Dignified Exits Managing the Risks of Termination When No Good Reason Exits

Dignified Exits Managing the Risks of Termination When No Good Reason Exits March 2013 Megan Richards, Partner Minter Ellison Rudd Watts 7349144 1

DIGNIFIED EXITS: MANAGING THE RISKS OF TERMINATION WHEN NO GOOD REASON EXITS 1. INTRODUCTION 1.1 At some stage, every employment relationship comes to an end. Some well, some badly, but all do (eventually) end. 1.2 However, many problematic employment relationships do not end by dismissal or resignation, but through the negotiation of an exit package. Typically, such a package will contain some (often financial) benefit for the employee while giving the employer an assurance that any grievances or claims arising out of the employment relationship (existing or yet to be raised) are at an end. This form of negotiated exit is generally what parties consider when wanting to bring an employment relationship to a dignified end. 1.3 Similarly, the use of no reason (or no fault termination or face doesn t fit ) clauses in employment agreements is becoming more common, especially when employing CEOs and other senior employees. 1.4 This session will examine: (a) (b) (c) (d) (e) Use of no reason clauses the pros and cons; When age is a key factor and succession planning is needed; Minimising any risks associated with a negotiated exit; How to have the initial and subsequent discussions; and Terms of settlement agreements. 2. USING NO REASON CLAUSES 2.1 To help facilitate an employee s exit, where there would not otherwise be any basis for termination of their employment, no reason clauses are sometimes used in employment agreements. These clauses ostensibly allow for the employment agreement to be terminated on a no fault basis in return for an agreed exit package, often a lump sum monetary amount. Typically, a clause of this type would: (a) (b) Begin with a statement recognising that, given the seniority and key nature of the employee s role, there is a need for there to be a high level of compatibility, trust and confidence between the parties (and that an issue of incompatibility or irreconcilable differences may arise); and Set out the payment that the employee would receive, should the employer terminate in reliance on this clause. This payment may be expressed to be inclusive of or additional to the employee s entitlement notice (or to pay in lieu of notice). 7349144 2

2.2 Many such clauses also make payment conditional on the employee releasing the employer from any liability for employment-related claims (and may require the employee to sign a settlement agreement or other document before payment is made). 2.3 Generally, clauses of this type are only used and should only be used in the employment agreements of Chief Executive Officers and other senior executives of an organisation. For these types of senior managers, sometimes a change in the direction of an organisation may be needed (with a corresponding change in skills of senior employees), the relationship between managers or between management and the board may become strained, or there may simply not be a good fit. However, no redundancy situation, misconduct or other issues may be present that would clearly justify termination. In other cases, there may be some evidence of poor performance, but the senior nature of the employee s role makes a poor performance management process problematic. 2.4 In these types of situations, no reason clauses can be a useful way to protect the professional reputation of the employee concerned, while still achieving the employer s goal of exiting him or her from the organisation. The use of these clauses can allow the employee to walk away from the employment relationship with their record and reputation intact. Additionally, a public dispute between an employer and senior employees is rarely in the interests of either party, and such clauses can provide the catalyst for a more discrete exit. 2.5 However, there are risks with including such a clause in an employment agreement, and seeking to rely on it, which are discussed in more detail below. 2.6 While courts have previously, on occasion, upheld clauses in employment agreements that provide for termination on notice without cause (see, for example, Air New Zealand v Raddock [1999] 2 NZLR 641), their current legal status is uncertain. As yet, because we have no precedent to show how the Employment Relations Authority or Employment Court would deal with a no fault termination clause; the validity of such a clause is questionable, but no one is keen to take a test case. That said, the lack of litigation, combined with anecdotal evidence about how many agreements in fact contain such clauses perhaps, in and of itself, illustrates how effective no fault termination clauses can be! Pros of no reason clauses 2.7 The fact that no reason clauses are in relatively common usage for senior employees shows that a number of organisations consider the pros of using them to outweigh the cons. 2.8 Essentially, such clauses provide a form of comfort to organisations that, if the relationship with one of its most senior employees is not working well, there is a mechanism included in the agreement to bring the relationship to an end a form of escape hatch, if you will. This can be particularly important to multinational organisations, where the parent company (such as those based in the USA) is accustomed to, and expects, this degree of flexibility. 2.9 Such clauses also provide some comfort to those employees that, should the relationship begin to sour and the employer relies on this clause, they will not be leaving empty handed. There is even a school of thought to say that the inclusion of a clause of this type may encourage executives to adopt a more aggressive or dynamic 7349144 3

