Hit the road, Jack

first_imgRelated posts:No related photos. Hit the road, JackOn 10 Apr 2001 in Personnel Today Previous Article Next Article Comments are closed. Gettingrid of senior staff has little to do with fairness. It has more to do withnegotiating a suitable go-away package with the minimum of fuss. And with hugepayoffs on the table, the law is rarely an issue. By Stephen OverellTheboardroom putsch is one of the classic manoeuvres of corporate life, practised,according to employment lawyers, on an almost daily basis by their clients. Butit is also one of the few areas of their trade in which the law seems to bealmost irrelevant. Whereas the law is of prime importance when carrying out anormal dismissal, when sacking a senior director, nine times out of 10, what iswritten in statute books is immaterial; it is what is written in contracts thatis critical.”Thereis an increasing tendency to dismiss directors unlawfully,” says DanielBarnett, an employment barrister at Gray’s Inn Chambers. “They will bedismissed without notice for any reason without regard to whether it is fair ornot and expected to mitigate their losses. It is cynical, but it has becomestandard advice.”Whilesenior executives have the same employment rights as everybody else, with amaximum award of £51,700 potentially available for an unfair dismissal, this isonly rarely at issue. Neither party wants to go to court or tribunal if theycan avoid it; the risk of bad publicity and poor impact on future careers cutstwo ways. Whatis more important is what the contract says about notice periods. For almostall senior executives these are likely to be upwards of a year and couldtheoretically form the basis for a significant breach of contract claim.SueNickson, head of employment at law firm Hammond Suddards Edge, says, “Ifthere is not a situation of gross misconduct, and a company wants someone toleave quickly, the driver for the whole process is what the contract says aboutpayments in lieu of notice.”AndJames Davies, partner in the employment department of law firm Lewis Silkin,says, “There is not really much law in the process. It all comes back tothe terms of the contract. Usually, it is all done diplomatically and amicablyand will normally result in a windfall for the individual. But if the terms ofdeparture have not been properly tied down at the time of recruitment, it canbe very tricky for the employer.”Forany employer hoping to get rid of a senior employee, the ideal scenario is verysimple. They want the person to leave quickly without upsetting colleagues,customers or suppliers and, more important still, without poaching any of them.Rather like a divorce, the best way is to sit down and negotiate a compromise.In return for a go-away payment, the company gets minimum fuss.Negotiationsover the departure of a senior executive are based on assumptions of thepotential damages the individual could receive in a breach of contract claim.When suing for breach of contract, individuals normally have a duty to mitigatetheir losses. In other words, they are under an obligation to find work, withthe amount likely to be earned offset against any damages they receive to covertheir losses. Therefore the ease with which a person is likely to findcomparable work is of great importance to the amount of damages. So too fornegotiations.Typically,says Cliff Weight, principal in the executive compensation practice ofconsultancy William M Mercer, the executive will receive between a third andtwo-thirds the value of the contract.Despitethe Cadbury and Greenbury committees into corporate governance recommendingthat senior executives should not be on contracts lasting more than a year,about a third of directors are on contracts lasting longer. Many have noticeperiods of three or more years. Forindividuals with hefty bargaining power, some are able to negotiate”liquidated damages” for their con- tracts. This gives an employeedismissed with immediate effect – other than for misconduct – not just anentitlement to payment in lieu of notice, but no obligation to mitigate thecost of that to the employer.”Damagesare there to put someone in the position they would have been in if they hadseen out the contract,” says Ben Wood, employment solicitor at law firmLupton Fawcett. “In breach of contract cases, the notice period is likelyto be the basic measure for damages, but there are also benefits such ascompany cars, long-term incentivisation packages, share options and bonuspayments which all have to be taken into consideration.”Contractsof employment for senior staff typically have restrictive covenants writteninto them preventing the individual from entering into direct competition, solicitingbusiness from customers or suppliers, poaching workers and from misusingconfidential information. Butone of the most important things to remember in potential breach of contractcases is that in the event of a breach, such covenants cannot always be reliedon. Most senior executive contracts contain payment in lieu of notice clauses –known as “Pilon” – enabling the employer to terminate the contractimmediately without there being a breach, thus maintaining the enforceabilityof the contract.Incases of doubt about the enforceability of the covenants, however, theexecutive may have to sign a compromise agreement. This is a document in whichthe executive agrees to sign away rights in return for a sum of money. Butcompromise agreements are also a way to repeat restrictive covenants from theservice agreement or put in new restrictions. “Ifan employer is particularly concerned about losing control of an employee aftertermination it is possible to make payments by instalments over time,” saysWood. Any instance of a person losing their job can easily become a highlyemotive one, with senior departures being no different from more lowly ones.Therefore,says James Davies, it is as well for companies not to underestimate theimportance of packaging the departure in a positive light – selling it in a waythat does not harm an individual’s career prospects or self-esteem. After all,terminating an employment relationship that has gone sour can indeed be apositive move for both sides.But,he says, it is also as well for employers not to give grounds for staff tolaunch a discrimination claim which, with uncapped compensation, can beinfinitely more damaging than any breach of contract suit. The famous case inthis area is that of Michael Bourgeois, a former director of Saga Petroleum ofNorway, who won £2m in a race bias claim last year after being sacked on thegrounds that “his management style did not fit in”. Hesuccessfully argued that the company wanted to fill key positions with Norwegiannationals, while forcing him to take a back seat at board meetings held largelyin Norwegian. “Sacking people on such vague, intangible grounds ofmanagement style, has been shown to potentially give rise to discriminationclaims,” says Davies.Inone or two rare cases, it has been known for executives to refuse to go quietlyin a bid to hang on to their jobs. In these situations, when senior employeesrefuse to play the game, employment lawyers say it is standard practice for anemployer to try to trump up charges of gross misconduct and engineer theirdismissal that way. “Fairness does not have much of a role in dismissalsat a senior level,” as one lawyer put it.last_img read more