Making a senior executive redundant comes with a different set of considerations to a standard redundancy.
Executive contracts are often individually negotiated and remuneration may include longer notice periods, bonuses, incentive schemes, equity arrangements and other entitlements that need to be carefully reviewed. The departure of a senior leader can also raise broader issues for the business, including confidential information, client relationships, internal responsibilities and how the exit is communicated.
From a legal perspective, the risks can extend beyond the minimum entitlements that apply to standard redundancy. What is set out in the executive’s contract, how their remuneration is structured and what legal protections remain available can all affect how the redundancy needs to be managed.
When is an executive role genuinely redundant?
Before looking at entitlements or the terms of departure, the business first needs to be clear on why the executive’s role is no longer required.
Under the Fair Work Act 2009 (Cth), a redundancy occurs where the employee’s job no longer needs to be performed by anyone because of changes in the operational requirements of the business. This may arise through a restructure, merger, change in business direction or redistribution of responsibilities.
For executive roles, the distinction between removing a position and replacing a person is particularly important. Some of the executive’s previous responsibilities may continue across other roles without affecting the redundancy. However, if the business still requires substantially the same job to be performed by someone else, that can create legal risk.
Employers should also check whether a modern award or enterprise agreement requires consultation before a redundancy is finalised. Where consultation is required, failing to follow that process can mean the redundancy does not meet the Fair Work Act requirements for a genuine redundancy.
Redeployment is another important consideration. If there is another suitable position available within the business or an associated entity, the employer should consider whether it would be reasonable to offer that role to the executive. This can include positions with different responsibilities or lower remuneration and employers should not assume that a senior employee would automatically reject them.
These steps help demonstrate that the redundancy is the result of a genuine change within the business and that the position is no longer required in its existing form.
Contractual entitlements rarely stop at the statutory minimum
Senior executive contracts often provide entitlements beyond the minimum requirements under the National Employment Standards. Before beginning a redundancy process, employers should review the contract closely to understand what the executive is entitled to if their employment ends.
Bonuses can become a point of contention where an executive is made redundant partway through a performance or incentive period. Whether some or all of a bonus remains payable will depend on the wording of the employment contract and the rules of the relevant scheme. Importantly, describing a bonus as “discretionary” does not necessarily give an employer an unrestricted right to withhold it.
That issue arose in Russo v Westpac Banking Corporation [2015] FCCA 1086, where a senior employee was made redundant partway through a bonus year and was denied a pro-rata bonus. The Court found that Westpac had exercised its discretion arbitrarily, including by relying on a performance assessment that did not follow its own stated criteria and ordered the bonus to be paid. The case highlights why employers need to consider both the wording of the bonus arrangement and the process used to reach a decision about payment.
Long-term incentives can create another layer of complexity. Shares, options and performance rights may be subject to separate plan rules that determine what happens to benefits the executive has not yet fully received when their employment ends. Those rules should be reviewed alongside the employment contract so the business understands the full financial position before the redundancy process begins.
Protecting the business during and after the exit
Once the redundancy decision has been made, attention also needs to turn to how the executive’s departure will be managed.
Where the executive has access to confidential information, key client relationships or commercially sensitive material, any post-employment restraints should be reviewed prior. This may include non-compete or non-solicitation clauses, depending on what is set out in the employment contract and whether those restraints are likely to be enforceable.
Garden leave is another option businesses may consider for senior executives. It allows the executive to remain employed and continue receiving their usual pay during the notice period, while stepping away from their normal duties.
This can be useful where the executive has close relationships with clients, access to company information or knowledge of upcoming business decisions. Keeping them away from day-to-day operations during the notice period gives the business time to transfer responsibilities, manage client relationships and limit access to sensitive information before the executive formally leaves.
In some cases, the parties may also agree to a Deed of Release. This can set out the terms of the executive’s departure, including any additional payment, the release of certain claims and arrangements around confidentiality or communications. Where there are outstanding financial or contractual issues, a deed can provide greater certainty for both parties once the employment relationship comes to an end.
Before making the decision
Executive redundancy should be approached with a clear legal and commercial strategy from the outset.
The strongest position for a business is to understand its obligations, identify any areas of exposure and settle the terms of departure before the process is underway. That preparation can make the difference between a controlled exit and a dispute that becomes significantly harder to manage.
At Aubrey Brown Lawyers, our Commercial and Employment Law team can assist businesses with executive redundancies, including reviewing employment arrangements, advising on entitlements and negotiating the terms of departure.
Contact our team on 02 4350 3333 or visit aubreybrown.com.au.
