Hiring and Firing Senior Executive Officers

5 July 2019

If employees are the engine room of your organisation, your senior Executives steer the ship and are responsible for its culture, performance and success. So what do you do if your captain strays off course, engages in misconduct or unsafe practices? Dismissing any employee is a challenge, but dismissing an Executive can be a legal minefield.

What are the key factors organisations should consider when engaging and dismissing Executives?

To protect the interests of both parties, the terms of the engagement should be in writing, well drafted and clearly identify the rights and obligations of both parties. Executive contracts should:

  • Clearly set out the nature and duties of the role of the Executive – It is important that the nature of the role is clearly articulated.  Ensure that it provides your organisation with the right to request or direct the Executive to carry out tasks, the required standards of behaviour and the need to comply with relevant obligations, whether regulatory or otherwise.
  • Beware of the fixed term contract – If you engage a senior Executive on a fixed term contract, ensure that you review it prior to its expiry. If an Executive is on a series of fixed term contracts or is engaged beyond the maximum term, it’s possible that they may be eligible for ‘reasonable notice’ rather than the notice in their employment contract, which may be 6 to 18 months.
  • Include the location and hours of work of the Executive – If the Executive may need to travel for work, this should be reflected in the contract to allow the primary work location to be viewed with some flexibility.  Executives often work long and unpredictable hours when compared to a typical 38 hour working week, and so we recommend that the contract should contain a provision clarifying that the Executive is expected to work reasonable additional hours to perform their role.
  • Include the remuneration and other benefits payable – The contract should clearly specify the components of the Executive’s remuneration package and whether they are contractual or discretionary (such as an ability to participate in a bonus scheme). If the employee is under the unfair dismissal high income threshold (which increased to $148,700 on 1 July 2019[ML1] ), you should be precise about the value of entitlements to mobile phones, laptops, cars and car allowances to ensure that any non-financial benefits are included in remuneration for the purposes of the unfair dismissal cap.  It is also important to consider any applicable caps and limitations on remuneration payments on termination under the Corporations Act 2001 (Cth).
  • Contain a restraint of trade clause – It may be necessary to protect the interests of your organisation by imposing a post-employment restraint on the Executive. This can prevent the Executive moving to a competitor and using the information, relationships and knowledge gained whilst with your organisation. It can also prevent the Executive from soliciting or interfering in your relationships with key staff, clients, supplier and stakeholders.  Restraints are often poorly drafted and can be difficult to enforce, so it is vital to consider what is reasonably necessary to protect your legitimate business interests and how this would affect the Executive’s ability to work after termination.
  • Confirm how the contract can be terminated – Often the most contentious time can be at the point of termination. The contract should clearly set out how and when the contract can be terminated and provide the employer with the flexibility to place an Executive on gardening leave.  Garden leave may work together with a restraint provision to ensure that the Executive remains under the direction of the company.

If the time comes to manage the termination of an Executive’s employment, it is important to consider the following issues to avoid significant impact on and disruption to your organisation.

Guidelines for negotiating an exit and potential settlement:

  1. Don’t start until you have a plan - You should not commence a termination process until you have established the reason for the termination, the Executive’s entitlements, and what (if anything) the organisation may be willing to offer the Executive in addition to their minimum entitlements to negotiate a separation subject to a deed of release. Also consider who should have the conversation with the Executive, and whether any practical steps need to be taken to manage the exit.  Preparing a script will help to maintain focus on the relevant factors and the message that you want to deliver.
  2. Consider whether you want to have without prejudice discussions – If you’re concerned about a claim or an unfair process, there may be benefit in having without prejudice discussions about a mutually agreeable separation. This means that the content of the discussion is to be relied on for the purpose of the negotiations only and cannot be used by either party in litigation at a later date. This provides an opportunity to have a full and frank discussion about alternatives to a dismissal, and encourages open discussions between the organisation and the Executive.
  3. Ensure that the termination payments do not breach your obligations – The Corporations Act 2001 (Cth) places caps on termination benefits payable to relevant Executives unless shareholder approval has been sought prior to the payment being made. There are significant penalties associated with breaches of these provisions for both the corporation and individuals involved in the contravention.
  4. Finalise the process with a deed of settlement – Settlements often include an ex gratia payment which is a payment made in addition to the Executive’s contractual or minimum entitlements. These payments are usually made in exchange for the Executive agreeing not to make or continue a claim against the Employer in relation to the Executive’s employment and/or termination. Formalising this arrangement should be done by both parties signing a settlement agreement with a release. The deed should also include both a confidentiality and non-disparagement clause to protect the company’s reputation and internal information.  Consider any practical issues such as the language of any announcement, retention of any company property, and how payments are to be structured.

If you need assistance with drafting an executive employment contract, restraint provisions or guidance on a strategy for terminating an Executive’s employment, please contact a member of our workplace relations team. Practice Leader, Skye Rose and Senior Lawyer, Sarah Adams can be contacted on (03) 9843 0418. Alternatively, you can fill out the enquiry form below.

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