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.