Legal Issues

03 Sep 2012

Due diligence can avoid legal issues

When hiring senior executives, a lot of time and attention tends to be given to perfecting the remuneration package.  A leading workplace law and strategy firm warns that it is important to give equal attention to exit strategies, to avoid costly legal battles if the relationship sours.

One aspect of the exit/departure process that is often disputed when senior executives move on is the restriant of trade clause, which sets out which organisations the executive is prohibited from working for after they leave the organisation and how long this prohibition lasts.  For instance, some organisations prohibit executives from working for competitors for up to on year after moving on.

Appropriate exit clauses as well as remuneration arrangements need to be included in employment contracts and signed by the executive prior to commencing work.  It may also be necessary to get legal advice, particularly for restraint of trade clauses, as they can be ruled to be void if they are not reasonably necessary for the protection of the employer’s legitimate business interests.

In addition, it is important to consider that benefits such as share options or bonuses can becoming difficult to navigate once the executive leaves the organisation.  It needs to be clear how these benefits operate after termination of employment.

The basic message is that ill-conceived strategies can result in legal issues for the organisation.

The following tips are given to assist organisations:

  • 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 the impact of termination on payments, payouts and bonus schemes
  • Be mindful of legislative impacts, particularly the Corporations Act and Competition and Consumer Act

Another take-home message for managing this risk is to employ executives who are most likely to be valuable, loyal employees who are well suited to the organisation.

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