In challenging times, organisations may need to make changes at the top to ensure their business gets the leadership it needs. Jonathan Chamberlain uses his many years' experience to advise on board room issues to provide an update on tips, trends and how COVID-19 (might) make a difference to handling senior exits.
Jane Fielding: Hello my name is Jane Fielding and I am head of the Employment, Labour & Equalities team here at Gowling in the UK and I am delighted to invite you to this which is the four and last of our webinars which we have been running over the last couple of weeks, to replace our usual in-person seminar in our offices.
Those of you who have been to the last three of these will have heard me say each time I very much hope in June, when we do our mid-year review we will be able to welcome you back in person. You may have thought I was being too optimistic but with the news yesterday about the Astra Zeneca vaccine potentially stopping the spread as well as giving immunity then I am staying optimistic and very much hope to see you there.
Today's topic is taking tough decisions in tough times and in this context, we mean dealing with senior executive exits. When everything else is uncertain it is tempting in an organisation to stick with the security of what you know and the status quo but that does not always give an organisation the leadership that it needs, particularly in challenging times. That can lead to these sorts of difficult decisions.
Our speaker today is my employment partner, Jonathan Chamberlain who is going to bring his wealth of experience over many years of helping boardrooms deal with this sort of situation. He is going to share his tips on how best to approach it, identify some trends in how these situations are being dealt with and he is also going to identify, how COVID may be affecting how we might deal with these situations differently.
This webinar is a little bit different from the previous three, there are not going to be any slides, other than this introduction one, and there are not going to be any notes. If you do want to take notes as you go along then please do.
We are also going to take questions throughout the session, as well as at the end, so if you do want to ask something, please use the Q&A function which you will find as usual in the middle of the bottom of your zoom screen. I'll be keeping an eye on those as Jonathan talks and we will feed those in at appropriate times when he pauses for breath.
If you have any technical problems, hopefully there will not be any, but if you do then please use that Q&A function to ask about those as well and Lucy Strong who is helping us with the tech will do her best to sort you out with those.
I will now hand over to Jonathan.
Jonathan Chamberlain: Thanks Jane, thank you very much for joining. You might have not done a senior executive exit before, you might have done dozens. Looking at the attendance list for this session this morning, there are some of you who have done at least as many of these as I have, but do not worry there is something for everyone, in fact, I hope this will all be for everyone as we go through this morning and what I need to do is talk about three things.
Firstly, I am going to talk about, as Jane has mentioned, what difference do we think that COVID is making to these scenarios at the moment. I am going straight in with that. That is going to be the first thing we have. This session is not like Eastenders, I do not have to build up to the duff duffs, I can give you the good stuff straight away.
Then we are going to go back to basics for a bit and just remind ourselves of the principles or the key principles, legal principles that apply, the economic principles that apply in negotiating a senior exit. Now, if you have done lots of these before that might be the point that you want to check your emails, and want to minimise me into the top corner, or have me on your second screen, that is fine, you carry on.
I will bring you back for the third part, which is talking about how we deal with discretionary bonuses and discretions in relation to share schemes, because the law on that has changed since 2015. I want to talk about how we got there and what difference it is making in practice. I think that is still a very confused situation, I think it is worthwhile everyone tuning in for that bit.
So, as Jane has said, I am not using slides for this, OK, this is you and me having a coffee talking about stuff, that is how we are going to do it.
So firstly, I said how is COVID making a difference and I had a chat with a friend who acts mainly for employees, obviously we act mainly for employers. I said - how do you think it is making a difference and he said I do not think it is making a difference at all, apart from mitigation. I thought that was a bit apart from that missing link how did you enjoy the play as it is pretty crucial, but it is not the only area where COVID is making a difference. I think there are three others as well. There is one that is quite helpful for employees, there is one that certainly makes it more difficult for employees and they are, I am going to cover these in a bit more detail in a second. The tribunal system is completely clogged up, that the formalities, the mechanics of exits are perhaps easier now we are all working remotely, but also COVID and this way of working is making a lot of things much harder and that is having an impact on how these things are dealt with and managed.
