Negotiating a Deed of Release
The three main issues you need to consider when negotiating a deed of release
Our related article was entitled Termination of employment – strategies for senior employees leading up to your departure. In that article, we discussed a miscellany of considerations that should be weighed up before negotiating a Deed of Release. In this article, we review the key components that together make up such an agreement.
There are usually three key issues which you need to consider when negotiating a Deed of Release. This is not to say that there may be other issues that should be included in such a document. However, the focus on the discussion below is on the most obvious issues.
In a nutshell, these issues are:
1. Financial issues you need to address when negotiating a Deed of Release
Assessing the offer on the table against your contractual/statutory position
Does the offer on the table properly reflect your contractual and statutory position? There are three possibilities. The first is that the offer is strictly in accordance with your contractual and statutory entitlements. The second is that it falls below what you are entitled to receive and the third is that the offer significantly exceeds what the company is strictly obliged to pay you.
In order to assess which category the offer falls into, there needs to be an initial determination as to your contractual/statutory position.
Last written employment contract may no longer be relevant
The critical issue is whether you have a current employment contract that governs the position from which you are being terminated or pressured to resign.
It may be, for example, that the initial employment contract that you signed at the commencement of the employment relationship has been overtaken by subsequent promotions. In circumstances where the positions are significantly different, there may well be an argument that the termination provision in the initial contract no longer governs the role you had at the point of termination of your employment.
In circumstances such as these, the common law will imply a term of reasonable notice. What is “reasonable” will depend on salary, seniority and length of tenure as well as the time it is likely to take you to find an alternative comparable position. Reasonable notice claims for senior executives are commonly worth up to 12 months on a total package basis. For middle level executives, the payout may be more in the range of 4 to 6 months.
Alternatively, the original employment contract may have given the employer the right to your services in whatever capacity they may subsequently appoint you to. In these circumstances, you may continue to be bound by the original notice provision.
Novation i.e. transfer from one employing entity to another?
You may have had your employment transferred from one entity to another within the Group and therefore have been subject to a “novation”, as noted in the related article on this website “Termination of employment – strategies for senior employees leading up to your departure”. In circumstances where this has occurred, it is possible that your initial employment contract has been extinguished and there was no new written contract when you commenced your employment with the alternative employer.
Redundancy and fragmentation
If your old role is no longer required to be performed by anybody, then that would fit the classic understanding of being made redundant. Subject to the qualifying comments below, that would entitle you to a redundancy payment which is separate from the notice payment.
The payout is usually set out in a “steps and stairs” formula so that the amount to be received is linked to years of service. That is certainly the case under the Fair Work Act 2009. Under that Act, an employee with at least 10 years’ service is entitled to 12 weeks’ redundancy pay. Under a company redundancy policy, the formula may be more generous.
However, the employer may argue that this has not occurred because the duties and responsibilities that went to make up your old role have now been split up and redistributed amongst continuing staff members. Many employers would argue that, in these circumstances, your duties and responsibilities still need to be performed and therefore your role has not been made redundant.
However, the courts have held that, although the duties remain to be performed for all practical purposes, the original role no longer exists because your former duties have been divided up and assigned to other staff members.
The courts have held that this may amount to a “fragmentation” of your duties and responsibilities. This means that the changes in your role are so substantial that your previous position no longer exists.
Where your old position appears to continue – even if under the same title – but the duties and responsibilities which go to make up the role are substantially altered so that your old role has been largely stripped of its functions, then this may entitle you to a redundancy payout.
Offer of suitable alternative position
Even if it is apparent that your old position has been made redundant, the employer may still be off the hook if they have offered you a “Suitable Alternative Position”. Employer redundancy policies commonly contain such a provision and there is a similar defence in the statutory redundancy scheme under the Fair Work Act 2009.
Essentially, it means that, if the employer is able to provide you with a Suitable Alternative Position – which you have declined – then you will be deemed to have resigned and thus been disqualified for any redundancy payout.
