Exhibit 10.1





Exhibit 10.1




EMPLOYMENT AGREEMENT




THIS AGREEMENT is made as of the 13th day of September, 2010 by and between SELECT MEDICAL
CORPORATION, a Delaware corporation, having an address at 4714 Gettysburg Road, P.O. Box 2034,
Mechanicsburg, PA 17055 (“Employer”), and DAVID S. CHERNOW, an individual, having an address at
7100 E. Crestline Avenue, Greenwood Village, CO 80111 (“Employee”).



BACKGROUND:




A. Employer is a leading operator of specialty hospitals and outpatient rehabilitation clinics
in the United States. Employer also provides medical rehabilitation services on a contracted basis
to nursing homes, hospitals, assisted living and senior care centers, schools and work sites. The
businesses operated by Employer and its affiliates (collectively with Employer, the “Company
Group”) now and in the future are hereinafter referred to collectively as the “Business”.



B. Employer desires to employ Employee in connection with Employer’s operation of the
Business.



C. Employee desires to be employed by Employer to render services in connection with the
Business, on the terms and conditions specified below.



NOW THEREFORE, in consideration of the mutual agreements contained herein and intending to be
legally bound, the parties hereto hereby agree as follows:



Article 1. CAPACITY AND DUTIES




1.01. Employment; Acceptance of Employment. Employer hereby employs Employee, and
Employee hereby accepts employment by Employer, subject to all the terms and conditions hereafter
set forth.



1.02. Capacity. Employee shall serve as President — Chief Strategy Officer of
Employer. Employee shall report to Employer’s Chief Executive Officer, Executive Chairman or such
other executive as Employer’s Board of Directors shall designate from time to time.


 


 









 





1.03. Responsibilities. During the term of this Agreement, Employee shall devote his
full attention and his best efforts to the performance of the customary duties and responsibilities
consistent with Employee’s position as described in Section 1.02. Employee agrees to perform
Employee’s duties diligently and to the best of Employee’s abilities, and to perform such
additional or different duties and services appropriate to Employee’s position which Employee from
time to time may be reasonably directed to perform by Employer. In carrying out his duties
hereunder, Employee’s office will be located in Mechanicsburg, Pennsylvania or such other location
of Employer’s corporate headquarters from time to time.



1.04. Authority and Control of Employer. Employee shall at all times comply with, and
be subject to, such reasonable policies, procedures, rules and regulations as Employer or its
parent company may establish from time to time, including Employer’s Code of Conduct, and all work
performed by Employee shall be subject to review and evaluation by Employer.



1.05. Duties; Conflicts. Employee acknowledges and agrees that Employee owes a duty
of loyalty, fidelity and allegiance to act at all times in the best interests of the Company Group
and to do no act which would injure the Company Group’s business, interests or reputation.
Employee shall not, during the Term, without the prior written consent of Employer, engage in any
other business, investment or activity, directly or indirectly, whether or not such activity is
pursued for gain, profit, or other pecuniary advantage, which interferes with the performance of
Employee’s duties hereunder or is contrary to the interests of the Company Group. It is agreed
that any direct or indirect interest in, connection with, or benefit from any outside activities,
particularly commercial activities, which interest might in any way adversely affect the Company
Group, involves a possible conflict of interest. In keeping with Employee’s fiduciary duties to
Employer, Employee agrees that Employee shall not knowingly become involved in a conflict of
interest with the Company Group, or upon discovery thereof, allow such a conflict to continue.
Employee shall disclose to Employer any facts which might involve a conflict of interest. Employee
shall request the written consent of Employer prior to accepting a position as a trustee, officer
or director of any outside organization.



1.06. Time Records. Employee shall submit to Employer such time records as Employer
may require from time to time showing the nature of the services performed by Employee and the time
Employee actually spent performing those services.



Article 2. TERM OF EMPLOYMENT; TERMINATION




2.01. Term. This Agreement shall commence on the date hereof and remain in effect,
unless this Agreement is terminated by either party hereto, or extended by the written agreement of
both parties hereto, until the third anniversary of the date hereof. Thereafter, this Agreement
shall continue in effect for additional periods of one (1) calendar year each unless either party
hereto shall, at least sixty (60) days prior to the end of the then current term, notify the other
party hereto of its/his decision to terminate this Agreement effective at the end of the term in
which such notice is given (such period, including extensions thereof, being hereinafter referred
to as the “Term”).