So let us just turn to the first of those, mitigation, as we are going to remind ourselves in a couple of minutes, the starting point to a calculation of loss in relation to senior executive is there contract. If you are a senior executive, perhaps we should have started with definitions, lawyers always like to start with definitions and that is perhaps why I have just kept away from them a little bit, a little bit different.
What do we mean by senior executive in this context, I think it is somebody with a six month, 12 month, 18 month notice period, but we do not see many of those these days, but somebody with a long notice period, where the value for them on exit, where they need to generate most cash, is in the contract rather than necessarily in their statutory protection rights or the right not to be unfairly dismissed. Discrimination is another thing, we will come onto that in a moment.
We are talking about people with long notice periods, and of course they are under a duty to mitigate, and that means they are under a duty to look for another job and it is harder to find another job in this climate, which means that if you are negotiating the contract and you are saying you are on a 12 month notice but we are only going to offer to pay you six, because you will easily get another job in three, they can turn around quite legitimately and say in this climate - are you kidding and that means that the price of exits is going to go up because it is quite hard to argue against that.
That is a big point because mitigation is normally the technical subject of discussion, that is not the only pressure or negotiating lever that one might have, but it is the heart of the legal principles that apply on negotiating damages for a contract of employment. If that then points towards higher settlement, something that points towards lower settlements of the state of the Tribunals because, although the Employment Tribunal may not be the forum for recovering most of your loss. If you do not do a deal as a senior executive because compensation for unfair dismissal is capped and that cap may be smaller than the value of your contract and you might therefore want to litigate in the High Court, what executives are being able to do until relatively recent, well this last year is push forward an Employment Tribunal claim specifically reserve their High Court damages claim as a way of putting pressure on the organisation, not necessarily in terms of cash, but to get people involved and focussed on it. Having to do witness statements, go over this stuff. Now that pressure is still there because the process is still there, but hearing dates have been pushed so far back that the latest Tribunal statistics indicate that claims are up about 13% year on year, so what is going in is up 13%, but what is coming out in terms of hearings is down by about 40%, so I mean you know there are three kinds of lawyers, as one of my clients put it, those who can count and those who cannot, but you do not have to be any good at maths to realise that that means the system is getting bunged up and when you realise that, unlike most of us, we are working remotely from home the Employment Tribunal's systems do not allow the staff to work remotely from home, they have to come in, which means they have been badly hit by COVID, by shielding and claims that go into the Tribunal are taking weeks before they come out and then months and months before they are listed, so that, COVID is making a difference. The threat of the Employment Tribunal is still there and it is a long way in the future.
One point that we have noticed that actually helps employers is how to conduct one of these exits with dignity because physically that is often quite difficult to do. If you are telling somebody you are leaving now, this is your last day, your last moment in the organisation, where do you tell them, in their office with everyone else around, when do you tell them, on a Monday morning, last thing on a Friday because the key point about dignity is both theirs and their colleagues is no one will ultimately forgive you for the walk of shame. The office knows when someone has just been fired. They just do. I do not know how, what the signals are, but trust me on this, they do and no one likes that sort of sideways glance, not wanting to meet someone's eyes, but it is just horrible, it is humiliating, so what we have always advised, catch somebody on their way in, go to a meeting room before they get to the floor. Now we are working remotely of course, we do not have to do that, you can do this over Zoom and once upon a time that would have been thought of as brutal, cannot do this remotely, you have to do it in person, well now it is the way we operate, so there is that, you do not have to meet with somebody in the same room to terminate their employment and in some way it is a lot easier now that you do not.
The final thing I wanted to bring up here in this section was the circumstances in which we are working and which we are living at the moment are making everything hard. It is already stressful losing your job and we talked about mitigating the prospects for other employment. It is actually quite stressful having to fire someone and both the person doing the firing and the person being fired are already under a tremendous amount of stress and it is stress that we have all absorbed because we have to because life has to carry on, but I think many of us will be able to say that there have been times when we have lost our temper with the family or we have not been able to sleep or anything like that, where it actually comes through and it is there in our sub-conscious and it comes out in this situation. There is more aggression, there is more fear and the process becomes just that little bit harder to manage. The machinery remains the same, but we are lacking a bit of lubricant in keeping the wheels turning and I think it just does us all good to be aware of that. This is going to be hard, it is going to feel harder, it is going to feel more difficult. That is okay, that is an awful phrase, a new normal.
