Problem with the ‘tick and flick’ approach to executive contracts

Disputes with senior employees can easily become protracted, principally because of the financial amounts and reputational issues at stake, and are extremely costly for all involved. And when we say ‘costly’, we are not just talking about orders for compensation or other legal costs – but also the significant time and emotional cost at the expense of managers and other employees involved. These disputes have a huge ‘loss of sleep factor’ but can nearly always be avoided with the right drafting.

The problem with a ‘tick and flick’ approach to executive contracts

Breach of contract claims are particularly ‘fertile ground’ for disgruntled senior employees, including because such employees usually have no recourse to unfair dismissal laws. This means that the wording in executive contracts is imperative.

However, whilst many organisations will properly focus resources on getting the right executive for a role, too often this is not followed through with the right contract. Instead, organisations often rely on copying over old contracts that have served them well in the past or templates that are not tailored and/or are out-of-date.

Part of the reason for this is that there is the ‘it won’t happen to us’ bias that typically arises during the honeymoon period of recruitment, and as a result a failure to commit the time and effort up-front which would avoid disputes at the ‘back end’. It seems that sometimes more time and resources are invested in reviewing and negotiating contracts for matters such as a photocopier lease or Internet service provider, compared to an agreement with an executive responsible for running the business!

Below we look at some recent executive contract disputes involving claims for significant pay-outs, and how such risks can be easily avoided.

Learnings from cases

In Willis Australia Group Services Pty Ltd v Mitchell-Innes[1], the General Manager had been summarily dismissed for, among other reasons, attending a work conference while intoxicated. The key provision in the employment contract specified that he could be summarily dismissed if he committed ‘serious misconduct’ in ‘serious circumstances’.

Although the GM’s behaviour generally constituted serious misconduct, ultimately the Court made a value judgement, finding that this had not occurred in ’serious circumstances’. The Court was effectively tied to the express wording in the GM’s contract, and so took into account matters such as his history of good service, a lack of evidence that the company’s reputation had been damaged by the misconduct and the GM’s limited role at the conference.

If the contract simply stated that the GM could be dismissed for serious or wilful misconduct (or even misconduct), then the outcome would have been different.

Consider your risks: What do your current contracts say about the ability to terminate without notice? Is the wording broad enough to cover your business’ risks and current circumstances, holding executives to account without the comfort of a notice period?

In Melbourne Stadiums Limited v Nicholas Sautner[2], the company initially sought to terminate the employment of its Director of Commercial Business on terms that included a payment in lieu of six months’ notice and the execution of a deed of release. However, it was subsequently discovered that Mr Sautner had engaged in serious misconduct, which included using tickets to barter for goods and services for personal gain, and so the company instead summarily dismissed him (i.e. without any notice payment). Mr Sautner issued proceedings against the company claiming over $150,000 in damages.

The company was ultimately successful in defending Mr Sautner’s claim because it had not made the payment in lieu of notice (and so his employment contract had not been terminated) by the time it discovered the misconduct, enabling it to still terminate for serious misconduct.

The position would have been different if the employment contract had already been terminated by a payment in lieu of notice. For this reason, executive employment contracts should include a term that provides the employer with the right to recover such amounts paid if serious misconduct is discovered after a termination has taken effect.

Consider your risks: Do your current contracts have such a clause?  If not, why not and what else are they missing?

In addition to the above examples, there are other types of disputes at the executive level, including in relation to post-employment restraints and termination benefits limitations under the Corporations Act, which can be avoided if properly addressed at the ‘front-end’ of the employment relationship.

Is your business able to afford not only the legal costs of such disputes and the potential costs of losing a claim, but also the indirect impacts on the business, including reputational damage?

How to effectively manage the risks

Risk management is critical to any organisation and the approach to this should not be any different with employment contracts.

Employers should consider the following:

  • Up-to-date templates – ensure that template executive contracts are reviewed at least annually so that they remain consistent with best practice and keep up with changes in the law and learnings from the cases.
  • Get the most out of the recruitment period – have your contract ready to go before any offers are made. A prospective employee is less likely to give you ‘push back’ on specific terms in an offer of employment during this period.
  • Set expectations early – your executive contract should be a written version of your compliance requirements and other expectations throughout the employment relationship. It should also anticipate that the relationship might not work out. The contract should not be used as a recruitment tool.
  • Don’t compromise on standards – don’t be embarrassed by saying what you mean and insisting on ‘employer friendly’ terms. This is the standard that you will be expecting executive managers to require of other employees (when recruiting and managing them) and to enforce during the employment relationship. Draft your executive contracts accordingly.
  • Tailoring – a suitable contract that is current and addresses all of the issues for a particular position will avoid the need to try to change specific terms once the relationship has commenced, which is notoriously difficult. It will also mean that you don’t end up in a dispute about unclear or implied terms.

[1] [2015] NSWCA 381

[2] [2015] FCAFC 20


About Luke Gattuso:

Luke heads up the Employment & Safety practice in the Melbourne office for Page Seager. His areas of expertise include workplace compliance (incorporating best practice agreements and policies), restructuring, advising on employment issues in mergers and acquisitions, assisting with employment termination and enforcing post-employment restraints. Before joining Page Seager as a Partner, Luke spent over 14 years with a major international law frm, including as a Special Counsel and Managing Associate. He has advised and represented clients across most sectors on employment and industrial relations issues, from medium sized companies through to some of Australia’s largest organisations, international companies and government. Luke has particular expertise dealing with employment issues at the executive level and advising on restructuring, redundancy processes and complex transfer of business issues. He also regularly assists clients in workplace investigations and in resolving workplace disputes, and has extensive experience representing clients before the Fair Work Commission and in the courts.

Page Seager will be represented at the upcoming HR Law Masterclass Series, with Partner David Dilger chairing both the Sydney and Melbourne locations.