strategy in carrying out their role, in the knowledge that the board expects a high level of performance and that they might have a safety net if the risk does not pay off. 2.10 Another commonly cited advantage of these clauses is that their negotiation allows parties to turn their minds, at a time when the relationship is good and cool reason prevails, to the question of appropriate compensation should the employee be required to depart. In this regard it is important to remember that this will be a negotiation between sophisticated parties, not to mention that one of those parties is a prospective employee who has more bargaining power than would usually be the case. 2.11 In addition, properly utilising a no reason clause can assist in protecting the reputation of the parties. As already noted, a public dispute between an employer and a senior employee is rarely in either party s interests in both cases, it can cause reputational damage, which can impact on the employer s business and the employee s future employment prospects. 2.12 These types of clauses can also allow an organisation to make decisions around its future direction and undertake proper succession planning faster. Sometimes the commercial reality is that a board decides that a new direction is needed with changes needed to senior personnel, and a no reason clause can provide a way to achieve this. Such a clause can also provide an incentive to departing executives not to disclose corporate information, through litigation or otherwise. In some cases, clauses may even be structured so that payments are made at intervals, rather than in a lump sum, to incentivise an executive to comply with ongoing obligations (including any restraint of trade). 2.13 Finally, the most commonly cited advantage of a clause of this type is that it can open the door to an exit discussion. This is discussed further below, but often making the initial move to discuss an exit package can be difficult both emotionally and legally! However, while reliance on a no fault termination clause can help start the discussion, employers must be careful not to walk into a constructive dismissal situation. Cons of no reason clauses 2.14 Turning to a less optimistic viewpoint, some of the very benefits of a no reason clause can be turned on their heads to become cons. 2.15 From a financial point of view, the main risk is that an employee will regard the no reason clause as setting only a starting point for any exit discussions and this essentially becomes the de facto minimum payment. If the package agreed on in the clause has a high value, the employer could end up paying much more than they wanted to. 2.16 Similarly, the clause can give rise to an expectation on the part of an employee that (notwithstanding the wording of the employment agreement) any employer-initiated termination will result in a payment under the clause. This can be frustrating if, for example, the employer has uncovered serious misconduct; in many cases a settlement is reached, but this can be made more difficult if the employee expects to receive the full value of a no reason termination clause in those circumstances. 2.17 Another of the benefits mentioned above is that these clauses can be comforting for employers. However, this comfort can turn out to be false. New Zealand does not have a fire at will employment system, and the test of justification applies to the employment (and termination) of all employees, irrespective of their seniority. 7349144 4

Employers, particularly multinational organisations, therefore need to be vigilant about this before embarking on a process of removing employees in New Zealand. 2.18 Linked to this point, it is important to remember that it is not possible for parties to contract out of the Employment Relations Act 2000 (the Act). Section 238 provides that The provisions of this Act have effect despite any provision to the contrary in any contract or agreement. 2.19 Accordingly, any clause that purports to limit the remedies available to an employee, or to limit an employee s access to the Authority or Court, arguably constitutes an attempt to contract out of the Act, contrary to section 238. In that event, the clause would not be enforceable. 2.20 This arose in a different context in Trotter v Telecom Corporation of New Zealand Limited [1993] 2 ERNZ 659. In that case, Mr Trotter was found to have been unjustifiably dismissed. In determining the remedies, there were various benefits Mr Trotter had lost. In particular, he had participated in Telecom s executive share ownership plan. The share ownership plan trust deed stated that, if an employee s employment terminated before a certain time, even by reason of unjustifiable dismissal, the employee s shareholding would diminish. Mr Trotter accepted employment on these terms. 2.21 However, Goddard CJ found the agreement to be unenforceable and awarded the full value of the pre-termination shareholding, plus a further $10,000 for future benefits lost. In doing so, Goddard CJ relied upon the no contracting out provision in the Employment Contracts Act 1991 (which was in force at the time). 2.22 What these points mean is that, in legal terms, the no reason clause is still something of an unknown. Whether winding up a relationship by relying on one of these clauses could give rise to a justified dismissal has not yet been tested, neither has the question of whether the clause might be held to be an attempt to contract out of the Act. Given this, it is hard to judge how the Authority or Court would approach such a case. One possibility is that, if the employee received a substantial payment as a result of a no fault termination clause, the Authority or Court could find the dismissal to be unjustified, but award little or no monetary compensation. The risk of this occurring is something of a disincentive to employees thinking of challenging a no fault termination clause, as they may incur the costs and publicity of litigation, but receive no benefit from doing so. 2.23 One way to further minimise the risk of litigation is, as discussed above, to make payment of any money under the clause conditional on the employee releasing the employer from any liability for employment-related claims. Such a provision would require the employee to choose at an early stage between receiving the payment or challenging the clause (and his or her termination). It also avoids the risk of an employee being paid out under the clause and then using that money to fund litigation against the employer. 2.24 A further, but related legal risk is that, because (as discussed in more detail below) a dispute is required before the parties can speak on a without prejudice basis, it is difficult to have without prejudice discussions about utilising a no reason clause. In many cases, there may not be a dispute. 2.25 This situation inherently gives rise to the risk of a constructive dismissal claim for anyone wanting to rely on a no fault termination clause. If an employer comes in too strong, an agreement is not reached and the employee resigns, chances are the 7349144 5