Establishing whether an alternative position is indeed “suitable” requires the preparation of a comparator between the previous and newly offered position.
Consideration needs to be given not just to whether the duties and responsibilities are similar or dissimilar, but also to whether the salary package is unchanged or reduced and whether the reporting line remains the same. Being offered a clearly demoted role would not be considered to meet the test of suitability nor are you required to accept it in order to mitigate your loss.
Statutory entitlements set in stone
In addition to questions of notice and severance payout, there is also the question of your annual leave entitlements. These entitlements are “set in stone” and the employer has a statutory obligation to pay these out.
A long service leave payout can vary between 1.4 months – 3 months depending on jurisdiction. Eligibility for long service leave requires 7 – 10 years of continuous service (also depending on jurisdiction) and there can be a pro rata payout after as little as 5 years’ service. In some States, eligibility can be put at risk if termination occurs due to misconduct.
Under the New South Wales Long Service Leave Act 1955, resignation for personal reasons might put at risk a long service leave payout and needs to be assessed before making a decision.
Bonus plans/commission entitlements
Questions relating to an exiting executive’s entitlement to a bonus will often arise. Most bonus plans stipulate that, if a termination occurs at the time when the bonus is normally paid, then it is to be forfeited.
However, if your performance in the company has been exemplary, then the company may be persuaded to pay the bonus in recognition of your contribution and not simply decide that it should be forfeited.
Bonus plans usually have considerable built-in “wriggle room” to enable the employer to amend or withdraw the bonus plan at any time and even on a retrospective basis. For this reason, we strongly recommend maintaining an amicable relationship with your reporting manager who may be persuaded that a bonus should be paid even if the company is not strictly obliged to do so.
Employee share schemes/options
Whether you are a participant in an Employee Share Scheme or an Employee Share Option Plan – or some variation of these scheme arrangements – your rights will be controlled by share plan documentation that will determine your rights as a departing executive. That will need to be considered at the time of reviewing the Deed of Release.
Adding cream to the cake – push out the final workout date?
Once a realistic assessment has been made as to your legal position, then you are in a position to assess the value of what is being offered. One approach that you can consider is pushing out the final workout date. For those executives who have heavy workloads and complex matters for which they are responsible, offering to provide an extended handover can be one way in which you can help to inflate the payout amount.
That approach may not, of course, suit everybody. There are many executives who simply can’t wait to leave the employer and the prospect of having to push out that date is intolerable. Nevertheless, it’s an idea worth considering.
Offer ad hoc consulting input?
It is possible that the company has decided to undergo an internal restructure which involves the discontinuation of your existing role. Nevertheless, you may be able to negotiate for yourself an ongoing part-time consulting role in the company. While this is not always possible, it is certainly an option that may be open to you if you are on good working terms with your reporting manager and the company is open to working with you in a different role.
Payout succeeding one times base salary?
Division 2 Part 2D.2 of the Corporations Act 2001 (Cth) contains prohibitions on a corporation paying to an exiting executive more than one times base salary without prior shareholder approval. In deciding what can be safely paid to an executive without offending this rule, statutory entitlements including superannuation and standard redundancy payouts are excluded. However, bonus or commission payments which are considered to be over and above what would otherwise be payable might well be caught by the rule.
In the event that these provisions are breached, civil penalties may apply. In addition, any settlement money paid to the executive in contravention of these provisions must be repaid to the employer.
The definition of “termination benefit” is broadly defined. If your employer is proposing to pay you an exit payment that exceeds the one times base salary figure, then this needs to be carefully considered before receiving the payment.
Outplacement is a service that helps terminated employees transition to another role with a different employer either in the same or a different industry.
One should not underestimate the importance of interview preparation, résumé creation, directional clarity regarding your next career move and remaining focused on the recruitment search. This is particularly so for executives who have spent many years with the one employer.
