related transactions; or

                  (iii) any  merger,  consolidation,  reorganization  or similar
         event of the  Corporation  or any of its  subsidiaries,  as a result of
         which the holders of the voting  stock of the  Corporation  immediately
         prior to such merger, consolidation, reorganization or similar event do
         not hold at least fifty-one percent (51%) of the aggregate voting power
         of the capital stock of the surviving entity.

                  (h) "Code"  shall mean the Internal  Revenue Code of 1986,  as
amended.

                  (i)  "Compensation  Committee"  shall  mean  the  compensation
committee of the Board, all of whose members are "outside  directors" within the
meaning of Section 162(m) of the Code.

                  (j)  "Corporation   Senior  Managers"  shall  mean  the  Chief
Executive Officer, the President, the Senior Vice  President--Manufacturing  and
Sourcing,  the  Senior  Vice  President--   Administration  and  Finance  (Chief
Financial  Officer) and such other employees of the Corporation as determined by
the Compensation Committee in consultation with the Chief Executive Officer.

                  (k)  "Disabled"  shall mean,  with  respect to the  Executive,
being physically or mentally disabled,  whether totally or partially, so that he
is  substantially  unable to perform his services  hereunder  for a  consecutive
period of more than six (6) months or for shorter periods aggregating six months
during any twelve-month period.

                  (l)   "EBITDA"   shall  mean  for  any  fiscal   year  of  the
Corporation,  the consolidated earnings before interest, taxes, depreciation and
amortization of the Corporation and its  consolidated  subsidiaries,  and before
any non-cash accruals for stock-based  compensation,  as determined  pursuant to
generally  accepted  accounting  principles  in effect in the  United  States of
America  from time to time,  provided  that for purposes of  determining  EBITDA
hereunder,  EBITDA shall be calculated  before  determination  of the Cash Bonus
Pool.
                                       -2-

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                  (m) "Effective Date" shall mean January 4, 1998.

                  (n) "Exchange Act" shall mean the  Securities  Exchange Act of
1934, as amended.

                  (o) "Good  Reason" shall mean the  continuation  of any of the
following  events  for more than ten (10) days after the  Corporation's  receipt
from the Executive of written notice thereof:

                           (i) the Executive  shall be removed from the position
         of Senior Vice President--Manufacturing and Sourcing of the Corporation
         at any time during the Term (other than for Cause);

                           (ii) the  Executive  shall fail to be vested with the
         powers and authority of Chief  Executive  Officer of the Corporation as
         described in Section 4(a) hereof,  or the powers and  authority of such
         position  or  his  responsibilities   with  respect  thereto  shall  be
         diminished in any material respect;

                           (iii)  the  Executive  shall  have  assigned  to  him
         without his express written consent any duties, functions, authority or
         responsibilities  that are inconsistent with the Executive's  positions
         described in Section 4 hereof;

                           (iv) the Executive's principal place of employment is
         changed to a location more than  twenty-five  (25) miles from the prior
         location without the Executive's prior written consent;

                           (v) any  material   failure  by  the  Corporation  to
         fulfill  any  of its  obligations  under  this  Agreement  (other  than
         pursuant to Section 4(b)), including,  without limitation,  the failure
         to make any  material  payment  required to be made by the  Corporation
         pursuant to Sections 5 and 6 hereof within five (5) business days after
         the date such payment is required to be made;

                           (vi)any  purported  termination by the Corporation of
         the Executive's  employment  otherwise than as expressly  permitted by,
         and  in  compliance   with  all  conditions  and  procedures  of,  this
         Agreement; or

                           (vii) the Corporation  shall fail to  comply with the
         provisions of Section 14 or Section 19(a) hereof.

                  (p) "Incentive  EBITDA" shall mean Eleven Million Five Hundred
Thousand Dollars ($11,500,000).

                  (q)  "Target  EBITDA"  shall mean Five  Million  Four  Hundred
Forty-Three Thousand Dollars ($5,443,000).

                                       -3-

<PAGE>

                  (r)  "Term"  shall  have the  meaning  set forth in  Section 3
hereof.

         2.  Employment.  The  Corporation  shall employ the Executive,  and the
Executive shall serve the Corporation, upon the terms and conditions hereinafter
set forth.

         3.       Term.

                  (a) Term of  Employment.  Subject to the terms and  conditions
hereinafter set forth,  the term of the Executive's  employment  hereunder shall
commence as of the Effective Date and shall continue until the third anniversary
of the Effective Date, unless earlier  terminated  pursuant to the provisions of
Section 8, 9 or 10 hereof (the "Term").

                  (b)  Renewal.   During  the  third  year  of  the  Term,   the
Corporation will conduct, in good faith and on a timely basis, negotiations with
the Executive  concerning  the renewal of the  Executive's  employment  with the
Corporation.

