Executives and senior managers are integral to businesses, so their departure can be disruptive – especially when that ends in dispute.
The three employment disputes we deal with the most involving executives and senior managers are:
- breach of confidentiality and post-employment restraints;
- general protections claims; and
- incentive payment disputes.
Below are our tips for preventing and managing executive employment disputes.
1) Breach of confidentiality and post-employment restraints
Executives and senior managers usually have unrestricted access to the business’s confidential information such as client lists, contact details and pricing details.
We often see cases of senior managers who have suspiciously accessed, downloaded or printed confidential information leading up to their resignation.
It is essential to have a well-drafted confidentiality clause which:
- Defines confidential information broadly but also identifies any specific confidential documents, data or intellectual property the business wants to protect.
- Prohibits the access, copying and use of confidential information for any reason other than for performance of the employee’s duties and for the employer’s benefit.
- Requires the employee to return and then delete/destroy all confidential information and to sign an undertaking to that effect if directed before their last day of employment.
Executives and senior managers usually build up valuable goodwill with clients (if they’re good at their job).
If they jump ship for a competitor and take your clients with them, that can do serious financial damage to the business.
Clauses in employment contracts preventing employees from working for a competitor (non-compete clauses) are generally difficult to enforce unless you are offering something extra. They can be a useful deterrent but the prospects of enforcement are often uncertain.
Manage this risk
If you are giving the employee something extra in return for the non-compete period they are more likely to be enforceable. For example, if the employee is a shareholder, and you agree to buy back their shares upon termination of their employment, that is a good opportunity to agree to a non-compete period. Courts have upheld these clauses, in some cases for up to 4 years.
On the other hand, preventing employees from soliciting clients (non-solicitation clauses) is achievable with a well-drafted clause. The clause should only restrict the employee as far as reasonable, otherwise they won’t be enforceable – for example by only prohibiting employees from soliciting clients they’ve actually had contact with during their employment.
We recommend writing to employees promptly after they give notice of resignation reminding them of their confidentiality or post-employment restraints. If you make that part of your ordinary risk management procedures for all senior employees they are unlikely to take offence.
If you suspect an employee may have breached their confidentiality and post-employment obligations, we recommend preserving their electronic devices and conducting a forensic analysis. This usually involves directing the employee not to interfere with the devices and promptly return them.
2) General protections claims
These claims often arise when there is a breakdown in the relationship between an employer and their executives and senior managers which ends in a dismissal.
Employees who earn more than the high-income threshold under the Fair Work Act (currently $158,500) cannot make an unfair dismissal claim (unless they are covered by a Modern Award).
However, any employee no matter their seniority and pay can make a general protections claim, also known as an adverse action claim.
If an employee makes a general protections claim they will allege the employer has taken adverse action (which is broadly defined and can include dismissal, reallocation of duties or performance management) because they have exercised a workplace right.
The most common workplace right employees use in a general protections claim is the right to make a complaint in relation to their employment.
When we see employment claims by senior managers and executives they often point to complaints they made in the lead up to their dismissal as the reason for the dismissal – for example complaints about their treatment by other employees or board members, a lack of support in their role or changes to their role.
Manage this risk
If you have decided to dismiss an executive for underperformance, or simply because they are no longer the right fit for the business you can proceed directly with the dismissal if you are comfortable they are not protected from unfair dismissal (it pays to get legal advice about that). There is no need to ask that employee to “show cause” or performance manage them – doing so may prompt complaints that subsequently become the basis for a general protections claim.
However, we do recommend carefully documenting the reasons for the dismissal
(and seeking legal advice about the reasons if you expect there will be a dispute) so the business can rely upon that to defend any general protections claim.
Careful planning for executive dismissals is important, because unlike unfair dismissal claims there is no limit to the amount of compensation that may be ordered, individual decision makers can be added as parties, and penalties are payable if breaches are proven.
3) Incentive payment disputes
Short and long term incentive payments are common in executive contracts.
The safest incentive payment scheme for a business is one that’s entirely discretionary, but those are unlikely to appeal to employees. They also don’t guarantee you can withhold an incentive for any reason – Courts have determined that employers cannot act unreasonably in exercising such a discretion.
The crucial elements to an incentive clause are:
- Clear and precise drafting about three separate issues:
- how the entitlement to the incentive is triggered – for example upon the business meeting certain financial targets;
- the amount of the entitlement – for example a fixed amount or the method of calculation (preferably with worked examples);
- when the incentive is paid – for example in the final pay run of July each financial year.
- Be specific about whether the entitlement to the incentive is lost upon the termination of employment for any reason (or upon either party giving notice of termination).
Vague drafting such as “you will be entitled to an incentive payment calculated as follows…” without any information about what happens upon the termination of employment may give the employee a “loss of chance” claim where they claim they would have been entitled to an incentive payment had the employment continued.
The end of the financial year is traditionally when executives receive remuneration increases – so it is a natural time to introduce a new employment contract that better protects the business’s confidential information and goodwill to manage the risks above.
If you are considering ending an executive’s employment, careful planning can help manage the risk of a general protections claim.
The employment law team at Batch Mewing Lawyers are experts in managing the risk of executive departures and disputes where the reputation and goodwill of the business is at stake – please get in touch if you need any assistance.