Breaking up is hard to do (even for senior executives)
Introduction
Employment relationships are not unique in that when they break down, the consequences can be distressing for all parties. However, when they do break down, the more senior the employee, the more commercially distressing the results may be. Not only can a higher paid employee expect to receive more in the way of damages if their contract is wrongly dealt with, but the senior employee may have the skills and the customer connection to take a large part of the employer’s business with them.
A recent case decided by the Victorian Supreme Court (BearingPoint Australia Pty Ltd v Hillard) provides a useful illustration of a number of important questions concerning senior executive termination, including:
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How do I ensure that contracts of employment adequately respond to a variety of termination situations?;
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Am I entitled to put an employee on “garden leave” – that is, to pay them during a notice period but to exclude them from the workplace?; and
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What do I need to do in order to be able to enforce post-employment restraints?
Before turning to consider those questions, it is necessary to say a little about the facts of the case.
The facts
Mr Hillard was a longstanding and senior employee of BearingPoint. He became dissatisfied with the nature of the work which he was performing and began to search for new opportunities, including with an accounting firm.
In early December 2007, Mr Hillard received an offer from the accounting firm and advised BearingPoint that he intended to resign (but did not formally give notice of resignation). In mid-December, BearingPoint gave Mr Hillard notice of termination of his employment, with the termination to take effect 180 days after the date on which the notice was given (in accordance with the terms of Mr Hillard’s contract). BearingPoint advised Mr Hillard that in the intervening period, he was not required to attend the office. BearingPoint also required Mr Hillard to return to BearingPoint the laptop computer which he used in the course of his employment.
On 20 December, Mr Hillard wrote to BearingPoint asserting that BearingPoint had repudiated Mr Hillard’s contract of employment and that as a result, the obligations which Mr Hillard owed to BearingPoint were at an end.
The first issue – had BearingPoint repudiated Mr Hillard’s contract of employment?
Repudiation occurs in the employment context when a party (in this case, it was alleged, the employer) demonstrates, either by what it says or what it does, that it no longer intends to be bound by the contract. Obviously, a party cannot seek to enforce a contract if it does not itself intend to perform its own side of the bargain. Thus, Mr Hillard sought to defeat BearingPoint’s claims to restrain him by arguing that BearingPoint had repudiated the contract. He relied upon four grounds by which he alleged that repudiation had occurred:
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Putting Mr Hillard on “garden leave”;
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Stopping the payment to Mr Hillard of certain monies arising from the realisation of shares in BearingPoint’s US parent;
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Treating Mr Hillard as having resigned when, on Mr Hillard’s case, he had not done so; and
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Threatening Mr Hillard in a telephone conversation in mid-December.
The most important ground was the “garden leave” ground, and it is unnecessary to consider the other grounds here (except to note that each of them failed).
“Garden leave” is an expression which has entered Australian employment law from the English cases (perhaps it should be Australianised as “beach leave” or “barbeque leave”). When an employee is placed on “garden leave”, the employee is relieved of the obligation to work, although salary is still paid in the usual way. It is often used in a situation where an employee gives notice of intention to resign (as indeed, was the case here) because it keeps the employment contract on foot and thus means that all of the obligations which the employee owes to the employer under that contract remain on foot.
It was common ground that Mr Hillard’s contract did not contain an express term permitting BearingPoint to place him on garden leave. Did that mean that BearingPoint’s action amounted to a repudiation of the contract? The Court held that it did not.
In general terms, provided that an employer pays the employee their remuneration, there is no obligation on the part of the employer to provide the employee with work (to use the memorable phrase of another age, “Provided I pay my cook her wages regularly, she cannot complain if I choose to take any or all of my meals out.”) There are exceptions where the employee is remunerated substantially by means of commission or bonus (so that by depriving the employee of work, the employer deprives the employee of the opportunity to obtain the benefit of the contract) or where it is necessary for an employee to continue to work in order to maintain a particular profile (such as in the case of an actor or TV personality). However, the Court held that neither of these exceptions applied to the work performed by Mr Hillard.
Lesson for employers – Ensure that contracts of employment contain an express right to permit the employer to place the employee on “garden leave”. However, even if there is not such an express right, be aware that the removal of an employee from their duties will in many cases be consistent with the contract provided that the employer continues to pay the employee’s wages.
The second issue – would an injunction be granted to restrain Mr Hillard from working for another employer during the period of notice?
As noted above, Mr Hillard’s contract of employment contained an express provision as to notice on termination, such that either party was required to give 180 days notice. Although BearingPoint was entitled to make a payment in lieu of notice, it elected not to do so, but instead to keep the contract on foot. An injunction will not normally be granted to force an employee to work for an employer during the period of notice, because the practical difficulties of enforcing such an order are plainly very great. However, BearingPoint argued that an
injunction should be granted to prevent Mr Hillard working for anyone else other than BearingPoint during the period of notice.