         4. Duties and Extent of Services.  During the Term, the Executive shall
serve as Senior Vice  President--Manufacturing  and Sourcing of the  Corporation
faithfully and to the best of his ability, and shall devote substantially all of
his business time, energy and skill to such employment,  it being understood and
agreed that the  Executive  may serve on the boards of directors  or  equivalent
governing bodies of other business corporations or other business organizations;
provided,  however,  that (i) such other corporations or other organizations are
not in direct  competition with the Corporation and/or its subsidiaries and (ii)
such service does not materially interfere with the performance by the Executive
of his duties  hereunder.  The  Executive  shall be invested with the duties and
authority    that    are    customarily    delegated    to   a    senior    vice
president--manufacturing  and sourcing of a corporation, and shall report to and
be subject to the  direction of the Board of Directors of the  Corporation.  The
Executive  shall also  perform  such  specific  duties and  services of a senior
executive  nature as the Board of Directors of the  Corporation  shall  request,
including,  without  limitation,  serving as a senior officer and/or director of
any of the Corporation's subsidiaries.

         5.  Base  Salary.  During  the  Term,  the  Corporation  shall  pay the
Executive a base salary ("Base Salary") of Three Hundred Fifty Thousand  Dollars
($350,000) during the first two years of the Term and Three Hundred Seventy-Five
Thousand  Dollars  ($375,000)  during the third year of the Term, or such higher
amount as the Board may from time to time  determine,  payable  in equal  weekly
installments.

         6.       Incentive Compensation.

                  (a) Amount.  If the  Corporation's  EBITDA for any fiscal year
(except as noted,  references in this Section to EBITDA or Incentive  EBITDA are
to the  corresponding  quantity for such fiscal year) during the Term is greater
than or equal to eighty-five percent (85%) (the "Minimum  Percentage") of Target
EBITDA, the Corporation shall pay a bonus ("Cash Bonus Pool") to the Corporation
Senior Managers in an amount equal to the sum of:

                                       -4-

<PAGE>

                  (x) nine and six-tenths percent (9.6%) of EBITDA, plus

                  (y) two-tenths percent (0.2%) of the Corporation's  EBITDA for
         each percentage point, if any, of Target EBITDA by which EBITDA exceeds
         the Minimum Percentage;  provided,  however, that in no event shall the
         combined  amount  under  clause  (x) above and this  clause  (y) exceed
         twelve and one-half percent (12.5%) of EBITDA, plus

                  (z) five percent  (5%) of the amount by which  EBITDA  exceeds
         the sum of (I) Incentive  EBITDA plus (II) the sum for all prior fiscal
         years (excluding the fiscal year for which the amount of the Cash Bonus
         Pool is being determined) of the positive difference,  if any, for each
         such fiscal year between (i) Adjusted  Incentive EBITDA for such fiscal
         year and (ii) EBITDA for such  fiscal year less (III) any amount  under
         clause (II)  applied in any prior year to reduce the amount of the Cash
         Bonus Pool that would otherwise have been payable in such year.

The amount of the Cash  Bonus  Pool for any fiscal  year only a part of which is
within  the Term  shall be equal to the amount of the Cash Bonus Pool that would
have been  payable for such fiscal  year had it been  entirely  within the Term,
times a fraction,  the  numerator  of which is the number of days of such fiscal
year occurring  during the Term,  and the  denominator of which is three hundred
and sixty-five (365).

                  The Executive and each other Corporation  Senior Manager shall
be entitled to receive  such  portion of the Cash Bonus Pool for any fiscal year
during  the Term as  determined  by the  Chief  Executive  Officer,  but only if
approved  by the  Compensation  Committee  not  later  than the end of the first
quarter of such fiscal year.  Other than with respect to allocation,  all of the
Corporation Senior Managers shall participate in the Cash Bonus Pool on the same
terms and conditions.

                  (b) Manner of Payment. The Cash Bonus Pool for any fiscal year
during  the Term  shall be  determined  after  the  close of such  fiscal  year.
However,  the Executive shall be permitted to draw during each fiscal year, on a
quarterly basis,  against his anticipated  allocation of the Cash Bonus Pool for
such year, as follows:

                  (i)  Following  each fiscal  quarter,  the  Corporation  shall
         determine  a  pro-rated  Cash Bonus Pool amount for the period from the
         beginning  of the fiscal year  through the end of such fiscal  quarter,
         calculated  as set forth in clauses  (x),  (y) and (z) of Section  6(a)
         hereof. For purposes of such  determination,  Target EBITDA,  Incentive
         EBITDA,  Adjusted  Incentive  EBITDA  and the  amount  described  under
         subclause  (II) of said clause (z), if any,  shall be prorated  for the
         relevant year-to-date period.

                  (ii) The Executive shall be permitted to draw up to two-thirds
         of his  allocated  amount of the  pro-rated  Cash Bonus Pool,  less the
         amount of all prior draws for the same fiscal year.

                                       -5-

<PAGE>



                  (iii)  Following the end of the fiscal year,  the  Corporation
         shall determine  whether the amount of the Cash Bonus Pool allocable to
         the Executive  exceeds or is less than the Executive's  draws under the
         pro-rated Cash Bonus Pool for such fiscal year.

