Dismissing Senior Employees – The Pitfalls to Avoid – Part 1
Whilst the termination of any level of employee contains a degree of legal risk, the position in respect of senior employees can be especially perilous.
Firstly, the costs of getting it wrong are generally greater (because an award of damages is likely to be calculated – at least in part – by reference to their (high) level of salary).
Secondly, there may be added complications involving the potential of the exiting employee doing damage to the business (they are likely to be privy to confidential information, may have strong relationships with your clients and given their status, may be of greater interest to the media than a more junior employee).
In this two part article, we provides some practical guidance on the termination of senior executives.
In Part 1 we look at protecting the business from the outset, by ensuring the executive’s employment contract is fit for purpose. In Part 2 we examine the sorts of legal claims senior employees may bring on termination, and how such claims can be avoided.
Whilst it is generally advisable for all employees to be given a written employment contract which sets out the terms of their employment (and the ability to terminate it), this is especially important for senior executives.
Generally it will be advisable to include in the employment contract:
1. A specific period of notice to be given when terminating the employment – without this a senior employee may be able to run an argument that they are entitled to “reasonable notice”. For a long serving, particularly senior employee, they may argue that this could be 6 or even 12 months’ notice, which would impose a great burden on the company. It should be observed that this area of the law is currently fluid and subject to contradictory judgments.
Consideration should be given to whether to provide for a reasonably lengthy notice period to ensure that there is sufficient time for a key employee to be replaced. A longer notice period may also help delay an exiting employee from being able to join a competitor or set up in competition.
2. A clear statement that the employment can be terminated summarily with no notice (or payment in lieu) - for example in the case of serious misconduct. It is often useful to provide a non-exhaustive list of the types of conduct that are considered serious misconduct (bullying, fraud, being under the influence of alcohol or drugs at work, bringing the company into disrepute, etc).
3. An ability to place the employee on “gardening leave” – so that the employee can be directed to not contact other employees, clients, suppliers, etc during a period of notice.
4. Terms protecting the company’s confidential information and intellectual property – which operate both during and after the termination of employment.
5. Restraints of trade – to prevent the employee from competing with the company, soliciting clients or poaching employees once the employment has ended.
6. Provisions dealing with payments on termination – if the employee is entitled to bonuses or incentives (including share options and schemes), the contract should clearly explain how the termination of employment affects this. For example, should they lose their entitlement to such benefits where they are dismissed for poor performance / misconduct?
Employers should ensure that any contractual entitlements to termination payments do not offend rules in the Corporations Act 2001 (Cth) and ASX Listing Rules which include rules requiring shareholder approval for certain termination payments (generally only where the payment is greater than one year’s base salary).
7. Return of company property – senior executives are often provided with a range of company property including a vehicle, mobile phone, etc. It will be important that the contract adequately deals with the mechanism for their return on termination. If the employee is provided with a telephone during their employment, consider whether the company wishes to retain ownership of the mobile phone number post-termination.
8. Social media — it may be advisable for the contract to provide for strict rules relating to social media. Although it is generally difficult for an employer to restrict an employee’s private activities, platforms such as LinkedIn are often used primarily for business purposes. An individual’s connections on LinkedIn may include clients and other employees of the business and it therefore may be possible (and prudent) to retain an ability to control a senior employee’s use of such a platform, particularly when their employment is being terminated.
9. Obligations to resign from directorships, etc it will often be advisable for the contract to provide for an ability to direct the employee to resign from directorships and other positions associated with the employment.
10. “Entire understanding” and “no reliance” clauses – it is generally advisable for employment contracts to include clauses which state that the contract forms the entire agreement between the parties and supersedes all previous negotiations and representations in relation to the employment.
This makes it more difficult for an employee to subsequently argue that the employer has misled or made misrepresentations to the employee, for example, in relation to the length of time they will be employed, their level of future earnings, the financial health of the company, etc.
11. A clause making clear that policies do not form part of the employment contract and that disciplinary policies do not apply to senior executives – to reduce the risk of an employee being able to argue they had a contractual right for a particular procedure to be followed before their employment could be terminated.
These are by no means the only clauses needed in an executive’s employment contract, rather we have focused on those that are the most vital in protecting the interests of employers on termination of employment. Other relevant clauses might include those dealing with:
- hours (to make clear that the role will require a flexible approach to hours)
- remuneration and other benefits
- travel (if interstate or international travel will be required)
- a bar on secondary employment and in acting in a way that may give rise to a conflict of interest
In Part 2 of this article we’ll look at the legal claims senior executives can bring on termination of employment – and how employers can safeguard against them.