 


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2.02. Termination.



(a) Death and Disability. The employment of Employee under this Agreement shall
immediately terminate (i) upon the death of Employee and (ii) upon the determination that Employee
is “disabled.” For purposes of this Agreement, “disabled” or “disability” shall mean that (i)
Employee is unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than twelve (12) months, (ii) Employee is, by
reason of any medically determinable physical or mental impairment that can be expected to result
in death or can be expected to last for a continuous period of not less than twelve (12) months,
receiving income replacement benefits for a period of not less than three (3) months under an
accident and health plan covering employees of Employer, or (iii) Employee is determined to be
“disabled” under Employer’s long-term disability insurance plan (provided that the definition of
“disability” under such plan complies with the requirements of Section 409A of the Code and the
regulations thereunder). Upon a termination of employment described in this Section 2.02(a), (i)
Employee or his estate or beneficiaries, as applicable, shall be entitled to receive any base
salary and other benefits earned and accrued under this Agreement prior to the date of termination,
such amount to be paid within seventy five (75) days following such termination, (ii) any stock
options with respect to Employer’s or Select Medical Holdings Corporation’s (“Holdings”) stock held
by Employee at the time of such termination shall become fully exercisable as of the date of such
termination and shall remain exercisable by Employee or his estate or beneficiaries, as applicable,
until the expiration date of such options, notwithstanding any contrary vesting schedules otherwise
applicable to such options, and (iii) Employee and his estate and beneficiaries shall have no
further rights to any other compensation or benefits, or any other rights, hereunder.



(b) Discharge for Cause. The employment of Employee under this Agreement shall
terminate immediately if the Chief Executive Officer or Executive Chairman of Employer discharges
Employee for cause. For purposes of this Agreement, “cause” shall mean: (i) the willful and
continued failure by Employee to substantially perform his duties hereunder (other than any such
failure resulting from Employee’s incapacity due to physical or mental illness), (ii) the engaging
by Employee in willful or reckless misconduct which is demonstrably and materially injurious to
Employer monetarily or otherwise, or (iii) the conviction of Employee of a felony involving moral
turpitude. For purposes of this Section 2.02(b), an act, or failure to act, on Employee’s part
shall be considered “willful” or “reckless” only if done, or omitted to be done, by his not in good
faith and without a reasonable belief that his action or omission was in the best interest of
Employer. Employee’s employment shall not be deemed to have been terminated for cause unless
Employer shall have given or delivered to Employee (i) reasonable notice setting forth the reasons
for Employer’s intention to terminate Employee’s employment for cause, (ii) an opportunity for
Employee to cure any such breach during the 30-day period after Employee’s receipt of such notice,
(iii) a reasonable opportunity, at any time during the 30-day period after Employee’s receipt of
such notice, for Employee, together with his counsel, to be heard before the Board of Directors,
and (iv) a Notice of Termination (as defined in Section 2.02(c)) stating that, in the good faith
opinion of not

 


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less than a majority of the entire membership of the Board of Directors, Employee was guilty of the conduct set forth in any of
clauses (i), (ii) or (iii) of the second sentence of this Section 2.02(b). If Employer terminates
Employee’s employment for cause pursuant to this Section 2.02(b), (i) Employer shall pay to
Employee, within seventy five (75) days following such termination, any base salary and other
benefits earned and accrued under this Agreement prior to the termination of employment, excluding
any unpaid bonuses, whether or not earned or accrued, and (ii) Employee shall have no further
rights to compensation or benefits, or any other rights, hereunder.



(c) Notice of Termination. Any termination of Employee’s employment, other than a
termination by reason of death, shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i)
indicates the specific termination provision of this Agreement relied upon, (ii) if applicable,
sets forth in reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee’s employment under the provision so indicated, and (iii) specifies the
termination date (which date shall, except as otherwise expressly provided in this Article 2, be
not more than fifteen (15) days after the giving of such Notice). In the event of a termination by
Employer for cause, the Notice of Termination shall not be effective unless preceded by
satisfaction of the procedural requirements set forth in Section 2.02(b) hereof.