So that is how I think, Jane Sorry.
Jane: Yes, there is a question here around that point you just made about the state of fear, but tied into mitigation, does it depend partly at the moment on the sector, how somebody might feel about their ability to go and get something else because retail is clearly very difficult, there are other sectors that are more buoyant.
Jonathan: I think it does and I think it is important to note that there are two parts of that. One is objective reality. Healthcare is doing very well for example. Data centres are very very buoyant. Professional services seem to be okay. So in those sectors you could say no you will easily be able to mitigate your loss but it does not necessarily feel like it. That general clouding of the judgement that general inchoate sense of existential terror, if it is not put too dramatically, but we live in a world where if you see somebody coming down the street, you find yourself doing this mental maths, like David Beckham about to pass a football, when am I going to be able to pass them without stepping into the road and getting run over. That is your constant way of working. Even though people might not have as much to fear, they may well feel like it.
If that is how COVID is making a difference in mitigations, some sectors more than others, the tribunals are clogged up, so it is not much of a threat to employees to say they are going to one, it is easier to terminate physical mechanics of it but the general state of fear makes negotiations harder.
Let us now just recap on some of the basics if we may. If you are an old hand at this, check your emails for five minutes. What I want to cover here, I want to talk again about some of the mechanics of exit, general principles for calculating damages which we get to form a starting board in negotiations, how we value benefits in that and we are going to deal with bonus later. What the cross over is with the employment tribunal conversation is and the different bases for calculation in the employment tribunal because, I do think that is relevant and these are the bits that always turn up when we are having these discussions.
Firstly, talking about the mechanics of exit. Nowadays, it is very rare for the Alan Sugar moment, "you're fired", and it used to happen a lot. It does not happen anymore. It is now more of "we are going to put you on garden leave whilst we work out an exit package." I would encourage that because you get to keep control if they are your employee you can give them some instructions, if not to do things then not to do things, do not talk to clients, do not talk to colleagues and they are still bound by the contract of employment so, ultimately those instructions can be backed up by court order if necessary.
Now, you might need to check your contracts to see that you can put someone on garden leave at any time as opposed to only being able to put them on garden leave once you have given notice because otherwise, you do have to have a "you're fired" conversation but it goes along the lines of we are now giving you notice of 12 months to terminate your employment and putting you on garden leave. It would be preferable not to give people notice because the giving them notice can be quite a useful escalation in negotiations, all sorts of psychological things, so we would like you to go home now and we are going to be working out an exit packet over the next couple of weeks but you are on garden leave. If things are getting sticky after a couple of weeks, you can say we are now going to give you notice. We are going to convert your fixed asset into a wasting one so the clock starts ticking and they start losing some and you have got that means of gradual escalation just turning up the heat a little bit. If you cannot put someone on garden leave, unless you have put them on notice, then you have a tricky call there because if you try to say to somebody you are garden leave and you have no contractual power, could that be constructive dismissal, might they then walk away completely and all the restrictive covenants and things fall away when you lose control and you do not want that. I think that you probably have a few days without an expressed garden leave clause, without material risk of terminating the contract but you have no more than a few days so just check the contract so you have that means of escalation.
Jane: Sorry, there is a comment here and a question. The comment is going back to the point you were making about doing things via Zoom that Zoom culture can feed into a sense of distance and sometimes people can forget it is a real person on the screen so getting empathy on a zoom call can be difficult, which I think is a very valid comment. The question though is as he started to talk about the actual mechanics and having the conversation, what is your view on whether it is worth doing that for somebody very senior as a pre-termination of employment conversation so a protected conversation? Do you think it is worth it to do it that way?
