For the Employer: Things to Consider When Dismissing an Executive

Dismissing an executive can cause direct and indirect impacts on your business and may have unexpected and unintended consequences. This article looks at important things your business should consider when dismissing an executive.

Farrah Motley wrote this article. Farrah is the Director of Prosper Law – an employment law firm. Farrah has negotiated the exits of senior staff and executives. Farrah advises employers on complex employment law matters.

Parting ways with any employee can be a challenge, but it can be much more challenging to dismiss an executive or other senior staff member of your business. Before your business takes any steps to dismiss an executive, it’s vitally important that you seek advice from an experienced executive employment lawyer.

In the meantime, this article sheds some light on those things your business should take into account when considering whether to dismiss an executive staff member.

1. Succession planning

Before we get into the legal issues surrounding the dismissal of an executive, let’s talk about succession planning.

Presumably, if you’re looking to dismiss an executive, the executive has been underperforming, engaged in serious misconduct or other behaviour that falls short of the expected standards. This might have happened over a short period of time (in which case you may not have had much time to think about succession planning) or a longer period of time.

It’s important that, for executive-level roles, businesses always keep a succession plan (after all, you never know if the executive is going to resign or fall ill, outside of the issue of poor performance).

However, if you don’t have a succession plan and no readily available, ideal candidate to replace the executive you’re looking to dismiss, ask yourself:

• what are the potential impacts to staff members and business units that report to that executive;
• how can you capture the institutional knowledge of that executive;
• how will you address critical gaps in the operation of your business which may result from the executive’s dismissal; and
• is there a time that better suits your business to dismiss the executive (ensuring you don’t waive any rights you may have or let any important contractual or other time periods lapse).

2. The company constitution and share buy backs

If the executive that your business is seeking to dismiss is a director or company secretary and formally recognised as such in the business’ Australian Securities and Investments Commission (“ASIC”) registration, you must ensure that the removal of the executive as director/company secretary complies with the company constitution, as well as adhere to the terms of the executive employment agreement.

You must (as a company) also notify ASIC within 28 days of the removal of the executive in his / her capacity as director/company secretary (this date may be different to the date of dismissal).

Further, if the executive owns shares in the company, you must comply with the terms of any relevant shareholder deeds. This may compel the company to buy and the executive to sell any shares held by the executive, at a particular price. Often, there will be a mechanism for valuing the shares and this is a cost that you must factor into the dismissal.

3. The executive employment agreement

Oftentimes, the level of the executive’s salary exceeds the high-income threshold and they are therefore not entitled to bring a claim against their employer for unfair dismissal. An executive may still be entitled to bring a claim for adverse action and (as well as or as an alternative) for breach of the executive employment agreement.

An employer may breach the terms of an executive employment agreement where:

• the employer has no contractual entitlement to dismiss the executive for the reason given;
• insufficient notice of dismissal has been given to the executive; and
• certain conditions precedent to the dismissal have not been met.

In all circumstances, whether an employer breached the terms of an executive employment contract in dismissing an executive is dependent on the terms of the agreement. This is why it’s imperative (particularly for those executive staff members with high salaries, entitlements and business-critical roles) to ensure that your business uses an appropriately drafted executive employment agreement.

4. Notice periods and garden leave

In the likely event your business has agreed to an extended notice period (between 3 months and 12 months) in the executive employment agreement, you may prefer to place the executive on ‘garden leave’ for the whole or a portion of the notice period. This may be the preferred route where it is undesirable to have the executive physically present in the office, interacting with other employees or there is a risk they may misuse company property.

When you place an employee on garden leave, the employee is not required to attend the workplace or perform any tasks, but is still fully remunerated for the period of the garden leave (which expires at the conclusion of the notice period).

However, you can only place an executive on garden leave if:

• the executive employment agreement expressly or impliedly entitles you to do so;
• if you are relying on an implied term of the agreement to place the executive on garden leave, the implied garden leave provisions will only be allowed for the duration of the notice period; and
• you must continue to provide the executive with all of the remuneration and other entitlements that form part of the executive’s remuneration package.

5. Restraints and competition

Restraint of trade clauses typically look like this:

During the Restraint Period and in the Restraint Area, [Executive Name] must not, either directly or indirectly, themselves or through any third party, be engaged, involved or otherwise connected in any way with a Competitive Business.

In this clause, Restraint Period means:

(a) 12 months;

(b) 6 months; or

(c) 3 months,

with the period in (a) taking precedence unless it is unenforceable at law, in which case the period immediately lower in the list will apply, and so on.

In this clause, Restraint Area means:

(a) Australia;

(b) Queensland; or

(c) Brisbane City,

with the area in (a) taking precedence unless it is unenforceable at law, in which case the period immediately lower in the list will apply, and so on.

An appropriately worded restraint clause should contain cascading lists, because the enforceability of restraint clauses are frequently scrutinised and highly dependent on the circumstances surrounding the employment, the employee and their role. The onus is always on the employer to prove (on the balance of probabilities) that the restraint clause is enforceable.

If your business operates in a highly competitive environment and you may want to ensure that your executive is not able to immediately jump ship to a competitor. As a senior staff member, an executive may do real harm to your legitimate business interests.

So, firstly, ensure your executive employment agreements contain restraint of trade clauses. Secondly, when you do dismiss the executive, ensure you remind them of their contractual obligations. Even better, if you’re willing to pay a bit extra, it is entirely appropriate to request the executive sign a deed of release (see below for further information).

This way, you can ensure the restraint of trade is captured in the deed (and separately paid for through an ‘ex gratia’ payment), which may provide your business with a better basis to enforce the terms of the deed (rather than relying on the terms of an executive employment agreement).

6. Use of trade secrets

Let’s be clear; there is a difference between misuse of an employer’s trade secrets by an executive, and the executive relying on the skills and knowledge they have organically acquired during their employment. Even if you define “trade secrets” in an executive employment agreement, the information captured in that definition will not become trade secrets if, at law, they are not considered so.

For this reason, it is important to always have a restraint of trade clause.

If you are concerned about an executive misusing trade secrets, this may be all the more reason for you to place the executive on garden leave and prevent the executive from gaining further access to company systems and information.

If an executive does misuse trade secrets to the detriment of their former employer, they may be liable to pay significant damages to their former employer.

7. Bonus entitlements

Just like a long notice period, triggers for bonus entitlements can operate like a double-edged sword.

Assuming that you want to dismiss an executive for some kind of wrongdoing, you’re unlikely to want to pay a bonus. It’s critical, however, that you comply with the terms of the executive employment agreement, particularly where you have placed the executive on garden leave.

8. Executive deeds of release

When it comes to dismissing executives, deeds of release are your business’s best friend. There are, however, a few things to remember:

1. deeds are only binding on a party when that party has signed and delivered the deed. So ensure you raise the topic of a deed on a ‘without prejudice’ basis and ensure that, if the executive does agree, he or she signs the deed first; and
2. the executive must sign the deed with an original, wet ink signature (as opposed to an electronic signature.

How can Prosper Law help?

Prosper Law provides employment law services to both employers and executives and senior staff. We understand employment law from both sides of the fence and for this reason, we are well placed to advise on employment matters.

Contact our employment lawyers for a fixed fee quote.

Like this article? Check out:

Unfairly terminated? 3 Ways Employment Lawyers Can Help

For the Executive: What to do When You’ve Been Dismissed

What is a Restraint of Trade Clause?

What is a deed?