(d) Certain Terminations. Employer may terminate Employee’s employment hereunder at
any time for any reason or for no reason by providing a Notice of Termination in accordance with
Section 2.02(c). If Employee’s services are terminated by Employer for any reason other than for
cause as defined in Section 2.02(b) hereof and other than due to death or disability, except as
provided in Section 5.01: (i) Employer shall pay to Employee any base salary and other benefits
earned and accrued under this Agreement prior the date of termination, such amount to be paid
within seventy five (75) days following such termination, (ii) Employer will continue to pay
Employee on its regular payroll dates, for a period of twelve (12) months following such
termination, his base salary as of the date of such termination, with such payments to begin on
Employer’s first regular payroll date of the seventh month following such termination of
employment; provided, that, such first payment shall include an amount equal to Employee’s base
salary for the period between the date of termination and the first regular payroll date of the
seventh month following such termination, (iii) Employee will not continue to accrue employee
benefits, such as paid time off, after Employee’s termination under this Section 2.02(d), and (iv)
Employee shall have no further rights hereunder.



Article 3. COMPENSATION




3.01. Cash Compensation. (a) During the period of Employee’s services hereunder, as
compensation for such services to Employer pursuant to this Agreement, Employer shall pay to
Employee a base salary of $640,000 per year in equal bi-weekly installments. The Board of Directors
of Employer may, in its sole discretion from time to time, increase the base compensation to be
paid to Employee as provided in this Article 3. Employee will also be eligible to receive bonus
compensation, annual or otherwise, in an amount to be determined by
Employer’s Board of Directors in its sole discretion, with any such bonus to be paid by March
15th of the year following the year in which it was earned.


 


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(b) Employer will pay Employee, within thirty (30) days following the commencement of the
Term, a one-time relocation bonus in the gross amount of $150,000 (the “Relocation Bonus”). The
Relocation Bonus will be repaid by Employee in full in the event that Employee does not remain
continuously employed by Employer during the first full year of the Term.



(c) All cash compensation paid to Employee will be subject to tax and payroll withholdings
and deductions.



3.02. Employee Benefits. During the Term, in addition to the compensation paid to
Employee pursuant to Section 3.01 above, Employee shall be entitled to any employment and fringe
benefits under Employer’s employment policies and employee benefit plans, as they may exist from
time to time, and which are made available by Employer to other similarly situated employees, it
being understood that Employee shall be required to make the same contributions and payments in
order to receive any of such benefits as may be required of such similarly situated employees.
Nothing in this Agreement shall be construed to obligate Employer to institute, maintain, or
refrain from changing, amending or discontinuing any incentive compensation or employee benefit
program or plan, so long as such actions are similarly applicable to covered employees generally.
Employer shall have no obligation to secure or otherwise fund any of the aforesaid benefits and
arrangements, and each shall instead constitute an unfunded and unsecured promise to pay money in
the future exclusively from the general assets of Employer.



3.03. Paid Time Off. During the Term, Employee shall be entitled to paid time off in
accordance with Employer’s paid time off policies in effect from time to time. Vacation schedules
will be coordinated and approved by Employer so as to facilitate the steady ongoing operation of
the Business.



3.04. Income and Employment Taxes. Employee shall be an employee of Employer for all
purposes. Employer shall withhold amounts from Employee’s compensation in accordance with the
requirements of applicable law for federal and state income tax, FICA, FUTA, and other employment
or payroll tax purposes. It shall be Employee’s responsibility to report and pay all federal,
state, and local taxes arising from Employee’s receipt of compensation hereunder.



3.05. Expenses. Employer shall pay or reimburse Employee for all ordinary and
reasonable out-of-pocket expenses actually incurred (and, in the case of reimbursement, paid) by
Employee in the performance of Employee’s services under this Agreement; provided that Employee
submits proof of such expenses, with the properly completed forms as prescribed from time to time
by Employer in accordance with Employer’s policies and procedures. Employer shall also pay or
reimburse Employee for the reasonable cost of moving his family’s household furniture, furnishings
and goods from Colorado to Pennsylvania.


 


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Article 4. CERTAIN COVENANTS