                  (iv) If the  allocated  amount of the Cash Bonus Pool to which
         the Executive is entitled  exceeds the amount of the Executive's  draws
         for the fiscal year,  the  Corporation  shall pay the difference to the
         participant  not later  than  ninety  (90)  after the end of the fiscal
         year.  If the  allocated  amount  of the Cash  Bonus  Pool to which the
         Executive is entitled is less than the amount of the Executive's  draws
         for the fiscal year,  the Executive  shall repay the  difference to the
         Corporation  within one hundred twenty (120) days after the Corporation
         informs the Executive in writing of the deficiency,  with a calculation
         thereof in reasonable  detail.  The amount  required to be repaid shall
         bear  interest  at the  applicable  federal  rate  from the date of the
         respective draw(s) until repayment.  If the Executive shall dispute the
         amount of the deficiency, the Executive shall inform the Corporation in
         writing of such dispute on or before the date payment of the deficiency
         is otherwise due, shall provide the Corporation with a statement of the
         basis  for the  dispute  in  reasonable  detail  and  shall  pay to the
         Corporation any undisputed  amount thereof on or prior to the aforesaid
         payment date.  Thereafter,  the Executive and the Corporation  shall in
         good faith attempt to resolve the dispute, but if the dispute cannot be
         resolved prior to the expiration of thirty (30) days from the aforesaid
         payment  date,  the  dispute  shall  be  submitted  to  arbitration  in
         accordance with the procedures set forth in Section 25.

                  (v) The Executive's  repayment obligations under the preceding
         clause (iv) of this  Section  6(b) shall be secured by all  unexercised
         options,   vested  or  unvested,   to  acquire  capital  stock  of  the
         Corporation granted by the Corporation to the Executive.

                  (c) If any payment is  required to be made under  Section 8, 9
or 10 hereof on the basis of the Cash Bonus Pool for any  fiscal  year,  and the
Cash Bonus Pool for such fiscal year cannot be  determined  until after the time
that such  payment is  otherwise  required to be made,  then the payment of that
amount  which is based  upon the  determination  of the Cash Bonus Pool for such
fiscal year shall be deferred until after such time as the  determination of the
Cash Bonus Pool for such fiscal year can  reasonably  be made,  and such payment
shall be made as soon thereafter as practicable.

                  (d)  Payment  of the Cash  Bonus  Pool shall be subject to the
approval of the Corporation's stockholders to the extent necessary such that all
payments under the Cash Bonus Pool will be fully deductible under Section 162(m)
of the Code,  and the  Corporation  shall used its  reasonable  best  efforts to
obtain such approval on a timely basis  consistent  with the  provisions of this
Section 6.

         7.       Employee Benefits.

                  (a) During the Term,  the  Executive  shall  receive  coverage
and/or benefits under any and all medical insurance,  life insurance,  long-term
disability insurance and pension plans and

                                       -6-

<PAGE>



other  employee  benefit plans of the  Corporation  generally  made available to
senior executives of the Corporation from time to time.

                  (b) During the Term,  the  Corporation  shall  provide (x) the
Executive and members of his immediate family with (i)  supplemental  disability
coverage and (ii) medical  insurance for all medical costs and services incurred
by the foregoing,  including costs of dental, vision and custodial care, and (y)
the Executive with an automobile allowance equal to $900 per month.

                  (c) The Executive  shall be entitled to paid vacations  (taken
consecutively or in segments),  in accordance with the standard  vacation policy
of the  Corporation  for senior  executives,  but in no event less than four (4)
weeks each calendar year during the Term. Such vacations shall be taken at times
consistent with the effective discharge of the Executive's duties.

                  (d) During the Term,  the Executive  shall be accorded  office
facilities and secretarial  assistance  commensurate with his position as Senior
Vice  President--Manufacturing  and Sourcing of the Corporation and adequate for
the performance of his duties hereunder.

                  (e) The Executive shall be awarded, as of January 1, 1998, ten
year options to acquire 109,379 shares of the  Corporation's  common stock,  par
value $.01 per share, under the Corporation's 1997 Management Stock Option Plan,
at an  exercise  price of $6.18 per share,  of which  options to acquire  70,060
shares will vest in three equal annual  installments  beginning June 4, 1998 and
options to acquire 39,319 shares will vest in four equal installments  beginning
January 4, 1998,  subject to  acceleration  and  expiration  as  provided in the
aforesaid plan.

         8.       Termination--Death or Disability.

                  (a)  In  the  event  of the  termination  of  the  Executive's
employment  because  of  the  death  of  the  Executive  during  the  Term,  the
Corporation  shall  pay  to any  one or  more  beneficiaries  designated  by the
Executive  pursuant to notice to the Corporation,  or, failing such designation,
to the  Executive's  estate,  (i) the unpaid Base Salary  owing to the  Employee
through  the end of the  month  of his  death,  in a lump  sum  within  five (5)
business  days  after his  death,  and (ii) a Bonus  for the year in which  such
termination  occurs,  equal to the Bonus (if any) that  would have been paid for
such year if no such termination had occurred,  times a fraction,  the numerator
of which is the  number of months in such year  through  the end of the month in
which such termination occurs, and the denominator of which is twelve (12).

