High time to stringently examine remuneration and departure clauses

by Stephanie Zillman28 Aug 2012

A leading workplace law firm has issued a warning to employers hiring senior executives – apply due diligence in stringently examining the remuneration and departure clauses of employment contracts or face potential difficulties when the relationship goes south.

In negotiating a contract, the departure clause should be afforded the same consideration as the remuneration package being offered – countless organisations have fallen prey to an ill-conceived exit strategy, and have paid the price in costly legal battles. According to one workplace law specialist, restraint of trade clauses are commonly held to be void if they are not reasonably necessary for the protection of the employer’s legitimate business interests.  “Any post-employment restriction [must] be reasonable in terms of prohibited activity, length of time and geography,” Kathryn Dent, director People + Culture Strategies (PCS) said.

Dent also warned employers of the due diligence required when negotiating executive employment contracts, as remuneration benefits such as share options and bonus-schemes can lead to significant inconvenience upon the executive’s departure. “Executives are often recruited to a role on the basis of remuneration and many employers fail to clearly draft how these arrangements operate not only during employment, but also upon termination,” she added.

Dent also pointed to some common examples of problematic exit clauses. For example, if an executive holds equity in a company, HR would have to consider the impact their departure would have on the company’s financial position or its ability to gain shareholder approval for the departure. Alternatively, if there is a bonus-scheme in place, it must be considered whether the contract dictates that pro-rata payments are made upon on the executive’s departure, or if their termination date doesn’t coincide with the bonus’s payment period.

Takeaway tips for high-level contract negotiations:
 

  • Consider what is reasonably necessary to protect the business in restricting the executive should employment cease
     
  • Ensure that all pre-contractual negotiations and representations are reflected in the contract.
  • Consider impact of termination on payments, payouts and bonus schemes
     
  • Be mindful of legislative impacts, particularly the Corporations Act and Competition and Consumer Act

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