4.01. Non-Competition. (a) Employee acknowledges that the services to be rendered by
Employee to Employer are of a special and unique character. Employee agrees that, in consideration
of his employment hereunder, Employee shall not, prior to two (2) years following the date of
termination of Employee’s employment by any member of the Company Group (i) engage, whether as
principal, agent, investor, distributor, representative, stockholder, employee, consultant,
volunteer or otherwise, with or without pay, in any activity or business venture, anywhere within
50 miles of Employer’s facilities or any other Company Group facility or customer in which, or to
whom, Employer has provided services hereunder during the twelve (12) months prior to the date of
termination, which is competitive with the business conducted by the Company Group on the date of
termination; (ii) solicit or entice or endeavor to solicit or entice away any of the clients,
referral sources or payors or customers of any member of the Company Group, either on such
Employee’s own account or for any other person, firm, corporation or organization; (iii) employ any
person who was a director, officer or employee of any member of the Company Group or any person who
is or may be likely to be in possession of any confidential information or trade secrets relating
to the business of any member of the Company Group; or (iv) at any time, take any action or make
any statement the effect of which would be, directly or indirectly, to impair the goodwill of any
member of the Company Group or the business reputation or good name of any member of the Company
Group or the business reputation or good name of any member of the Company Group, or be otherwise
detrimental to the Company Group, including any action or statement intended, directly or
indirectly, to benefit a competitor of any member of the Company Group.



(b) The two (2) year restrictive period above shall be deemed tolled during any period in
which Employee is in violation of Employee’s obligations under this Section 4.01. Employee agrees
that, in any action to enforce Employee’s obligations, the Company Group shall be entitled to a
full two (2) year period of protection, which two (2) year period shall be determined without
including any period of Employee’s breach.



4.02. Confidentiality. Employee covenants and agrees that he will not, to the
detriment of Employer, at any time during or after the termination of his employment hereunder,
reveal, divulge or make known to any person (other than Employer or its officers, employees or
agents who need to know such information, or as a result of legal process) or use for his own
account or the account of any other person any confidential or proprietary records, data, trade
secrets, customer lists or any other confidential or proprietary information whatsoever (the
“Confidential Information”) used by Employer and made known (whether or not with the knowledge and
permission of Employer, and whether or not developed, devised or otherwise created in whole or in
part by the efforts of Employee) to Employee by reason of his association with Employer. Employee
further covenants and agrees that he shall retain all such knowledge and information which he shall
acquire or develop respecting such Confidential Information in trust for the sole benefit of
Employee and its successors and assigns.


 


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4.03. Non-Solicitation. During the Term, and for a period of two (2) years after the
expiration or earlier termination of this Agreement, Employee shall not, directly or indirectly,
through any entity, family member or agent, without the express written consent of Employer (which
consent may be withheld in Employer’s sole discretion), solicit or contact, cause others to solicit
or contact, with a view to engaging or employing, nor shall Employee actually engage or employ, any
person who is, or at any time was, an employee or consultant of the Company Group.



4.04. Property of Employer. All written materials, records and documents made by
Employee or coming into his possession concerning the Business or affairs of Employer shall be the
sole property of Employer and, upon the termination of Employee’s employment hereunder or upon
request of Employer at any time, Employee shall promptly deliver the same to Employer and shall
retain no copies thereof.



4.05. Enforcement; Remedies. Employee acknowledges and agrees that any breach by his
of any of the provisions of Sections 4.01 through 4.04 (the “Restrictive Covenants”) would result
in irreparable injury and damage for which money damages would not provide an adequate remedy.
Therefore, if Employee breaches, or threatens to commit a breach of, any of the Restrictive
Covenants, Employer shall have the right and remedy (upon compliance with any necessary
prerequisites imposed by law upon the availability of such remedy), which shall be independent and
severally enforceable, and which shall be in addition to, and not in lieu of, any other rights and
remedies available to Employer under law or in equity (including, without limitation, the recovery
of damages), to have the Restrictive Covenants specifically enforced (without posting bond and
without the need to prove damages) by any court having equity jurisdiction, including, without
limitation, the right to an entry against Employee of restraining orders and injunctions
(preliminary, mandatory, temporary and permanent) against violations, threatened or actual, and
whether or not then continuing, of such covenants. The existence of any claim or cause of action by
Employee, whether predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement of the Restrictive Covenants.



4.06. In General. If any decision-maker determines that any of the covenants contained
in this Agreement, including, without limitation, any of the Restrictive Covenants, or any part
thereof, is unenforceable because of the duration or geographical scope of such provision, the
duration or scope of such provision, as the case may be, shall be reduced so that such provision
becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be
enforced. The parties hereto understand that each of the covenants of Employee contained in this
Article 4 is an essential element of this Agreement. Employee’s obligations under this Article 4
shall survive the termination of this Agreement.