Jonathan: I think not generally because as we know pre-termination conversations do not apply to discrimination and if you are only talking about protecting yourself against the risk of unfair dismissal, which we will come on to in a moment, is not that material in cash terms in this context then why would you bother. You set up this slightly artificial situation and to go back to the point that somebody has made about connection on Zoom, this is about authenticity which always eases communication and if we are going through this sort of elaborate ritual, this is a protected conversation and if you do not do this, come on you are firing me. We have already made things a little bit harder so my instinct says no, but it depends on the particular circumstances.
Jane: Yes and I suppose there is the value if you do it that way, that if they go to tribunal on discrimination and they lose, you are back to unfair dismissal, you can still protect those internal conversations around planning for the conversation, although, of course by the time you get to the point that they have lost the discrimination claim or that that has been aired and the tribunal [Jonathan agreeing with Jane]. There is another question actually, what happens if you put someone on garden leave whilst you look to work out the exit and while they are on garden leave the timing ticks over the two years unemployment but they get the unfair dismissal right.
Jonathan: I will come on to in a moment, the unfair dismissal rights may well not be all that significant in this context but clearly that is something to be taken into account. There are other circumstances where you have got to let somebody go immediately. You might choose to because under your payment in lieu of notice clause, you can terminate them by just making a payment of the basic salary as opposed to benefits which might be quite substantial over the length of those periods. The wording in the contract may be such that it is better for you to do it that way. You are going to have to dive into the detail of the contract here. The contract is a very important document in a way it is not necessarily in the unfair dismissal claims. Perhaps that is a good point to then just looking at the time here. To move over to calculation of compensation because I run both points together what somebody is entitled to in respect of a breach of contract is an early termination of the contract is calculated differently from what they would be entitled to if they had been unfairly dismissed. The test in contract is what they would have received had the contract been properly performed. In other words, if there is a 12 month notice period, I would have stayed for 12 months, I would have got everything I would have got in the next 12 months.
Now, as we will see in a moment, they might not have got a bonus or they might be in a bonus scheme or a share scheme but the company has certain discretions which it can choose to exercise on. We will look at those in a moment but you are looking there at what is the language of the relevant documents.
For statutory compensation, whether it is for unfair dismissal or for discrimination actually, the measure is what is just and equitable. The tribunal takes what you might call a more holistic view of that the employee might recover and they are not limited by the notice period. If you lost your job here you are not going to get another job at this level for three years never mind if it is a one-year contract. Never mind that the bonus has expressed to be entirely discretionary or whether you get shares is at the will of a parent company, many thousands of miles away. Ordinarily had you stayed in the job and had you not been discriminated against or unfairly dismissed you would have got this so we are going to compensate you for it. They do not look at the strict contractual processes.
For unfair dismissal with the cap on compensation, it is really quite rare for a senior executive on a 12-month notice period to be compensated for unfair dismissal as of right on top of that. Frequently it will be used in negotiation, it will be used as a way of paying somebody a bit more than their notice period in order to get the deal done. It is very very rare for a senior executive to bring an unfair dismissal claim. I have been doing this for nearly 30 years and almost never seen it. It is rarely worth it for them. Discrimination either entirely is discrimination we argue for a multiple of your annual compensation. Not a part of it.
Where the unfair dismissal compensation is used in the negotiations, is if you have got something like a pile on, I mentioned a moment ago where it is salary only for 12 months, they say oh yes but had I been unfairly dismissed, I am unfairly dismissed at an employment tribunal then I can bring in the value of the benefits there because it is just and equitable heading. So a pile-on may not save you as much money as you might think.
How do the two inter-relate? This is always an extraordinarily complex question but the way it works is this - you total up the loss and then the tribunal applies for cap. If someone is out of work or likely to be out of work for 12 months, on a 12 month contract and you have paid them out for a 12 month contract, a tribunal is not going to give them any more money materially for unfair dismissal, it might do for discrimination. They are not going to look more than 12 months out. If the tribunal says you are going to be out of work for three years, and you have paid them the 12 months money the tribunal will say well there is another two years of loss we can actually only compensate part of that because there are caps but that is how it will be applied. This is really complicated, it is second nature to us as English employment lawyers but when we have these conversations with our, we call them our friends on the other side of the English channel, whose employment laws are notoriously much more onerous. The mechanisms for enforcement are so much more straightforward for wrongful dismissal and unfair dismissal. To try explaining the difference in concepts and having to enforce it in different courts. People will just be baffled and rightly so. This is complicated.