employer may face a constructive dismissal claim. Depending on the circumstances, this may be on the basis that the employer gave the employee a choice between resigning or being dismissed, because the employer followed a course of conduct with the deliberate and dominant purpose of coercing the employee to resign, or because a breach of duty by the employer causes the employee to resign (which could include a breach of the duty of good faith or the mutual obligation of trust and confidence). 2.26 Employers should therefore be cautious when seeking to utilise a no reason clause. Amongst other things, they should ensure that they are not simply trying to terminate an employee s employment for an unlawful reason (for example, dismissing an employee because of one of the prohibited grounds of discrimination). 3. WHEN AGE IS A KEY FACTOR AND SUCCESSION PLANNING IS NEEDED 3.1 Even if the reality is that an employee s age is the key factor behind an employer s wish to bring his or her employment to an end and/or to rely on a no fault termination clause, this should not be something disclosed to the employee. Regardless of what the employment agreement states, employers will still be required to comply with the relevant provisions of the Human Rights Act 1993 which does not look favourably upon even the most best intentioned discrimination (assuming there is such a thing as well intentioned discrimination). 3.2 In particular, the Human Rights Act 1993 makes age discrimination unlawful in employment and in other areas of public life. It is unlawful to discriminate against employees and job applicants of any age, commencing at age 16. There is no upper age limit for age discrimination unless an exception applies and an exception is unlikely to apply in most situations. Compulsory retirement is also unlawful under the Human Rights Act. Therefore, it is not lawful to retire employees simply because they have reached a certain age or, with some limited exceptions, to attempt to enforce retirement age provisions in employment agreements. This can come as quite a surprise to some multinational organisations. 3.3 However, in practice, there are a variety of reasons why an employee s older age, particularly a senior executive s older age, may be a factor in an employer wanting to end the employment relationship. At one end of the spectrum, this can sometimes be primarily a matter of perception the board may simply decide that a fresh face or a new direction is needed. In other cases there may be issues such as a decline in performance or health that need to be addressed. 3.4 Of course, there are recognised and legitimate processes for dealing with poor performance and prolonged ill health, both of which may ultimately lead to termination, and the same legal considerations apply with an older person as with any other employee. That said, there are various reasons why an employer may be reluctant to subject an older employee to a process of this type. These reasons include that: (a) (b) (c) The issues may not (yet) have reached the stage that would justify termination for poor performance or on medical grounds; Both types of process take a period of time to reach completion, and an organisation may require a quicker solution (particularly when the performance or health of an older employee is seriously impacting on the performance of the business and/or on staff or customers); It may be considered impractical to follow one of these processes. A good example is where the performance of the Chief Executive Officer is in issue the Chair of the board (or some subcommittee of the board) will seldom be 7349144 6

