In the current economic climate, employers will have to take some tough and often emotional decisions regarding the current and future value to their business of some of their long standing senior employees.
Rarely are senior employees performance-managed or taken through a full consultation process. When the decision is taken to remove a senior employee, it’s common for the dismissal to take immediate effect and to be in breach of contract. The reason for this is obvious – a business will not want to run the risk of having a disgruntled CEO, head of IT or finance, running and leading the business half-heartedly (or worse), during their notice period.
With senior employees, the contractual entitlements are often significantly higher than the statutory entitlements on termination. Typically a stand-off ensues. On the one hand, the senior employee takes the view that the manner in which the exit has arisen and the compensation package offered is unreasonable. The business though, takes the view that the employee’s financial demands are unreasonable.
Often the root of the problem can be traced back to the service agreement. With some carefully thought-out drafting, the employer can place itself in a position where it holds the upper hand when exiting senior employees and leaves little or no room for conflicting interpretations on what the contractual entitlements are.
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When drafting or reviewing a service agreement thought should be given to the following termination provisions:
Payment in lieu of notice (PILON) – express the PILON as a discretionary entitlement i.e. that the employer is not obliged to make a PILON, but can elect whether to do so. If the employer chooses not to exercise the PILON and breaches the contract instead, the employee’s remedy is in damages (subject to the duty to mitigate), not by enforcement of the PILON as a debt. All too often the PILON clause requires, rather than entitles, and the employer ends up making the full PILON payment only for the employee to very quickly obtain alternative employment, or worse still, have secured alternative employment at the same time as they are negotiating their exit.
Consider exactly what elements of pay will be taken into account of when calculating the PILON.
For example, payment of basic salary only, that would have been earned during the notice period, excluding bonuses, commissions or other benefits.
If benefits other than salary are to be earned, consider specifying how these will be calculated. For example, a specified sum in respect of benefits such as life cover and private medical insurance.
Consider adopting a “phased payment” approach to PILON’s. For example, payments being made on a monthly basis over what would have been the notice period, backed up with an express duty to mitigate during the notice period and with any income from alternative employment deducted from installments.
Poor performance notice periods – in order to reduce the level of contractual compensation payable on termination, the agreement should attempt to define what will constitute poor performance, which in turn will provide for a shorter notice period than if the employer sought to terminate under normal notice provisions.
Bonus Payments – it should be made clear that, in order to receive any bonus, the employee must be in employment and not under notice at the date the bonus is payable. Such a clause, if properly drafted, will defeat any bonus entitlement, unless the employer has dismissed in breach of the notice provisions and the bonus would have fallen due if notice had been served.
Share Options/Other Incentive Plans – termination of employment may deprive the employee of valuable share options or other deferred compensation tied-up in incentive schemes. Typically such schemes will distinguish between “Good Leavers” and “Bad Leavers”. The employee may have a claim for shares which would have vested if the employment contract had not been breached. However, recovery will normally be limited to vesting or payments which should have taken place during the notice period. Even this limited recovery of notice period vesting may be precluded if the incentive scheme includes a “Micklefield” clause.
It is quite open on a contractual basis, for the employer to terminate the contract whenever they like, provided that the employer sticks to the letter of the contract or compensates the employee if they fail to do so. The key here is to manage the employee’s expectations from the outset to minimise the risk of a standoff.
Harmajinder Hayre is a Partner in the Employment Team at leading North law firm Ward Hadaway. He can be contacted on 0113 205 6712 or at [email protected]