Now, if you had me in the corner for a bit or on your second screen and you are doing your emails, now might be a good time to come back in because we are going to talk about bonuses and share schemes and what I still call the new law, although this all stems out of a decision in 2015 which was not about bonuses or share schemes. It was about life insurance of the most unfortunate Mr Braganza who went overboard at night off a British registered tanker belonging to BP. The question for the employer was did he commit suicide, in which case they did not have to pay out under life insurance or did he not, in which case they did. They had a discretion as to their view of the facts. The case went all the way to the Supreme Court and it was about employers take a decision in circumstances where they have a conflict of interest because clearly BP does not want to have to pay out life insurance in those circumstances, self-insured. The Supreme Court recognised and indeed mentioned in the decision that this was going to have an impact on discretionary bonuses. It particularly comes into play on termination. Remember we said a moment ago, you are looking at what they would have received over the 12 months, they might have received a bonus. The bonus will be expressed to be, what is often expressed to be, discretionary. Sometimes it is targets. If you hit targets then this is what you get. It is a formula. Even the formulas tend to include an element of discretion either as to whether you get it all or whether you get part, depending on the assessment of your performance et cetera et cetera.
This language has been around for a long time and up until the late 90s early 2000s there was an arms race effectively in the city of London between the lawyers who were drafting these contracts and the lawyers who were acting for the traders and the bankers who had been fired. The bulk of the remuneration came in bonus needs to get their hands on it. The language would say "this bonus is entirely in our discretion and we can pay you if we feel like it and not pay you if we do not feel like it, depending on the weather and the colour of our socks this morning" and that is all fine. The employees would be saying "no, that can't be what the language means if I have performed really highly."
Where it ultimately got to was this concept that a series of decisions in the Nomura, Dresdner cases where the only fetter on the employer's discretion was rationality. Was it an irrational decision not to pay the bonus? That changed under Braganza because as well as irrationality, there was brought in a procedural element, and it was a straight read-across from public law concepts that apply to local councils when they make decisions. Have they taken into account factors which they should not have taken into account? Have they taken into account all the factors they should have taken into account? Then was the decision so irrational that no employer in similar circumstances would have taken it? It is that procedural element. The Court recognised that applying that sort of test by a Judge to a decision taken by an employee, is really hard and they said they do not want to go down that route. They said it is much more amenable to, as in the case of Braganza, literally life or death decisions, one-offs, did this fact happen, did this fact not happen? Not when you get into questions of subjectivity around performance. The Judges themselves have said they find this really hard to apply in practice. Let me give you one illustration of where it has worked in practice, which was a bonus decision for a very substantial company. The company knew that they had this risk. They followed very careful, very thorough legal advice on things they should take into account and things they should not take into account. They came up with their decision that the existing executive was not going to be a good lever for the purpose of the bonus scheme. They were going to be a bad lever. That was very often used. He made the argument that you have taken these things into account that I will apply my job that I was not very collegiate but you never heard my version of events, you never asked me. These are all subjective things.
I have a view on this. I have more information to give you. That is a factor which you have not taken into account and you should have taken it into account. The employer had applied for the case to be struck out on a summary basis. The Judge would not do it. The Judge said he has got a point. We need to hear about that properly in full Court. The case was settled before it ever got to that but what became clear there was that it is not as simple for employers anymore, so we will use in the negotiations to be able to say discretionary bonus not an irrational decision you do not get it.
Now we are going to have to show our working out. That working out may well include hearing from the departing employee. Again, so much is going to come down to the wording of the particular scheme and the particular circumstances in which you find yourself. It may be that there are factors here which means that it does not really matter what the employee says and so their view is not something which you have to take into account. It is not as simple as it used to be. That is the thing that I want to leave you with because I think that is the whole theme of today and the environment which we find ourselves. These things are not quite as easy as they used to be.
I am going to pause there Jane to see if we have got any more questions. I can see a little red number on my Q&A which indicates that there are some.