able to spare the time required to follow a formal poor performance management process; and (d) Organisations may be reluctant to commence a formal process of one of these types against an employee who is often a longstanding and highly regarded senior executive. This can seem to be an undignified or uncaring way to deal with someone in that position. 3.5 One method some organisations use to assist with succession planning and to encourage employees to think about retirement is to put in place a policy or scheme allowing planned or phased retirement. Naturally, such a policy needs to be workable for the organisation, but there are often options that can be considered such options vary considerably, but can include matters such as moving to a fixed term project or advisory role, a reduction in hours (in the same or a different role), or the ability to take extended leave (often with no guaranteed right of return). If nothing else, this type of policy can help to open the door to an exit negotiation with an employee. 3.6 In the absence of such a scheme, and/or where an employee does not appear to wish to retire voluntarily, employers are known to have off the record discussions which lead to an exit package arrangement (which are discussed in more detail below). Often, in order to hold such discussions safely and to persuade an employee to have a conversation of this type, it may be necessary to first commence a formal process of one of the types discussed above distasteful or impracticable as that may seem. 3.7 Where a settlement is reached with an older employee, more so than in other situations, different or additional terms of settlement may be desirable. In particular, it is sometimes in both parties interests to reach a settlement that specifies a future termination date (sometimes a number of months in the future). From an organisational perspective, this can allow an orderly handover and provide an incoming Chief Executive Officer or senior manager with the benefit of the outgoing employee s institutional knowledge. From the point of view of the employee, such an arrangement can help to preserve the employee s reputation, provide a more dignified departure, and also give an opportunity for the employee to explore other opportunities (such as directorships). However, care needs to be taken with the drafting of any settlement agreement that will see employment continue for a period of time and, in particular, an employer should retain the power to put the employee on garden leave if any issues or problems arise during the transitional period. 4. MINIMISING RISKS 4.1 When considering exiting an employee without good reason, there are a number of risks to bear in mind. Some of these risks can be minimised, provided care is taken and legal advice is sought in appropriate cases. It is also wise to seek legal advice before inserting a no fault termination clause into an employment agreement and almost certainly before relying on one! Minimising risk through without prejudice and off the record discussions 4.2 The best way for an employer to minimise risk in this type of situation is to hold exit negotiations on a without prejudice basis. This is because an employer who, on the record, raises the possibility of an exit package with an employee faces the risk of tainting any later attempts to performance manage or dismiss the employee. If the discussion is not properly established on a without prejudice basis, an employee could resign following the discussion and then raise a constructive dismissal claim. 7349144 7

4.3 Written and verbal communications which are made in a genuine attempt to compromise and settle a dispute are generally inadmissible as evidence. Typically without prejudice is the term used to protect the fact of and details concerning offers of settlement. However, agreeing that discussions between the parties are confidential and off the record can also protect them in some circumstances (see below). 4.4 The policy behind this rule is to encourage parties to freely and frankly discuss their disputes and try to settle them, without being concerned that anything said in those discussions might later be used against them. 4.5 However, simply marking a letter without prejudice (or referring to a discussion as being such) does not automatically mean that it is protected. The general rule is that communications noted as being without prejudice are only protected if there is: (a) (b) A bona fide dispute or negotiation; and The letter was written, or the communication made, in a genuine attempt to compromise and settle the matter. 4.6 In Bayliss Sharr & Hansen v McDonald [2006] 1 ERNZ 1058 the without prejudice rule was discussed in depth. In that case, the Employment Court reaffirmed that the rule could only apply to discussions and negotiations relating to an existing dispute between the parties. The definition of a dispute for these purposes is not limited only to situations in which litigation has either been commenced or threatened, but on any view of the matter for a dispute to exist there must be a significant difference between the expressed views of the parties about a matter concerning them both. 4.7 In brief, the facts of the case were that Ms McDonald was a young woman employed as an office junior. Ms McDonald was asked to attend a disciplinary meeting, which she attended with her representative. Shortly after the meeting commenced, the company asked Ms McDonald to have an off the record discussion and, whilst negotiations took place, the parties left the meeting with different understandings of the outcome of those negotiations. Ms McDonald left the workplace immediately following the negotiations and raised a personal grievance for constructive dismissal. That claim was successful in both the Authority and the Court. 4.8 A further issue to bear in mind is that a statement is not without prejudice unless there is a genuine attempt to compromise. Therefore, a letter marked without prejudice which discusses the facts of the case in detail, but does not actually make an offer to settle, or at least raise settlement options or compromise possibilities, may not meet this requirement. 4.9 In the context of discussing an exit package, the question will be whether there is a bona fide dispute or negotiation underway, and whether there is a genuine attempt to compromise. The without prejudice rule in this context will generally protect the nature, and fact of making, any offers of settlement. 4.10 However, it is also important to note that the rule is not absolute without prejudice communications are generally inadmissible as evidence, but there remains a residual discretion to consider evidence of the communication where the effect of excluding it will be more prejudicial than admitting it. Nevertheless, the Authority and the Court will usually be reluctant to exercise this residual discretion. 7349144 8