 


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Article 5. CHANGE OF CONTROL




5.01. Payment Due.



(a) Certain Terminations Following a Change of Control. If, during the Term, there
should be a Change of Control (as defined in Section 5.02), and within the one-year period
immediately following such Change of Control, (A) Employee’s employment with Employer is terminated
by Employer without cause as defined in Section 2.02(b) (and not due to death or disability) or (B)
Employee terminates Employee’s employment with Employer for Good Reason (as defined below) or
because (1) there is a reduction, by Employer, in Employee’s compensation from that in effect
immediately prior to such Change of Control or (2) Employee is required by Employer to relocate
Employee’s principal place of employment with Employer to a location anywhere other than Employer’s
principal executive offices in (or within 25 miles of) Mechanicsburg, Pennsylvania (except for
required travel on Employer’s business in a manner that is substantially consistent with Employee’s
business travel obligations immediately prior to such Change of Control), then in lieu of any
compensation pursuant to Section 2.02(d), (A) Employer will pay to Employee any base salary and
other benefits earned and accrued under this Agreement within seventy-five (75) days after the
termination date, (B) Employer will pay to Employee a lump sum cash payment equal to his total cash
compensation for base salary and bonus for the immediately preceding three completed calendar years
(or equal to three times his average total annual cash compensation for base salary and bonus for
his years of service to Employer, if less than three years), such payment to be made on the first
payroll date coincident with or next following the sixtieth (60th) day after such
termination, (C) Employer agrees that such termination would not be voluntary or a termination “for
cause” as contemplated by any stock option or other incentive plans of Employer or Holdings and any
stock option or other award agreements entered into between Employer or Holdings and Employee
(including agreements that may be entered into after the date hereof), and that all unvested,
unexercised stock options to purchase stock of Employer or Holdings held by Employee shall become
fully vested and exercisable as of the date of such termination, and Employee shall have the right
to exercise such options at any time prior to the expiration date of such options, notwithstanding
any contrary vesting schedule otherwise applicable to such options, and (D) Employee shall have no
further rights to compensation or benefits, or any other rights, hereunder.



(b) Certain Termination Prior to a Change of Control. If (i) Employee’s employment is
terminated by Employer other than for cause (and not due to death or disability) during the Term,
(ii) within the six-month period following such termination, a Change of Control occurs, and (iii)
Employee reasonably demonstrates that such termination of employment was at the request of a third
party who has taken steps reasonably calculated to effect the Change of Control, then in lieu of
the payments described in Section 2.02(d)(ii) hereof, Employer shall pay to Employee an amount
equal to Employee’s total cash compensation for base salary and bonus for the immediately preceding
three completed calendar years (or equal to three times his average total annual cash compensation
for base salary and bonus for his years of service to Employer, if less than three years), with
such amount to be paid in equal installments on each of Employer’s regular payroll dates over the
twelve (12) month period following such termination; provided, however, that the commencement of
such payments shall be delayed until the first payroll date of the seventh month following such
termination; provided further, that, the first payment made hereunder shall include the payments
that otherwise would be made had the delay described in the preceding clause not been imposed.


 


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5.02. Definition of Change of Control.



(a) A “Change of Control” shall mean:



(i) the acquisition during any period of twelve (12) consecutive months, by any Person (as
defined below), including a Group (as defined below), of all or substantially all of the assets of
the Employer or Holdings (on a consolidated basis), other than a sale or disposition by the
Employer or Holdings of all or substantially all of such entity’s assets to an entity, at least 50%
of the combined voting power of the voting securities of which are owned by Persons in
substantially the same proportion as their ownership of the Employer or Holdings, as applicable,
immediately prior to such sale or disposition, provided that any such transaction satisfies the
requirements of Treasury Regulation Section 1.409A-3(i)(5)(vii);



(ii) any Person including a Group, but excluding any stockholder of the Employer or Holdings
who immediately prior to the Public Offering beneficially owned 12% or more of the Employer’s or
Holdings’ outstanding shares, becomes the beneficial owner of shares of more than 50% of the total
number of votes that may be cast for the election of directors of the Employer or Holdings, as
applicable, provided that such transaction satisfies the requirements of Treasury Regulation
Section 1.409A-3(i)(5)(v);



(iii) during any period of twelve (12) consecutive months, the individuals who served on the
Board of Directors of Holdings (the “Holdings Board”) as of the beginning of such period (the
“Holdings Incumbent Directors”) cease for any reason to constitute at least a majority of the
Holdings Board; provided, however, that any Person who becomes a director subsequent to the
effective date hereof, whose election or nomination for election was approved by a vote of at least
a majority of the directors then constituting the Holdings Incumbent Directors shall for purposes
of this clause (iii) be considered a Holdings Incumbent Director; provided further, that such
events satisfy the requirements of Treasury Regulation Section 1.409A-3(i)(5)(vi)(2); or