                  (b) In the event that the Executive shall become Disabled, the
Corporation  shall  have  the  right to  terminate  the  Executive's  employment
hereunder by giving him written notice of such termination. Upon receipt of such
notice, the Executive's  employment  hereunder shall terminate.  In the event of
such termination, the Corporation shall pay to the Executive (i) the unpaid Base
Salary owing to the Executive  through the end of the month of such termination,
in a lump sum within  five (5)  business  days of such  termination,  and (ii) a
Bonus for the year in which such termination occurs, equal to the Bonus (if any)
that would have been paid for such year if no such termination had


                                       -7-

<PAGE>



occurred,  times a fraction,  the  numerator of which is the number of months in
such year through the end of the month in which such termination occurs, and the
denominator of which is twelve (12).

                  (c) If the Executive has made interim draws against his Bonus,
in accordance with Section 6(b) hereof, for any fiscal year prior to the date of
his death or termination for disability for which a year-end  reconciliation has
not been made in accordance with clause (iv) of such Section,  any Bonus payment
required pursuant to Section 8(a) or 8(b) shall be adjusted, and the Corporation
shall make a payment to the  Executive  or his  estate or the  Executive  or his
estate shall make a payment to the Corporation, as required by Section 6(b)(iv).

         9.       Termination for Cause by Corporation.

                  (a) The Executive's  employment hereunder may be terminated by
the  Corporation  for Cause upon  compliance with the provisions of Section 9(b)
hereof.  In the event that  Executive's  employment  hereunder  shall validly be
terminated  by the  Corporation  for  Cause  pursuant  to this  Section  9,  the
Corporation  shall  promptly  pay  accrued but unpaid Base Salary to the date of
termination  and reimburse or pay any other accrued but unpaid amounts due under
Sections 6 and 13 hereof as of the date of  termination,  and  thereafter  shall
have no  further  obligations  under this  Agreement.  Upon  termination  of the
Executive's  employment  hereunder for Cause,  the Executive  shall  nonetheless
remain bound by the obligations  provided for in Sections 11 and 12 hereof.  For
purposes of this Section 9(a), the amount accrued to the Executive under Section
6 hereof shall mean a Bonus accrued but unpaid for all fiscal years prior to the
fiscal year in which the termination of the Executive  occurs.  If the Executive
has made  interim  draws  against his Bonus,  in  accordance  with  Section 6(b)
hereof,  for the fiscal year during which his termination  occurs, the Executive
shall  promptly repay the amount of all such draws to the  Corporation,  and, to
the extent not repaid,  such amount may be offset by the Corporation against any
amounts owing to the Executive under this Section 9(a).

                  (b)  Termination for Cause shall be effected only by action of
a majority of the Board then in office  (excluding  the  Executive) at a meeting
duly  called and held upon at least ten (10) days' prior  written  notice to the
Executive  specifying  the  particulars  of the  action or  inaction  alleged to
constitute  "Cause"  (and at which  meeting the  Executive  and his counsel were
entitled to be present and given reasonable opportunity to be heard).

         10.      Termination  for Good Reason by the Executive or Without Cause
                  by the Corporation; Change of Control; Non-Renewal.

                  (a) Termination by Executive for Good Reason.  The Executive's
employment  hereunder  may be  terminated  by the  Executive  for Good Reason by
providing  written notice to the Corporation to such effect (such termination to
be effective on the date specified in such notice,  which date shall not be more
than  sixty  (60) days nor less  than  thirty  (30) days  after the date of such
notice).
                                       -8-

<PAGE>



                  (b)  Severance.  If at any time (other than following a Change
of Control)  the  Executive  terminates  his  employment  for Good Reason or the
Corporation  terminates the Executive's  employment without Cause, then, in lieu
of any other  amounts  that might  otherwise  have been payable  hereunder,  the
Corporation shall promptly pay to the Executive:

                  (i) all accrued  but unpaid Base Salary and any other  accrued
         but unpaid amounts due under Sections 6 and 13 hereof as of the date of
         termination; and

                  (ii) the  greater of (I) an amount  equal to one and  one-half
         times the Base  Salary in  effect on the date of  termination  for each
         year or partial year remaining during the Term; and (II) (i) the sum of
         (x) the Base Salary in effect on the date of termination,  plus (y) the
         amount of the Bonus, if any, payable to the Executive in respect of the
         prior  year of the  Term,  multiplied  by (ii)  the  number  of  years,
         including any partial year, remaining during the Term.

If the  employment  of the  Executive is  terminated as provided in this Section
9(b) or Section 9(c) below and the  Executive has made interim draws against his
Bonus, in accordance with Section 6(b) hereof,  for the fiscal year during which
such  termination  occurs,  the Executive shall promptly repay the amount of all
such draws to the Corporation, and, to the extent not repaid, such amount may be
offset by the Corporation  against any amounts owing to the Executive under this
Section 9(b) or Section 9(c) below.

                  (c)  Change of  Control.  If a Change of  Control  occurs  and
thereafter  the  Executive  terminates  his  employment  for Good  Reason or the
Corporation terminates the Executive's employment without Cause, the Corporation
shall promptly pay to the Executive an amount equal to the sum of (x) the amount
payable  to the  Executive  under  Section  10(b)  above,  and (y) the Gross- Up
Payment.