Off the Record 4.11 There is a possibility that, in addition to without prejudice discussions, an agreement that discussions are being held in confidence or off the record will also protect them from later disclosure. 4.12 In Jackson v Enterprise Motor Group (North Shore) Ltd [2004] 2 ERNZ 424 one party applied to remove parts of the other party s costs submissions as being confidential and privileged as they related to what had been discussed at a settlement meeting. At the time of the meeting, both parties had agreed that the meeting was being held on the understanding that the information to be discussed was privileged and without prejudice. In relation to costs, one party then tried to argue that only offers of settlement and responses to those offers are protected, and wished to disclose other discussions between the parties during the meeting. 4.13 The Court did not accept this argument, and held that the references in the costs submissions to matters discussed in the meeting were privileged. In particular, it upheld the party s agreement that the meeting they held and its subject matter were to be off the record or in confidence and ordered the statements be removed from the costs submissions. 4.14 The Employment Court also noted that the term without prejudice was inappropriate to this case (as there was no offer to settle as such). However, while not without prejudice, these particular statements were protected as being in confidence and off the record. 4.15 This case also makes it clear that for a conversation to be protected in this way, it does not need to be between two legal representatives. There can be without prejudice conversations between employer and employee, and in situations (as in Jackson) where only one side has legal representation. 4.16 That said, the question of whether in confidence or off the record discussions form a separate class of documents protected from disclosure must be treated with some caution in light of the later decision of the Employment Court in Bayliss Sharr & Hansen v McDonald. In that case Jackson was treated as, in fact, referring to the without prejudice privilege discussed above. 4.17 To attract protection, therefore, an off the record discussion must (in the same way as any other without prejudice communication) be made in a genuine attempt to compromise and settle a dispute. As noted above, the definition of the word dispute adopted in Bayliss Sharr & Hansen v McDonald is a significant difference between the expressed views of the parties about a matter concerning them both. This is a wider approach to the without prejudice privilege than was adopted in Jackson. Legal privilege 4.18 A further way to minimise risks is to be extremely careful of what is set out in internal communications, and to consider strategic use of legal advisers so that communications attract legal professional privilege. 4.19 In particular, it is important to avoid any communication that indicates an employee s employment will be terminated without justification or that provides evidence of predetermined view that his or her employment must end. Such communications, in an employee s hands, can be the proverbial smoking gun. 7349144 9

4.20 Some organisations are surprised to learn that an employee is entitled to request disclosure of internal communications between HR, senior management and/or board members (either during an employment process or in subsequent litigation). However, there is generally no protection for such communications, apart from limited, and narrowly interpreted, grounds to withhold access to confidential information where there is good reason (in terms of the Employment Relations Act 2000) to withhold it. The fact that a communication is marked confidential (or even privileged ) will not in itself protect it from disclosure it is the nature of the communication that matters. 4.21 Given this, one way to manage risk is to make strategic use of an organisation s lawyers and the protection of legal professional privilege. In particular, communications made with a legal adviser for the purpose of obtaining legal advice and assistance are protected from disclosure, as are communications that are reasonably necessary for the legal advice to be safely and sufficiently obtained, and certain further communications made once litigation is threatened or contemplated. 4.22 For example, a communication between board members indicating that the board wants to replace the Chief Executive Officer will likely be discoverable. However, a communication from a board member to the organisation s lawyers (potentially copying in other board members) noting that the board wants to replace the Chief Executive Officer and seeking advice as to whether it is entitled to do so and/or how to go about this should be privileged. Corporate and public sector considerations 4.23 Further risks, and therefore further considerations for an organisation to take into account, may arise from other legal obligations placed on the organisation. 4.24 Where the employer is a company or parent company based overseas, corporate law advice may be necessary. For example, in Australia some types of payments may require shareholder approval or raise issues under the ASX Corporate Governance Council Guidelines. 4.25 Turning to the public sector, Cabinet sets a specific approval procedure for government departments agreeing to any kind of settlements and payments that are not legally required. Payments for ex gratia expenses over $30,000 require Responsible Minister approval, with anything over $75,000 requiring Cabinet approval. For compensation, or damages in settlement claims, payments over $150,000 require Responsible Minister approval, while any payment over $750,000 requires Cabinet approval. Compensation and settlement payments must also be certified by either a departmental solicitor or the Crown Law Office. 5. HOW TO HAVE THE INITIAL AND SUBSEQUENT DISCUSSIONS 5.1 An employer may be willing to negotiate with an employee to reach a settlement, but opening the door to a discussion about this can be difficult. 5.2 As already noted, an employer who raises the possibility of an exit package without doing so on a without prejudice basis faces the risk of tainting any later attempts to performance manage or dismiss the employee. Where the employee declines the option of an exit package, he or she could later claim that a performance management or dismissal process is predetermined, as demonstrated by the employer having raised the exit package option. An employee could also resign in this situation and then raise a constructive dismissal claim. However, if it is the employee who first suggests this solution, any such risk is minimised. 7349144 10

