Getting
rid of senior staff has little to do with fairness. It has more to do with
negotiating a suitable go-away package with the minimum of fuss. And with huge
payoffs on the table, the law is rarely an issue. By Stephen Overell
The
boardroom putsch is one of the classic manoeuvres of corporate life, practised,
according to employment lawyers, on an almost daily basis by their clients. But
it is also one of the few areas of their trade in which the law seems to be
almost irrelevant. Whereas the law is of prime importance when carrying out a
normal dismissal, when sacking a senior director, nine times out of 10, what is
written in statute books is immaterial; it is what is written in contracts that
is critical.
"There
is an increasing tendency to dismiss directors unlawfully," says Daniel
Barnett, an employment barrister at Gray’s Inn Chambers. "They will be
dismissed without notice for any reason without regard to whether it is fair or
not and expected to mitigate their losses. It is cynical, but it has become
standard advice."
While
senior executives have the same employment rights as everybody else, with a
maximum award of £51,700 potentially available for an unfair dismissal, this is
only rarely at issue. Neither party wants to go to court or tribunal if they
can avoid it; the risk of bad publicity and poor impact on future careers cuts
two ways.
What
is more important is what the contract says about notice periods. For almost
all senior executives these are likely to be upwards of a year and could
theoretically form the basis for a significant breach of contract claim.
Sue
Nickson, head of employment at law firm Hammond Suddards Edge, says, "If
there is not a situation of gross misconduct, and a company wants someone to
leave quickly, the driver for the whole process is what the contract says about
payments in lieu of notice."
And
James 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 to
the terms of the contract. Usually, it is all done diplomatically and amicably
and will normally result in a windfall for the individual. But if the terms of
departure have not been properly tied down at the time of recruitment, it can
be very tricky for the employer."
For
any employer hoping to get rid of a senior employee, the ideal scenario is very
simple. 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.
Negotiations
over the departure of a senior executive are based on assumptions of the
potential damages the individual could receive in a breach of contract claim.
When suing for breach of contract, individuals normally have a duty to mitigate
their losses. In other words, they are under an obligation to find work, with
the amount likely to be earned offset against any damages they receive to cover
their losses. Therefore the ease with which a person is likely to find
comparable work is of great importance to the amount of damages. So too for
negotiations.
Typically,
says Cliff Weight, principal in the executive compensation practice of
consultancy William M Mercer, the executive will receive between a third and
two-thirds the value of the contract.
Despite
the Cadbury and Greenbury committees into corporate governance recommending
that senior executives should not be on contracts lasting more than a year,
about a third of directors are on contracts lasting longer. Many have notice
periods of three or more years.
For
individuals with hefty bargaining power, some are able to negotiate
"liquidated damages" for their con- tracts. This gives an employee
dismissed with immediate effect – other than for misconduct – not just an
entitlement to payment in lieu of notice, but no obligation to mitigate the
cost of that to the employer.
"Damages
are there to put someone in the position they would have been in if they had
seen out the contract," says Ben Wood, employment solicitor at law firm
Lupton Fawcett. "In breach of contract cases, the notice period is likely
to be the basic measure for damages, but there are also benefits such as
company cars, long-term incentivisation packages, share options and bonus
payments which all have to be taken into consideration."
Contracts
of employment for senior staff typically have restrictive covenants written
into them preventing the individual from entering into direct competition, soliciting
business from customers or suppliers, poaching workers and from misusing
confidential information.
But
one of the most important things to remember in potential breach of contract
cases is that in the event of a breach, such covenants cannot always be relied
on. Most senior executive contracts contain payment in lieu of notice clauses –
known as "Pilon" – enabling the employer to terminate the contract
immediately without there being a breach, thus maintaining the enforceability
of the contract.
In
cases of doubt about the enforceability of the covenants, however, the
executive may have to sign a compromise agreement. This is a document in which
the executive agrees to sign away rights in return for a sum of money.
But
compromise agreements are also a way to repeat restrictive covenants from the
service agreement or put in new restrictions.
"If
an employer is particularly concerned about losing control of an employee after
termination it is possible to make payments by instalments over time," says
Wood. Any instance of a person losing their job can easily become a highly
emotive one, with senior departures being no different from more lowly ones.
Therefore,
says James Davies, it is as well for companies not to underestimate the
importance of packaging the departure in a positive light – selling it in a way
that does not harm an individual’s career prospects or self-esteem. After all,
terminating an employment relationship that has gone sour can indeed be a
positive move for both sides.
But,
he says, it is also as well for employers not to give grounds for staff to
launch a discrimination claim which, with uncapped compensation, can be
infinitely more damaging than any breach of contract suit. The famous case in
this area is that of Michael Bourgeois, a former director of Saga Petroleum of
Norway, who won £2m in a race bias claim last year after being sacked on the
grounds that "his management style did not fit in".
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He
successfully argued that the company wanted to fill key positions with Norwegian
nationals, while forcing him to take a back seat at board meetings held largely
in Norwegian. "Sacking people on such vague, intangible grounds of
management style, has been shown to potentially give rise to discrimination
claims," says Davies.
In
one or two rare cases, it has been known for executives to refuse to go quietly
in a bid to hang on to their jobs. In these situations, when senior employees
refuse to play the game, employment lawyers say it is standard practice for an
employer to try to trump up charges of gross misconduct and engineer their
dismissal that way. "Fairness does not have much of a role in dismissals
at a senior level," as one lawyer put it.
