C-suite terminations come with complex contracts, high stakes, and legal risks employers can’t afford to overlook, lawyer says
This month, Kohl’s, an American department store retail chain, fired its new CEO for unethical behaviour.
Ashley Buchanan, who started at the company on Jan.15, was terminated for cause after violating the company’s policies by failing to disclose a personal relationship with a vendor and a consulting contract that resulted in a million-dollar deal with the retailer.
In a statement, Kohl’s said the firing “was unrelated to the company’s performance, financial reporting, results of operations, and did not involve any other company personnel.”
But dismissing any senior executive is rarely straightforward or easy, says Jordan Bailey, employment lawyer from Zubas Flett Liberatore Law.
“You can pretty much assume that if they're terminated for cause, they will likely get a lawyer, and they will almost definitely challenge the termination,” he adds.
Bailey notes that firing C-suite executives involves unique legal and reputational risks.
The legal standards for termination apply equally to all employees, regardless of their role. However, Bailey says the difference with executives lies in their employment agreements, which often include terms that go beyond the minimum entitlements set out in employment standards legislation.
“They usually have something like a golden parachute," explains Bailey.
C-suite individuals are often able to add their own terms and agreements that will benefit them in situations like this, he says. Depending on how they're terminated, they can even secure higher severance packages.
“In a without-cause termination… [ executives] can get paid six months of salary just because they're being let go, when they might have only worked there for less than a year,” he says.
While courts tend to interpret employment agreements in favour of the employee — because of the power imbalance — Bailey notes they often presume C-suite executives to be “sophisticated” enough to understand the legal complexities. Still, the burden is on the company to prove compliance.
Buchanan had a base salary of US$1.475 million and received a US$3.5 million signing bonus. According to Kohl's SEC filing, he will be required to pay back US$2.5 million of the signing bonus.
Bailey expects this termination to be contested.
“I think [Buchanan] will absolutely be bringing a claim, because it's not only to not pay back the money, it's trying to clear his name,” he says.
So, how can HR and employers avoid risks when it comes to terminating a C-suite individual? Bailey says it's by making sure they “play everything by the book”.
While the decision to terminate a C-suite individual usually comes from the board of directors, HR plays an important role in handling investigations and documentation of policies, Bailey says.
“It's really important that [HR] have the documentation to show that that policy was in place when the employment relationship started."
HR needs to ensure that the individual was aware of the policy and also acknowledged it—preferably in writing, he says. That also applies to policies that are added mid-employment.
That way, if a breach occurs, the employer can point to the fact that the policy was in writing and that the employee acknowledged it, Bailey explains.
If a company tries to terminate an executive for cause based on a policy that the individual was were never made aware of, they risk legal challenges for wrongful dismissal, he says
Equally critical is making sure to conduct an investigation that allows an individual a fair opportunity to respond to the employer’s allegations.
In most cases, employers will conduct their own investigation, review the material, and identify a policy breach to justify termination, Bailey says. While that may be sufficient, it can still lead to problems.
'Usually, the employee comes back and says, ‘You didn’t have the right to terminate me without taking that extra step—conducting a proper investigation that includes my side of the story,"' he explains.
One of the pitfalls Bailey has seen in terminations such as this is a board acting on whistleblower information about the executive individual from other employees, without verifying the information through a proper investigation.
“In those situations, you are setting yourself up for a wrongful dismissal suit that can get pretty ugly,” says Bailey.
An investigation done by an outside law firm found Buchanan had violated the company’s policy.
Bailey says this case is a reminder to vet executive hires thoroughly. “Don't get rose-tinted glasses looking at this person,” he says.
He emphasizes that regardless of the role, employers should follow the same hiring and vetting steps they would for any position.
“Treat everybody the same, so that all the policies are applicable,” he adds.
Buchanan was brought in after the retail department store experienced a 9.4 per cent sales decline last year.
The company has named board member Michael Bender as interim CEO.