5.3 Most employees will not raise the possibility of an exit package in the absence of other processes, but faced with a disciplinary meeting, redundancy consultation process, or performance management process, many will. Others may seek legal advice at such times and raise grievance or stress claims, which can then form the basis for negotiating an exit package. 5.4 While slightly more risky, it is also possible for an employer to initiate a without prejudice exit negotiation, provided there is clearly a dispute in existence and provided also that the employee agrees to speak on a without prejudice basis. Certainly, it is open to an employer to hint that the organisation is willing to listen to any proposal that an employee may have for resolving the issues between them. Setting up the discussion 5.5 Ideally two people representing the employer should be present at any meeting, with the second person being present as a note taker and witness to the discussion (and/or have the meeting recorded). That way, if a dispute ends in litigation, there is then evidence to show that the discussion was without prejudice (so is inadmissible) and it is not simply one manager s word against the employee s. 5.6 Before beginning a without prejudice discussion, and before offering an exit package, it is important to clearly establish that there is a dispute between the employee and the employer, that the parties wish to have a discussion in a genuine attempt to settle the dispute, and that the employee and/or the employee s representative has agreed to engage in a without prejudice discussion. 5.7 In the event that the employer wishes to hold a without prejudice discussion with an employee who does not have a representative present, particularly if the employee is junior or young, it is prudent for the employer to take time to explain, in detail, the purpose and meaning of a without prejudice discussion. That is, the employer should explain that the discussions cannot be discussed by either party in any subsequent on the record discussion and/or legal proceedings. 5.8 The employer should also reiterate that, notwithstanding the invitation to talk off the record, it is committed to following a fair process in respect of the on the record process. If an employee asks whether the company wants him or her to resign, the answer is no in the on the record portion of any discussion, it is important for the employer to avoid saying anything that might show pressure on the employee to resign. It must always be the employee s decision whether or not to resign, and any other answer may expose the employer to the risk of a constructive dismissal claim. 5.9 Unless the employer is certain that a without prejudice discussion has been established, it should still ensure that nothing is said that would support an argument that the employee is being forced to leave. Similarly, unless the employer is certain that a genuine dispute has been created and that the employee has agreed to have a without prejudice discussion, no exit offer should be made. 5.10 In the event that an employee does not accept there is an dispute, is not willing to participate in a without prejudice discussion, or is not taking the bait (so to speak) when such an option is hinted at, the employer should continue with the on the record process. However, it is okay to let the employee know that if he or she changes his or her mind, the employer would be happy to have a without prejudice discussion at a later time. 5.11 Another option to consider is whether to suggest that mediation might be worthwhile, as a way to resolve the problem between the parties. That is, this is one of the 7349144 11