The Court refused to grant this injunction. It held that the use of a notice period as a means of preventing Mr Hillard from competing with BearingPoint during the notice period was “not a legitimate purpose” (which will cause a degree of concern to many employers who use extended notice periods for just this purpose). The Court held that the function of a notice period is to enable the employer to make arrangements to fill the position which the departing employee is to vacate, and noted that BearingPoint had filled this position very quickly after Mr Hillard first gave notice of his intention to resign, so that it was not necessary to enforce the period of notice in order to give BearingPoint time to fill the position.
BearingPoint’s case was also not helped by the fact that Mr Hillard’s contract contained a provision requiring Mr Hillard to pay a specified sum to BearingPoint in the event that Mr Hillard gave short notice. An injunction will usually only be granted where damages are not an adequate remedy, and it is very difficult to argue that damages are not an adequate remedy if the parties have agreed in advance the precise sum that must be paid by way of damages in the event that the contract is breached.
Lesson for employers – Be wary of using extended notice periods as a substitute for properly drafted non-competition clauses. Be very, very wary of liquidated damages clauses in employment contracts – not only are they likely to be held to be penalties (and thus unenforceable) but they may also hamper an application for an injunction.
The third issue – the post employment restraints in Mr Hillard’s contract
The post employment restraints in Mr Hillard’s contract of employment extended for over five pages. At trial, BearingPoint accepted that many of the provisions contained within those five pages were too broad to be enforceable, and thus sought orders in terms of a “cut-down” version of the restraints. However, even this version was rejected by the Court.
Specifically, it was held that a twelve month period of protection against competition was longer than was reasonably necessary to protect BearingPoint’s legitimate interests. In addition, the non-solicitation provisions were poorly drafted so that they did not limit the customers whom Mr Hillard was prevented from soliciting to those clients with whom Mr Hillard had an existing customer connection. Finally it was held that the inclusion of words such as “you agree that these restraints are reasonable” did not assist BearingPoint. The question of reasonableness is a question for the Court to determine, and words to this effect do not alter that position.
Lesson for employers – Because a post-employment restraint will be invalid if it goes beyond what is necessary to protect the legitimate interests of the employer, the cardinal rule when drafting such clauses is that the employer must consider what the legitimate interests are for the given employee to whom the clause will apply. A bigger clause is not a better clause and one size does not fit all!
Conclusion
It will be observed that the case was not a complete win for either side. Mr Hillard did not succeed in arguing that his contract of employment had been repudiated, and BearingPoint did not succeed in its claims for the enforcement of the remaining provisions of Mr Hillard’s contract of employment. However, this case does provide a complete and helpful lesson concerning some of the key issues that arise in the context of the termination of the employment of senior executives, and in particular, the way in which employers can ensure that they are in the best possible position to protect their interests when it comes time to break up.
Damages in sexual harassment claims – a new high water mark
When a court or tribunal is considering damages in sexual harassment claims, it will usually be the case that the largest part of the damages award will relate to economic loss suffered by the complainant. For example, if the complainant has been forced to resign because of the harassment and has suffered a period of unemployment, or if the complainant has suffered medical or psychiatric consequences as a result of the harassment (and thus been unable to work) then damages will usually be made up of lost wages, medical expenses, and other such items.
Damages for non-economic loss (that is, the hurt, humiliation and stress caused by the harassment) are usually also awarded, but are often comparatively modest in relation to economic loss. However, in a recent decision, the Victorian Civil and Administrative Tribunal has made an award of $100,000 for non-economic loss in a sexual harassment case in respect of a single instance of conduct, which marks a new high water mark for cases of this kind.
The complainant was a registrar in training in neurosurgery who was invited to the private professional rooms of one of the neurosurgeons who was supervising her. The neurosurgeon embraced the complainant, attempted to pin her against a desk, and made an indecent proposal. The complainant escaped from the room but her working relationship with the neurosurgeon subsequently became, for obvious reasons, difficult.
The neurosurgeon denied that the incident had occurred, and, in conducting the case, sought to “completely smear” the character of the complainant. The Tribunal found that the neurosurgeon was aware that there had been performance issues raised concerning the complainant’s progress as a registrar and inferred that the neurosurgeon took advantage of the complainant’s vulnerability in his conduct. The Tribunal also noted that the neurosurgeon had called as witnesses “the most powerful men in [the complainant’s] professional life” and that the case could thus not fail to have a significant and lasting effect on her.
Lesson for employers - This case illustrates the dangers of attempting to defend anti-discrimination cases by endeavouring to destroy the person who has made the complaint – if that attempt fails, defendants should expect to be judged harshly for the additional distress that they have inflicted upon the complainant. It also illustrates that the failure to take steps to eradicate sexual harassment not only affects productivity, employee morale and retention, but can result in the award of substantial damages.
If you would like more information, please contact a member of our National Workplace Relations Team listed on the right hand side of the screen.
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