The Deed of Release should contain a specific clause giving you access to outplacement consultancy services from a third-party service provider. That may either be with a firm that already has an existing relationship with the employer or it could be with an outplacement service provider of your choosing.
2. Protect your brand by comprehensively dealing with reputational issues in the deed of release
It is essential that the Deed of Release protects your “brand” and minimises the damage to your reputation. It needs to facilitate the recruitment process and to make the securing of an alternative position as stress free as possible.
In order to achieve this aim, it is necessary to have an agreed understanding between you and your former employer as to the reason for your departure from the company. You can be sure that recruitment consultants will be seeking to ask prying questions as to the reason for your departure.
The most efficient way of achieving this objective is to ensure that the exit agreement sets out the “narrative” as to why you left the company. It also needs to stipulate who is to deal with any enquiries from recruitment consultants and prospective employers. Clearly, the person chosen needs to be the most supportive. Choosing as a referee somebody who is no longer involved with the company is not the preferred option. While such a person cannot be excluded, prospective employers will want to speak to somebody senior who is able to comment about your work and your ability to work with staff members.
It is for this reason that we recommend obtaining an agreed written reference that is supportive of the exit narrative and which chronicles your achievements at the company and expresses regret as to your departure. It is also useful to obtain an agreement as to an internal announcement in which the company also regrets your departure.
It is a mistake for an executive to leave an employer without doing everything possible to deal with the reputational issues.
3. It is critical that you endeavour to cover the risk issues when negotiating a deed of release
There are a number of protective “shield” provisions that need to be considered when negotiating a Deed of Release. These include:
Access to company documents
Being able to access company documents after your departure may be critical to conducting a defence to any ASIC or Tax Office investigation/prosecution. While it is possible to mount a court application seeking discovery of documents after you cease to be employed by the company, this is clearly not ideal. It would be better if you had access to the documents provided for in the Deed of Release.
Directors & officers insurance policies
The maintenance of the Directors and Officers Insurance Policy and your coverage under it once you have left the company should not be overlooked. You should ask to obtain a copy of the policy prior to your departure. Insurance coverage of this type is, however, notoriously expensive, and if your employer has not obtained that policy at the commencement of your employment, it is unlikely that they will do so on your departure.
Indemnity and release
If your employer does not have a Directors and Officers Insurance Policy in place, then indemnity and release provisions in the Deed of Release become even more important. The indemnity provision should reimburse you for any liability incurred as an officer of the company as well as legal costs incurred in defending or resisting any legal claim because of your former capacity as an officer of the company.
While many employers will agree to the Deed of Release containing mutual release provisions, there is, of course, no guarantee that an employer will agree to the granting of these benefits on departure.
All middle management and senior management positions involve the acceptance of significant personal responsibility and therefore risk. You should therefore seek to make every effort to deal with – and shift – those risks as part of the Deed of Release.
When the time comes to negotiate a Deed of Release, you need to have a clear idea of what the document should contain. Hopefully, the discussion above will assist in that regard.
However, it is one thing to have a general understanding of what should be contained within such a document, but entirely another to know whether the agreement that you have been presented with adequately protects your interests.
It is not uncommon for Deeds of Release to be prepared by an HR Manager who has simply “cut-and-pasted” previous agreements to produce the version submitted to you. Invariably, documents that have been prepared in that fashion have many drafting problems, which can only be resolved by significant amendment.
You should never allow yourself to be “railroaded” into signing a Deed of Release before you have had an opportunity to take legal advice. The terms and conditions contained within the document need to be the most favourable that you can negotiate. Your career and future livelihood may depend upon it.
Once you have been presented with the proposed Deed of Release then the best approach is to simply politely decline to execute it until you have had an opportunity to take legal advice.
Executive Rights Employment Lawyers have extensive experience in assisting senior employees with the negotiation of Deeds of Release.
If you are seeking urgent advice on a Deed of Release, please don’t hesitate to contact us and we will promptly attend to your matter.
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The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult a lawyer for individual advice regarding your own situation.