relatively few situations in which it may be in the employer s interest to raise an employment relationship problem that it wishes to resolve. Assuming that the employee agrees to attend, anything said at mediation will be confidential and protected from disclosure in any later litigation. In addition, sometimes the presence of a neutral mediator may make an employee who is particularly suspicious of his or her employer willing to discuss a negotiated exit. During the without prejudice discussion 5.12 Once the parties are speaking on a without prejudice basis, the employer is free to make an offer to the employee. In the course of this conversation, some practical tips to bear in mind are that: (a) (b) (c) The employer should encourage the employee to consider his or her options before making a decision; If the employee asks to have some time to think about the employer s proposal and/or settlement offer then the employer should seriously consider giving the employee this time, particularly if the employee does not have a representative present; and If the employee becomes emotional or distressed, the meeting should be adjourned. Depending on the circumstances, this could either be a brief adjournment for the employee to collect him or herself, or the adjournment could be to another day. To try to continue the negotiation with a distressed employee is risky and, in any event, there is much less chance of reaching agreement when emotions are high. Following the initial discussion 5.13 If the employer and the employee cannot reach agreement on a settlement, the parties can continue without prejudice discussions at a later time (including continuing in writing, or over the telephone). Alternatively, the employer can leave the offer open for a period of time, following the expiry of which the employer should revert to the on the record process. 5.14 However, it is important to ensure that any subsequent discussions or communications are also noted to be part of the without prejudice negotiations. Once an initial without prejudice discussion has been held, it is generally sufficient for an employer to indicate that it wishes to continue the previous without prejudice discussion and have the employee confirm his or her agreement to this. Any written communication or offer need simply be marked without prejudice or without prejudice save as to costs. 5.15 If without prejudice negotiations continue for some time, an employer should think about whether to continue with the on the record process in the meantime. This does two main things. First, it avoids the risk of delay becoming an issue in any on the record process. Secondly, it maintains pressure on the employee to reach agreement (and thereby avoid the outcome of the formal process). At the very least, an employer should give consideration to doing something so that the delay can later be explained if a settlement is not reached. 5.16 If a verbal without prejudice agreement is reached, it is important to document the outcome of the negotiations as being in full and final settlement of all claims the employee may have against the employer, and to do so without delay. 7349144 12

5.17 If the agreed exit package is not documented, and the employee has not agreed that it is in full and final settlement, the employee will not be barred from later raising a personal grievance or other claim. Further, if there is a time delay between the apparent agreement and it being signed and sealed, the employee might change his/her mind and elect to proceed with a grievance instead. 5.18 If a package is agreed between the parties at a meeting, it may be worthwhile taking the time to write down the points agreed, even if they are later to be put into a formal settlement agreement. This ensures that there is a true meeting of the minds at that point, and that the parties have actually agreed on the package. Having each party sign this note can also be helpful, even if it is an informal handwritten document, as again this can prevent one party from changing their mind afterwards. However, if it is intended to later formally document the settlement (as is usually the case), this note should also record that it is only an agreement in principle and is subject to the parties executing a settlement agreement. 6. NEGOTIATING EXIT PACKAGES 6.1 In negotiating an exit package, it is important not to focus exclusively on monetary options although, of course, monetary payments may still constitute a significant component of the package. Often both parties have concerns and agendas that can be better met in other ways. Such alternatives may also help the parties to reach agreement in a situation where a difference in monetary expectation cannot be reconciled. Some bargaining options may have more value for one party than the other; for example, assets belonging to an employer may have a higher value to a departing employee than they do to the employer. 6.2 Some options which may be appropriate to the exit package being negotiated are as follows: (a) (b) (c) (d) (e) An agreed termination date, including treatment of the notice period. As part of this, the parties should consider whether the employee will remain in employment for a time (possibly with a requirement to complete a handover), or will be paid in lieu of notice or placed on garden leave. Where employment has already ended, there may sometimes be agreement about altering dates of termination (and/or the reason for termination); Re-employment of the employee in another role or different part of the employer organisation, or entering into consultancy or independent contractor agreements for a period of time following termination of employment; Provisions relating to restraint of trade (which may either enhance or reduce obligations set out in the employment agreement); The provision of an apology, particularly where there is an emotional component to the issue or the employee feels aggrieved; References or letters of recommendation, or letters of commendation (in respect of particular projects, for instance). If the employer s policies prohibit references, then certificates of service may be an option in this case, it may be agreed that the employee is able to approach someone from the organisation to provide a reference in a personal capacity; (f) Agreed statements, whether for internal and/or external distribution. In appropriate cases, this may be in the form of a media release; 7349144 13