                  (d)      Gross-Up Payment.

                  (i) For purposes of Section 10(c), "Gross-Up Payment" means an
additional  amount  such that the net amount  retained by the  Executive,  after
deduction of the Excise Tax (as defined below) on any payments or benefits under
this  Agreement  and/or under any option plan or  agreement  of the  Corporation
received  by the  Executive  from the  Corporation  as a result  of a Change  of
Control  (within the meaning of section  280G(b)(2) of the Code)  (collectively,
the "Payments")  and any federal,  state and local income tax and the Excise Tax
upon the  Gross-Up  Payment,  and any  interest,  penalties  or additions to tax
payable  by the  Executive  with  respect  thereto  (other  than such  interest,
penalties or  additions to tax payable  solely as a result of action or inaction
by the Executive),  shall be equal to the total amount of the Payments.  "Excise
Tax"  means the tax  imposed  by  Section  4999 of the  Code.  For  purposes  of
determining  whether any of the  Payments  will be subject to the Excise Tax and
the amounts of such Excise Tax, (x) the total  amount of the  Payments  shall be
treated as "parachute  payments" within the meaning of section 280G(b)(2) of the
Code,  and all  "excess  parachute  payments"  within  the  meaning  of  section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax,  except to
the extent that, in the opinion of independent counsel selected by the

                                       -9-

<PAGE>



Corporation and reasonably acceptable to the Executive ("Independent  counsel"),
a Payment (in whole or in part) does not constitute a "parachute payment" within
the  meaning  of  section  280G(b)(2)  of the Code,  or such  "excess  parachute
payments"  (in whole or in part) are not  subject  to the  Excise  Tax;  (y) the
amount of the Payments  that shall be treated as subject to the Excise Tax shall
be equal to the lesser of (A) the total amount of the Payments or (B) the amount
of "excess parachute  payments" within the meaning of section  280G(b)(1) of the
Code  (after  applying  clause  (1)  hereof);  and (z) the value of any  noncash
benefits or any deferred  payment or benefit shall be determined by  Independent
Counsel in accordance with the principles of sections  280G(d)(3) and (4) of the
Code.  For  purposes of  determining  the amount of the  Gross-Up  Payment,  the
Executive  shall be deemed to pay federal  income taxes at the highest  marginal
rates of federal income  taxation  applicable to the individuals in the calendar
year in which the  Gross-Up  Payment  is to be made and  state and local  income
taxes at the highest marginal rates of taxation applicable to individuals as are
in effect in the state and locality of the Executive's residence in the calendar
year in which the Gross-Up  Payment is to be made, net of the maximum  reduction
in federal  income taxes that can be obtained  from  deduction of such state and
local  taxes,  taking into account any  limitations  applicable  to  individuals
subject to federal income tax at the highest marginal rates.

                  (ii) The  Gross-Up  Payments  referred to in Section  10(d)(i)
hereof shall be made, subject to applicable withholding  requirements,  upon the
earlier of (x) the payment to the Executive of any Payment or (y) the imposition
upon the Executive or payment by the Executive of any Excise Tax.

                  (iii) If it is established  pursuant to a final  determination
of a  court  or an  Internal  Revenue  Service  proceeding  or  the  opinion  of
Independent  Counsel  that the Excise Tax exceeds the amount  taken into account
hereunder  (including by reasons of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Corporation shall
make an additional Gross-Up Payment in respect of such excess within thirty (30)
days of the  Corporation's  receipt  of notice of such  final  determination  or
opinion.

                  (iv) In the event that the Internal  Revenue Service makes any
claim,  gives notice of any potential  claim or institutes a proceeding  against
the Executive  asserting that any Excise Tax or additional  Excise Tax is due in
respect of the Payments,  the  Executive  shall  promptly  give the  Corporation
notice of any such claim,  potential claim or proceeding.  The Corporation shall
have the right to conduct all discussions,  negotiations,  defenses, actions and
proceedings  solely to the extent  relating to any Excise Tax payable in respect
of the  Payments,  and  the  Executive  shall  cooperate  with  and  assist  the
Corporation,   at  the   Corporation's   expense,   in  any  such   discussions,
negotiations,  defenses,  actions  and  proceedings,  to the  extent  reasonably
requested  by the  Corporation.  The  Executive  will not  settle  any  claim or
proceeding solely to the extent relating to the Excise Tax payable in respect of
the Payments without the consent of the Corporation,  which consent shall not be
unreasonably  withheld.  The Executive shall file, at the Corporation's expense,
all requests for refunds of the Gross-Up Amount, or any portion thereof, paid to
any taxing  authority as shall be reasonably  requested by the  Corporation  and
shall pay over to the Corporation (net of any tax payable
                                                               
                                      -10-

<PAGE>



thereon) any such refunds,  together with any interest thereon, when and as such
refunds and interest are received by the Executive.

                  (v) All fees and  expenses  of  Independent  Counsel  shall be
borne by the Corporation.