(iv) the consummation of a merger or consolidation of the Employer or Holdings in which the
stockholders of the Employer or Holdings, as applicable, immediately prior to such merger or
consolidation, would not, immediately after such merger or consolidation, beneficially own,
directly or indirectly, shares representing in the aggregate at least 50% of the combined voting
power of the voting securities of the corporation issuing cash or securities in the merger or
consolidation (or of its ultimate parent corporation, if any), provided that such transaction
satisfies the requirements of Treasury Regulation Section 1.409A-3(i)(5)(v).



Notwithstanding the foregoing, in no event shall a “Change of Control” be deemed to occur for
purposes of this Agreement unless the total consideration for the transaction or transactions which
would, absent this paragraph, constitute a Change of Control, has a value that is equal to or
greater than $3.75 per share of common stock of the Employer or Holdings, as applicable (the
“Minimum Value”); provided, however, that such Minimum Value shall be adjusted to reflect
changes to such common stock in the event of a stock dividend, stock split, reverse stock split,
stock combination, reclassification, recapitalization, or other similar change in the structure or
capitalization of the Employer or Holdings.


 


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(b) For purposes of this Section 5.02, (A) the terms “Person,” “Group,” “Beneficial Owner,”
and “beneficially own” have the meanings set forth in Section 13(d) of the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder, (B) the term “Voting
Securities” shall mean securities, the holders of which are ordinarily, in the absence of
contingencies, entitled to elect the corporate directors (or persons performing similar functions)
and (C) the term “Public Offering” means the consummation of the first public offering of shares of
common stock of the Employer or Holdings after December 18, 2008 in a firm commitment underwritten
offering registered under the Securities Act of 1933, as amended, on Form S-1 or its successor
forms.



(c) For purposes of Article 5, Employee shall have “Good Reason” to terminate Employee’s
employment after a Change of Control if (i) Employee makes a good faith determination that, as a
result of such Change of Control, Employee is unable to perform Employee’s services effectively, or
there is any significant adverse change in Employee’s authority or responsibilities, as performed
immediately prior to such Change of Control, or (ii) Employer’s obligations under this Article 5
are not assumed by the acquiring entity or any of its affiliates in the event of a Change of
Control.



5.03. Claims Procedure. Any claim for benefits under Article 5 of this Agreement by
Employee shall be made in writing and sent to Employer at its principal offices in Mechanicsburg,
Pennsylvania, or such other place as Employer shall hereafter designate in writing. If Employee,
or any beneficiary following Employee’s death (collectively, the “Claimant”), believes he has been
denied any benefits or payments under Article 5 of this Agreement, either in total or in an amount
less than the full benefit or payment to which the Claimant would normally be entitled, Employer
shall advise the Claimant in writing of the amount of the benefit, or payment, if any, and the
specific reasons for the denial within thirty (30) days of the receipt of the Claimant’s claim.
Employer shall also furnish the Claimant at that time with a written notice containing:



(a) A specific reference to pertinent provisions of this Agreement;



(b) A description of any additional material or information necessary for the Claimant to
perfect the claim if possible, and an explanation of why such material or information is needed;
and



(c) An explanation of the claim review procedure set forth in this Section 5.03.


 


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Within sixty (60) days of receipt of the information described above, the Claimant shall, if
further review is desired, file a written request of reconsideration of Employer’s decision with
the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as
the Compensation Committee of the Board of Directors of Employer immediately prior to the Change of
Control. The Appeal Committee shall select from its membership a chairperson and a secretary and
may adopt such rules and procedures as it deems necessary to carry out its functions. In the event
any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal
Committee shall appoint a successor provided such successor must have been a member of the Board of
Directors of Employer prior to the Change of Control (“Prior Board Member”). So long as the
Claimant’s request for review is pending with the Appeal Committee (including such 60-day period),
the Claimant, or his duly authorized representative, may review pertinent documents and may submit
issues and comments in writing to the Appeal Committee. A final and binding decision shall be made
by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for
reconsideration. The Appeal Committee’s decision shall be conveyed to the Claimant in writing and
shall include specific reasons for the decision and specific references to the pertinent provisions
of this Agreement on which the decision is based. The Appeal Committee shall discharge its duties
under this claims procedure in accordance with the fiduciary standards of Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), and in doing so, to the extent permitted by law,
shall be indemnified and held harmless by Employer (to the extent not indemnified or saved harmless
under any liability insurance or other indemnification arrangement with Employer) for or against
all liability to which the Appeal Committee may be subjected by reason of any act done in good
faith with respect to the adjudication of any claim under Article 5 of this Agreement, including
reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall
be entitled to submit his claim for determination to any court having competent jurisdiction
regardless of whether he has first exercised his right to have Employer’s decision reconsidered by
the Appeal Committee.