(g) (h) (i) (j) (k) (l) (m) (n) (o) Undertakings to make no public or negative comment; Payment for job search, career counselling and/or CV preparation services, or the offer of training or retraining opportunities; Relocation expenses and airfares, particularly when dealing with expatriate employees; Transfer of assets (such as computers, mobile phones, ipads, company vehicles etc); Payments in kind, in particular allowing non-salary benefits (such as insurance) to continue for set periods; Payment of a sum of money, whether as taxable monetary remuneration (including remuneration to the termination date, accrued but unpaid holiday pay and, where applicable, redundancy compensation) and/or non-taxable compensation for humiliation, loss of dignity or injury to feelings (see further discussion of this type of compensation below); Payment of legal fees, or a contribution to legal fees; Purchase of stock or company options; and/or Appropriate confidentiality and full and final settlement provisions. Section 123(1)(c)(i) compensation for humiliation, loss of dignity, and injury to feelings 6.3 When it considers that an employee has a valid personal grievance claim, the Authority or Court can award compensation for humiliation, loss of dignity and injury to feelings under section 123(1)(c)(i) of the Employment Relations Act. 6.4 Similarly, when an exit package is negotiated, a portion of the settlement may be described as compensation for humiliation, loss of dignity and injury to feelings (or section 123(1)(c)(i) compensation). Where an employee's claim is for a number of items, including lost wages, holiday pay, and costs, as well as for section 123(1)(c)(i) compensation, it is common practice to reach a global sum for the purposes of settlement discussions, and then attribute portions to each head in the settlement agreement. For example, a settlement of $25,000 might be apportioned into one month's lost wages, $15,000 section 123(1)(c)(i) compensation, and $3,000 costs. 6.5 A section 123(1)(c)(i) compensation payment made as part of a settlement reached between an employee and an employer that is genuinely and entirely for compensation for humiliation, loss of dignity, or injury to feelings is not taxable (BR Pub 06/05). However, a payment will be taxable if parties to an agreement agree to characterise or describe payments as being for humiliation, loss of dignity, or injury to feelings when they are in reality for lost wages. The IRD has stated that such an agreement would be a sham which would be open to challenge. Such an agreement may also be open to attack by the IRD as a tax avoidance arrangement. In such a case, the appropriate apportionment will depend on the facts surrounding the employment history of the employee and the events that gave rise to the settlement payment. 6.6 In order to be a position to later prove the genuineness of a section 123(1)(c)(i) compensation payment, the parties should clearly document the steps taken to objectively evaluate what would be a reasonable amount to attribute to humiliation, 7349144 14

loss of dignity, or injury to feelings. As a starting point, having a written personal grievance claim or statement from the employee which sets this out, is recommended. At the very least, the fact that the employee raised a personal grievance should be noted in the settlement agreement if compensation of this type is to be paid. 6.7 As there is no general standard regarding the amount that it is reasonable to pay as section 123(1)(c)(i) compensation, the general practice of the Court and the Authority is helpful, but not determinative. From the judgments, it can be concluded that the quantum of these awards only exceeds $15,000 in exceptional circumstances. As a result, parties should be wary of apportioning much more than this amount as section 123(1)(c)(i) compensation in a settlement agreement, as it may well be difficult to convince the IRD that such a high level of compensation is a reasonable amount. What is the going rate? 6.8 Lawyers are often asked what the going rate is for an exit package where it is not a redundancy situation, or where performance management or disciplinary processes are not at the point of justifying dismissal. The short answer is that there is no going rate. Like any negotiation, the answer to this question lies in the price the employee is willing to accept in exchange for leaving their employment on terms both parties can control. Some employees will have a higher price than others. 6.9 Where there are no immediate grounds for dismissal or redundancy, it is usually prudent to consider a range of 6-12 months remuneration as a starting point for a senior employee. This is because such employees might take some time to find alternative employment, and will be conscious of maintaining their income during that time. 6.10 With senior managers and executives, they are also likely to have long notice periods which will lengthen this starting point. The payment of 2 years remuneration as an exit package for a Chief Executive Officer or very senior manager is not unheard of, particularly where a senior person is being exited with haste. Senior employees are generally conscious of their reputations however, so are relatively open-minded to such packages being arranged. 7. CONCLUSION 7.1 In summary, it is often possible for an employer to achieve an employee s exit, even when no good reason exists for termination. However, the ease with which this can be accomplished, and the cost of the employee s departure will vary significantly from case to case. 7.2 For an employer to best position itself to negotiate an employee s exit, particularly when the employee is a senior executive, there are several key factors to bear in mind, including whether the employment agreement contains a no fault termination provision (and the risks inherent in relying on this), the need to minimise any risks associated with a negotiated exit (particularly by conducting negotiations on a without prejudice basis), and the wisdom of documenting any settlement in an appropriate settlement agreement. 7349144 15