                  (e)  Non-Renewal.  In the  event  that the  employment  of the
Executive  is not renewed by the  Corporation  following  the end of the Term on
terms  that  are no less  favorable  to the  Executive  than  the  terms of this
Agreement, the Corporation shall pay to the Executive, promptly after the end of
the  Term,  an amount  equal to (x) the Base  Salary in effect at the end of the
Term,  plus (y) the amount of the Bonus,  if any,  payable to the  Executive  in
respect of the third year of the Term.  If the  Corporation  is willing to renew
the  employment  of the  Executive  at the  end of the  Term  on  terms  no less
favorable to the Executive than the terms of this Agreement but the Executive is
unwilling to accept such employment, no amount shall be payable to the Executive
under this Section 10(d).

         11. Confidential Information.  In addition to any other confidentiality
obligation  the Executive may have to the date hereof,  and until the end of the
original  Term,  the  Executive  shall  keep  secret  and  retain  in  strictest
confidence,  and shall not use for his benefit or the benefit of others, any and
all confidential  information  relating to the Corporation and its subsidiaries,
including,  without limitation,  customer lists, financial plans or projections,
pricing  policies,  marketing  plans  or  strategies,  business  acquisition  or
divestiture  plans, new personnel  acquisition  plans,  designs,  and, except in
connection with the performance of his duties hereunder, the Executive shall not
disclose any such  information to anyone outside the  Corporation and any of its
subsidiaries,  except as required by law (provided  prior written notice thereof
is given by the Executive to the  Corporation) or except with the  Corporation's
prior consent,  unless such  information is known generally to the public or the
trade through sources other than the Executive's unauthorized disclosure.

         12. Competitive Activity.  The Executive hereby agrees that, during his
employment  hereunder,  and, following a termination of his employment,  for the
balance of the Term (if any), the Executive shall not, without the prior consent
of the Board (i) directly or  indirectly,  engage or be interested in (as owner,
partner,   shareholder,   employee,  director,  officer,  agent,  consultant  or
otherwise),  with or without compensation,  any business wherever located in the
world  engaged in the  manufacture,  distribution,  design  marketing or sale of
women's apparel,  if such business is a material  competitor of the Corporation,
or (ii) induce or attempt to persuade any employee of the  Corporation or of any
subsidiary of the Corporation, or any person who was employed by the Corporation
or any subsidiary of the Corporation  within the preceding six months,  to leave
the employ of the  Corporation  or any  subsidiary of the  Corporation  (but the
foregoing shall not be deemed to prevent the Executive in his capacity as Senior
Vice  President--Manufacturing  and Sourcing of the  Corporation  from hiring or
dismissing any employee of the  Corporation or any subsidiary for the benefit of
the Corporation).  The provisions of clause (i) of the preceding  sentence shall
not apply in the case of a  termination  by the  Executive for Good Reason or by
the Corporation without Cause. Nothing in this Section 12

                                      -11-

<PAGE>



shall  prohibit  the  Executive  from  acquiring  or holding  not more than five
percent (5%) of any class of publicly traded securities of any business.

         13.  Expenses.  The  Corporation  shall reimburse the Executive for all
reasonable  expenses  incurred  by  the  Executive  in  the  performance  of the
Executive's duties hereunder;  provided,  however, that, in connection with such
reimbursement,  the Executive shall account to the Corporation for such expenses
in  the  manner  customarily  prescribed  by  the  Corporation  for  its  senior
executives.

         14. Directors' and Officers' Insurance;  Indemnification. The Executive
shall be provided with directors' and officers' insurance in connection with his
employment  hereunder and service as a Director as contemplated hereby with such
coverage  (including  with respect to unpaid  wages and taxes not remitted  when
done) as shall be reasonably  satisfactory  to the Executive and with  aggregate
limits of  liability  for all covered  officers  and  directors of not less than
Thirty-Five  Million Dollars  ($35,000,000),  and the Corporation shall maintain
such insurance in effect for the period of the Executive's  employment hereunder
and for not less than five (5) years thereafter; provided, however, that, in the
event that the Corporation shall not obtain such insurance,  it shall provide or
cause the Executive to be provided with indemnity (or a combination of indemnity
and  directors'  and  officers'  insurance) in  connection  with his  employment
hereunder  with  substantially   equivalent   coverage  and  amounts,   and  the
Corporation  shall  maintain  such  indemnity (or  combination  of indemnity and
directors'   and  officers'   insurance)  or  cause  such   indemnity  (or  such
combination)  to be  maintained  for the  period of the  Executive's  employment
hereunder and for not less than five (5) years thereafter.

         15. No Duty to Mitigate.  The Executive  shall have no duty to mitigate
the severance  amounts or any other amounts payable to the Executive  hereunder,
and such amounts shall not be subject to reduction for any compensation received
by the Executive from  employment in any capacity or other source  following the
termination of Executive's employment with the Corporation and its subsidiaries.

