The BBC has recently hit the headlines itself for making over-generous termination payments to departing senior employees.
The Parliamentary Public Accounts Committee criticised the BBC for paying £25 million to 150 outgoing executives, reportedly £2 million more than they were entitled to under their employment contracts. This begs the question why any employer would be so generous to outgoing staff?
When questioned about the reasons for the payments being so high, the BBC's HR Director told the committee that the corporation was trying to, "get people out of the door" with minimal disruption and no risk of legal action and that "occasionally" it was necessary to pay more than was contractually required.
Commentators have suggested that in fact, this approach was more than an occasional necessity for the BBC, it became the norm. How can other employers avoid falling into the same pattern?
Usually, the starting point for a company considering the exit of a senior employee is to examine the terms of the employee's service agreement and consider what the employment contract requires in terms of the notice provisions applicable on termination. Where the employer desires a swift exit for the individual, this will often involve a consideration of whether the contract permits a payment in lieu of notice to be made. Only where an employee is being dismissed for reasons permitting summary dismissal (most likely gross misconduct) can an employer dismiss an employee without any notice or payment in lieu of notice.
At the recruitment stage when terms and conditions are being negotiated an employer will be looking to reduce its future potential exposure by keeping the employee's notice entitlement as short as possible. It was reported that some BBC executives had notice periods of two years. This is exceptional, in the private sector it is highly unusual to find notice periods of more than 12 months and these are often just 3 months, even for senior employees.
There are some other drafting approaches that employers can use to minimise their contractual exposure towards departing senior employees. For example, some contracts will permit an employer to pay basic salary only in lieu of notice, rather than salary and other benefits on top. Others provide that a shorter notice period will apply in certain circumstances, typically during a probation period or where dismissal is for a specific reason, such as a long term absence. An employer can also mitigate the potential liability by keeping certain entitlements non-contractual and subject to its discretion; typically redundancy payments and bonus awards.
When might ex-gratia payments be acceptable?
Beyond assessing the contractual liabilities that an exiting employee is entitled to, businesses will sometimes need to consider making an additional payment, to incentivise a departing employee to sign up to a settlement agreement.
However, an employer should carefully weigh up the real risks from the individual and should be slow to agree a generous payment that it is not be obliged to make and which may set an unhelpful precedent for future cases.
The amount of any additional sum which may be made - often described as an "ex-gratia" payment - always comes down to the respective bargaining position of the parties. This can be influenced by a number of factors such as the:
- strength of any legal claim that the departing employee may have or that is threatened. For example, may they have suffered discriminatory treatment?
- The strength of any evidence of wrong doing or under performance which the company may have in respect of the individual.
- The need for the employer to effect a swift exit of the individual in order to consolidate customer connections or resolve workplace issues.
- The need for the employer to ensure the individual fully co-operates in a smooth hand-over of their duties before exit.
- Whether or not the employee has secured alternative employment (or the period within which they are likely to be able to do so).
Contrast with the Companies Act 2006
Unlike the BBC, companies are subject to more formal requirements which are contained in the Companies Act 2006 (the "Act") making it clear that in certain circumstances information needs to be given to shareholders, and their approval obtained, before a company can legitimately make a payment to a departing or former director.
In particular, section 217 of the Act states that it is unlawful for a company to make "a payment for loss of office to a director of the company unless the payment has been approved by a resolution of the members of the company". Where approval is not obtained, the director receiving the payment holds it on trust and the directors responsible for making the payment will be liable to the company for the amount paid.
This requirement can be of particular concern where a company is listed. One key reason for this is due to the current climate of shareholder hostility to perceived excessive executive pay; any significant proposals are likely to be closely scrutinised and there is recent precedent for shareholders trying to block what they consider to be excessive payments to executives (e.g. Aviva).
There can also be the practical problem of trying to obtain approval, especially where a company needs to send circulars to all shareholders. Where a company is privately owned it will often be possible to proceed on short notice by "paper resolution".
However, importantly for companies negotiating severance packages, shareholder approval is not needed for payments made in good faith by way of settlement or compromise of any claim arising in connection with the termination of a person's office or employment.
This is a useful and much used exception for companies where the requirement for shareholder approval must otherwise be obtained. The requirement that payments should be made "in good faith" means that factors such as the obligation for an employee to mitigate their loss, or the need for accelerated receipt will need to be taken into account. Moreover, an employer will need to keep in mind whether any claim or threatened claim is well founded and will need to consider the potential extent of any compensation or damages, if the exception is to apply.
Although the exceptions to the shareholder approval provisions appear to give companies some significant latitude, companies will equally need to ensure that any severance payments are not excessive or gratuitous so that they can stay within the exception that the payment is being made "in good faith".
The BBC's approach to making decisions about its termination payments can be contrasted to that of listed companies. Given its strong bargaining position it is surprising that the BBC adopted such an uncommercial position when it came to the exit of its executives: without being subject to the statutory regulation provided by the Act it seemingly had little incentive to be more aggressive in its approach.
Had the BBC had more faith in the robustness of its employment terms, it might have felt less worried about executives refusing to "go quietly". Furthermore, had it been confident it had followed its internal process properly the potential strength of any executive's legal claims would have been weak. The lesson for other employers is to ensure they get any termination procedure right and that their employment terms are drafted, as far as they can be, in the employer's favour to provide clearly for what may happen on termination.