Jane: We do indeed have questions, yes. There are a couple on garden leave which I will come back to in a minute. First of all, l I thought it would be helpful to highlight a comment we have had from somebody we both know well, rather than a question, saying that they find it helpful to bring up outplacement counselling very early on in the conversation to try to get people focussed on the future, that there is a future and it helps obviously with mitigation. Then allied to that, using a structured settlement which incentivises them financially to find something earlier and it limits the long term exposure for the company which is something that we do as well, do we not?
Jonathan: Yes that is right and there are ways that you can split this. You can pay people on the drip and then say you will have half of the balance of your notice period, for example, when you get another job which means that clearly the earlier they get it the more ultimately they get, which will work out roughly the same amount of money if they are out of work for the whole 12 months, but it does mean they get a chance of the bonus as it were. Something more than their actual loss.
Jane: Yes. The two questions on garden leave, if we take those together. One is you talked about putting people on garden leave before giving notice if the contract allows you to do that, is there some standard contract wording to achieve that? The second one is clarifying using garden leave is it actually better because that is what this organisation does is to talk about paid leave while you are negotiating, and then put them on garden leave, or does it not really matter?
Jonathan: Garden leave is not really internal art. What garden leave means is we are still paying you but you are not working for us and you are not working for anyone else. How you label that goes back to the point that has already been made by me and by you which is do this sensitively. I think that is what the question here is also saying. Garden leave might have pejorative connotations, we put you on garden leave because we do not want you to go to a competitor. We put you on garden leave because we are putting you out to grass. If you want to say we are just going to ask you to go on leave or even not label it, just do not come into the office, do not make a series of negatives rather than an actual label. The point about standard wording, while there is standard wording in this sense, the garden leave clause in the contract says we can at any time choose to ask you or to require you not to return the offers, not to perform any duties, not to contact clients, customers, colleagues, provided that we pay you whatever it is we pay you out of the contract.
Contrast that with a clause that begins "during any period of notice whether given by you or the company, the company may require you to remain at home, not contact colleagues" et cetera et cetera et cetera. We see both clauses. If you are negotiating whether these things or a senior executive, if you are a senior executive you may well want to say I only want to be on garden leave while I am on notice. Both are in circulation. Check the contract before you do it.
The key thing is do not put someone on garden leave in circumstances where you are not entitled to put them on garden leave because, although they are unlikely to turn around and say "aha got ya constructive dismissal" in these circumstances it would not be helpful for them to do that. They might and remember for everything you said, there is a lot of irrationality, there is a lot of fear around this, that sort of detail is important to get right. You need to demonstrate you have a grip on this process. That is really important if you are going to get a successful resolution.
Jane: Okay. We have got a number of attendees from publicly listed companies, can you give any guidance on what different approach they may need to take whether they need extra requirements or steps?
Jonathan: I think the point to note here is that the way the rules are now and have been for many years, this is not new is that if you take somebody out of the active management of the company then you have to announce. For these purposes, garden leave is as good as termination. If you want to announce a deal, so and so has agreed to step down, you are going to have to do that deal at a time the market is closed so between Friday and Monday. Otherwise you have to tell the market.
There are as you might imagine different views on this. People can be ill. Does the market really need to know if someone is out of commission for a few days? My view is yes because this is different from the random nature of illness. This is the company has decided to make a change in management and that is something about which investors ought to know. That is not necessarily a universal practice but garden leave in these circumstances is useful for all reasons that we have been discussing but the point to note is that it does not necessarily get you out of the duty to make an announcement.
Jane: Okay. We are just about out of time now. There are a few questions that we did not quite get to that we will follow up with you afterwards if you are one of those people so you will get an answer. Otherwise, I will say thank you to Jonathan for the presentation and the Q&A and thank you to all of you for joining us again today. You will get a request for feedback pop up in your internet browser at some point later this morning. If you do have the time to complete that and send it back to us that would be great. We do read them and we do take them into account for future sessions in June and in between. Thank you very much and enjoy the rest of your day.
Jonathan: Thank you, everyone, and thank you Jane.
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