         16. Entire Agreements;  Amendments;  No Waiver. This Agreement contains
the entire understanding  between the parties hereto with respect to the subject
matter  hereof.  This  Agreement  may  not be  changed  orally,  but  only by an
instrument  in  writing  signed by the party  against  whom  enforcement  of any
waiver,  change,  modification,  extension or discharge is sought. No failure on
the part of either  party to  exercise,  and no delay in  exercising,  any right
hereunder shall operate as a waiver thereof,  nor shall any partial  exercise of
any right hereunder preclude any further exercise thereof.

         17. Survival of Provisions.  The provisions of Sections 10(d),  11, 12,
23 and 25 shall  survive the  termination  or  expiration  of this  Agreement as
provided therein. Such provisions are unique and extraordinary,  which give them
a value  peculiar to the  Corporation,  and cannot be  reasonably  or adequately
compensated  in  damages  for its loss and any breach by the  Executive  of such
provisions shall cause the Corporation irreparable injury and damage. Therefore,
the  Corporation,  in addition to all other  remedies  available to it, shall be
entitled to injunctive and other

                                      -12-

<PAGE>



available equitable relief in any court of competent  jurisdiction to prevent or
otherwise  restrain a breach of such  provisions  for the  purposes of enforcing
such provisions.

         18. Withholding. The Corporation shall be entitled to withhold from any
and all amounts payable to the Executive hereunder such amounts as may from time
to time  be  required  to be  withheld  pursuant  to  applicable  tax  laws  and
regulations.

         19.  Succession,  Assignability and Binding Effect. (a) The Corporation
will  require any  successor  or  successors  (whether  direct or  indirect,  by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business  and/or  assets of the  Corporation  expressly  to assume  and agree to
perform  this  Agreement  in the same  manner  and to the same  extent  that the
Corporation  would be  required  to perform it if no such  succession  had taken
place.  Failure  of the  Corporation  to  obtain  such  agreement  prior  to the
effectiveness   of  any  such  succession   shall  constitute  Good  Reason  for
resignation by the Executive.

                  (b) This Agreement  shall inure to the benefit of and shall be
binding upon the Corporation  and its successors and permitted  assigns and upon
the Executive and his heirs,  executors,  legal representatives,  successors and
permitted assigns;  provided,  however, that neither party may assign, transfer,
pledge,  encumber,  hypothecate or otherwise dispose of this Agreement or any of
its or his  rights  hereunder  without  the prior  written  consent of the other
party,  and  any  such  attempted  assignment,  transfer,  pledge,  encumbrance,
hypothecation or other  disposition  without such consent shall be null and void
and without effect.

         20.  Headings.  The paragraph  headings  contained  herein are included
solely for  convenience of reference and shall not control or affect the meaning
or interpretation of any of the provisions of this Agreement.

         21. Notices.  Any notices or other  communications  hereunder by either
party  shall be in  writing  and shall be  deemed  to have  been  duly  given if
delivered  personally  to the other party or, if sent by registered or certified
mail,  upon  receipt,  to the other party at his or its address set forth at the
beginning  of this  Agreement  or at such other  address as such other party may
designate in conformity with the foregoing.

         22.  Governing Law. This Agreement  shall be governed by, and construed
and  enforced in  accordance  with,  the laws of the State of New York,  without
giving effect to the principles thereof relating to the conflict of laws.

         23. Legal Fees and Expenses.  In order to induce the Executive to enter
into this Agreement and to provide the Executive with reasonable  assurance that
the  purposes  of this  Agreement  shall  not be  frustrated  by the cost of its
enforcement,  the  Corporation  shall  pay  and be  solely  responsible  for any
attorneys'  fees and  expenses  and court costs  incurred by the  Executive as a
result of the  failure by the  Corporation  to  perform  this  Agreement  or any
provision  hereof to be performed by it or in  connection  with any action which
may be brought, by or in the name or for the

                                      -13-

<PAGE>



benefit  of the  Corporation  or  any  subsidiary  contesting  the  validity  or
enforceability  of this Agreement or any provision hereof to be performed by the
Corporation,  which action shall have been  dismissed by a final,  nonappealable
court order.

         24. Opportunity to Review. The Executive  acknowledged that he has been
given the opportunity to discuss this Agreement, including this Section 24, with
his private legal  counsel and has availed  himself of that  opportunity  to the
extent he wishes to do so.

         25.      Arbitration.

                  (a)  Disputes  Subject to  Arbitration.  In the event that the
Corporation  terminates the  Executive's  employment on the grounds set forth in
clause (iii) of the  definition of "Cause",  the  Corporation  and the Executive
mutually  consent to the resolution by  arbitration  of any dispute  between the
Corporation and the Executive as to whether such Cause has occurred.  Unless the
Corporation and the Executive otherwise agree, no other disputes, issues, claims
or controversies arising out of the Executive's employment (or its termination),
or  any  other  matter  whatsoever,   shall  be  submitted  to  or  resolved  by
arbitration.

                  (b)      Arbitration Procedures.