Article 6. CERTAIN ADDITIONAL PAYMENTS




6.01. If all, or any portion, of the payments or other benefits provided under any section of
this Agreement (including, without limitation, Sections 2 and 5 hereof), either alone or together
with other payments and benefits which Employee receives or is entitled to receive from the
Employer or its affiliates, (whether or not under an existing plan, arrangement or other agreement)
(collectively the “Payments”) would constitute an excess “parachute payment” within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and would result in the
imposition on Employee of an excise tax under Section 4999 of the Code, (such excise tax, together
with any interest and penalties related thereto, are hereinafter collectively referred to as the
“Excise Tax”) then, in addition to any other benefits to which Employee is entitled under this
Agreement, Employee shall be entitled to receive an additional payment (a “Gross-Up Payment”) in
cash, in an amount such that after payment by Employee of all taxes including, without limitation,
(i) any income taxes (and any interest and penalties imposed with respect thereto) and (ii) any
Excise Tax, imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Unless Employer and Employee otherwise agree in

 


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writing, any determination required under this Article 6, including without limitation, the amount of payments under this
Article 6 (the “Parachute Gross- up”) shall be computed and made in writing by Employer’s then
independent public accountants (the “Accountants”), whose determination shall be, subject to
Employee’s reasonable approval of the calculations required under this Article 6, conclusive and
binding upon Employee and Employer for all purposes. For purposes of making the calculations
required by this Article 6, the Accountants may rely on reasonable, good faith interpretations
concerning the application of Section 280G and 4999 of the Code. Employee and Employer shall
furnish to the Accountants such information and documents as the Accountants may reasonably request
in order to make a determination under this Article 6. Employer shall bear all costs the
Accountants may reasonably incur in connection with any calculations contemplated by this Article
6.



6.02. As a result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accountants hereunder, it is possible that (i) Gross-Up
Payments which will not have been made by the Employer should have been made (an “Underpayment”),
consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that
have been made will be determined to have been in excess of the Gross-Up Payments actually required
(an “Overpayment”). In the event that Employee is required to make a payment of any Excise Tax, the
Accountants shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Employer to or for the benefit of Employee. In the event
that it is finally determined that an Overpayment has occurred, Employee shall promptly, and in any
event within thirty (30) days of such determination, refund the amount of the Overpayment, plus any
interest actually paid to Employee with respect to the Overpayment, to the Employer. The Employer
shall have the right with respect to the determination of either an Underpayment or an Overpayment
to require Employee to appeal the assertion of any Underpayment or to claim, and sue for, a refund
of any Excise Tax paid by Employee upon any Payment or Gross-Up Payment, provided that the Employer
shall promptly reimburse Employee for all expenses, including counsel and accounting fees, incurred
in connection with any such proceeding. Alternatively, the Employer may undertake any such
proceeding, and Employee shall cooperate with the Employer in any such proceeding.



6.03. Notwithstanding anything contained herein to the contrary, the Gross-Up Payment and any
Underpayment shall be made promptly after Employee remits the related taxes, but in no event later
than the last day of the taxable year following the taxable year in which Employee pays the taxes
giving rise to such Gross-Up Payment or Underpayment.



Article 7. MISCELLANEOUS




7.01. Assignment and Successors. This Agreement shall not be assignable by Employee;
and shall be assignable by Employer only to a person, firm or corporation which may become a
successor in interest to Employer with respect to the Business or a substantial portion of the
Business presently operated by it. Employer will require any purchaser of all or substantially all
of the assets of Employer to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that Employer would be required to perform
if no such purchase had taken place. As used in this Agreement, Employer shall mean Employer as
hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the
agreement provided for herein.


 


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7.02. Release. As a condition to the payment of any amount required under Section
2.02(d) or Section 5.01 hereof, Employee shall deliver to Employer a general release of liability
of Employer and its officers and directors in a form reasonably satisfactory to Employer, such that
such release is effective, with all revocation periods having expired unexercised, within sixty
(60) days after the date of Employee’s termination.



7.03. Withholding. All payments made pursuant to this Agreement shall be subject to
withholding of applicable deductions and income and employment taxes.



7.04. Entire Agreement. This writing represents the entire agreement and understanding
of the parties with respect to the subject matter hereof, and supersedes all prior agreements,
written or oral, with respect thereto. This Agreement may not be altered or amended except by an
agreement in writing.



7.05. Binding Effect. Subject to Section 7.01, this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors, assigns, heirs,
executors and administrators. If any provision of this Agreement shall be or become illegal or
unenforceable in whole or in part for any reason whatsoever, the remaining provisions shall
nevertheless be deemed valid, binding and subsisting.



7.06. Notices. Any notice or other communication required or permitted hereunder shall
be in writing and shall be delivered personally, sent by facsimile transmission or sent by
certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when
so delivered personally or sent by facsimile transmission or, if mailed, five (5) days after the
date of deposit in the United States mails to the following addresses:




If to Employee:




David S. Chernow

7100 E. Crestline Avenue

Greenwood Village, CO 80111




If to Employer:




Select Medical Corporation

4714 Gettysburg Road

Mechanicsburg, PA 17055

Attention: General Counsel


 


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7.07. Waivers and Amendments. This Agreement may be amended, superseded, canceled, and
the terms hereof may be waived, only by a written instrument signed by the parties or, in the case
of a waiver, by the party waiving compliance. Except as expressly provided herein, no delay on the
part of any party in exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor
any single or partial exercise of any such right, power or privilege, preclude any other or further
exercise thereof or the exercise of any other such right, power or privilege.



7.08. Governing Law. This Agreement has been negotiated and executed within the
Commonwealth of Pennsylvania, and the validity, interpretation and enforcement of this Agreement
shall be governed by the laws of Pennsylvania.



7.09. Headings. The headings of paragraphs in this Agreement are for convenience only;
they form no part of this Agreement and shall not affect its interpretation.



7.10. Section 409A of the Code. This Agreement is intended to comply with Code
Section 409A (to the extent applicable) and the parties hereto agree to interpret, apply and
administer this Agreement in the least restrictive manner necessary to comply therewith and without
resulting in any increase in the amounts owed hereunder by the Employer. Notwithstanding any other
provision of this Agreement to the contrary, if Employee is a “specified employee” within the
meaning of Code Section 409A and the regulations issued thereunder, and a payment or benefit
provided for in this Agreement would be subject to additional tax under Code Section 409A if such
payment or benefit is paid within six (6) months after Employee’s “separation from service” (within
the meaning of Code Section 409A), then such payment or benefit required under this Agreement shall
not be paid (or commence) during the six-month period immediately following Employee’s separation
from service except as provided in the immediately following sentence. In such an event, any
payments or benefits that would otherwise have been made or provided during such six-month period
and which would have incurred such additional tax under Code Section 409A shall instead be paid to
Employee in a lump-sum cash payment on the earlier of (i) the first regular payroll date of the
seventh month following Employee’s separation from service or (ii) the 10th business day
following Employee’s death. If Employee’s termination of employment hereunder does not constitute a
“separation from service” within the meaning of Code Section 409A, then any amounts payable
hereunder on account of a termination of Employee’s employment and which are subject to Code
Section 409A shall not be paid until Employee has experienced a “separation from service” within
the meaning of Code Section 409A. In addition, no reimbursement or in-kind benefit shall be
subject to liquidation or exchange for another benefit and the amount available for reimbursement,
or in-kind benefits provided, during any calendar year shall not affect the amount available for
reimbursement, or in-kind benefits to be provided, in a subsequent calendar. Any reimbursement to
which Employee is entitled hereunder shall be made no later than the last day of the calendar year
following the calendar year in which such expenses were incurred.


 


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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above
written.



	 	 	 	 	 
	 	SELECT MEDICAL CORPORATION

 	 
	 	By:  	/s/ Robert A. Ortenzio
 	 
	 	 	Robert A. Ortenzio, 	 
	 	 	Chief Executive Officer 	 
	 
	 	                                      /s/ David S. Chernow
 	 
	 	David S. Chernow 	 




 


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