                  (i) The Corporation  and the Executive  agree that,  except as
         provided in this Agreement, any arbitration shall be in accordance with
         the  then  current  Model  Employment  Arbitration  Procedures  of  the
         American  Arbitration  Association  ("AAA") before an arbitrator who is
         licensed  to  practice  law in the  state in which the  arbitration  is
         convened (the  "Arbitrator").  The  arbitration  shall take place in or
         near the city in which the  Executive  is or was last  employed  by the
         Corporation.

                  (ii) Upon  designation  as a Dispute,  the AAA shall give each
         party a list of eleven (11)  arbitrators  drawn from its panel of labor
         and  employment  arbitrators.  The  Corporation  and the  Executive may
         strike all names on the list which it deems  unacceptable.  If only one
         common name remains on the lists of all parties,  said individual shall
         be designated as the  Arbitrator.  If more than one common name remains
         on  the  lists  of  all  parties,   the  parties   shall  strike  names
         alternatively  until only one remains. If no common name remains on the
         lists of all parties,  the AAA shall furnish an additional list and the
         parties  shall  alternate  striking  names on such second list until an
         arbitrator is selected.

                  (iii) The  Arbitrator  shall apply the law of the State of New
         York  applicable to contracts  made and to be performed  wholly in that
         state  (without  giving effect to the  principles  thereof  relating to
         conflicts  of law).  The Federal  Rules of Evidence  shall  apply.  The
         Arbitrator, and not any federal, state, or local court or agency, shall
         have  exclusive  authority  to  resolve  any  dispute  relating  to the
         interpretation,  applicability  or formation of the term  "Cause".  The
         Arbitrator  shall render a decision within thirty (30) days of the date
         upon which the  Arbitrator is selected  pursuant to Section  25(b)(ii),
         which decision shall be final and                         
                                          
                                      -14-

<PAGE>



         binding upon the parties. In the event that the Arbitrator decides that
         Material   Insubordination  has  (x)  occurred,  then  the  Executive's
         employment  shall be deemed to have been  terminated for cause pursuant
         to  Section  9(a)  hereof  or (y) not  occurred,  then the  Executive's
         employment  shall be  deemed  to have  been  terminated  without  Cause
         pursuant to Section 10(b) hereof.

                  (iv) The Arbitrator  shall have  jurisdiction to hear and rule
         on   pre-hearing   disputes  and  is  authorized  to  hold   prehearing
         conferences  by  telephone  or  in  person  as  the  Arbitrator   deems
         necessary.  The  Arbitrator  shall have the  authority  to  entertain a
         motion to dismiss and/or a motion for summary judgment by any party and
         shall apply the  standards  governing  such  motions  under the Federal
         Rules of Civil Procedure.

                  (v) Either party, at its expense,  may arrange for and pay the
         costs  of  a  court  reporter  to  provide  a  stenographic  report  of
         proceedings.

                  (vi) Either party, upon request at the close of hearing, shall
         be given leave to file a post-hearing brief. The time for filing such a
         brief shall be set by the Arbitrator.

                  (vii)  Either  party  may  bring  an  action  in any  court of
         competent  jurisdiction  to compel  arbitration  under this Section 25.
         Except as otherwise  provided in this Section 25, both the  Corporation
         and the  Executive  agree that  neither  such party  shall  initiate or
         prosecute  any lawsuit or  administrative  action in any way related to
         any Dispute covered by this Section 25.

                  (viii)  The  arbitrator  shall  render an  opinion in the form
         typically rendered in labor arbitrations.

                  (c)  Arbitration  Fees  and  Costs.  The  Corporation  and the
Executive shall equally share the fees and costs of the  Arbitrator.  Each party
shall  deposit  funds or post other  appropriate  security  for its share of the
Arbitrator's fee, in an amount and manner determined by the Arbitrator, ten (10)
days before the first day of hearing. Each party shall pay for its own costs and
attorneys'  fees, if any.  However,  if any party prevails on a statutory  claim
that affords the  prevailing  party  attorneys'  fees,  the Arbitrator may award
reasonable fees to the prevailing party.

                  (d) Opportunity to Review. The Executive  acknowledged that he
has been given the opportunity to discuss this Agreement, including this Section
25, with his private legal counsel and has availed  himself of that  opportunity
to the extent he wishes to do so.

                  (e) Law  Governing.  The  parties  agree that the  arbitration
provisions  set  forth  in this  Section  25 shall be  governed  by the  Federal
Arbitration Act, 9 U.S.C.ss.ss.  1-16,  ("FAA").  The parties further agree that
all Disputes,  whether  arising under state or federal law,  shall be subject to
the FAA, notwithstanding any state or local laws to the contrary.
                                                                                
                                      -15-

<PAGE>


         26. Prior Employment Agreement.  The employment agreement,  dated as of
June 2, 1997 between the Executive and the  Corporation is hereby  terminated as
of the Effective Date.

                  IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.



                                          THE LESLIE FAY COMPANY, INC.


                                          By:  /s/ John J. Pomerantz
                                               ---------------------------------
                                          Name:  John J. Pomerantz
                                          Title: Chairman and Chief Executive
                                                 Officer


                                          /s/ Dominick Felicetti
                                          --------------------------------------
                                          Dominick Felicetti
                                          Executive


                                      -16-