The employment of key people in a business, particularly senior executives, is critical for any employer. An “executive” employee can be any individual who performs managerial functions, ranging from junior managers with minor managerial duties to chief executive officers of major listed private companies.
The knowledge and skill possessed by an executive make them highly valuable to their employer. In turn, in order to perform their roles, executives are generally entrusted with commercially sensitive and confidential information, have access to considerable valuable intellectual property and can receive generous remuneration packages.
That’s why it’s important for employers to be aware of the various employment issues that are unique to executives and deal with those matters in executive employment contracts.
What regulations do I need to consider when employing an executive?
There are a number of regulations that impact on the employment of executives, which increases the complexity of issues that can arise in their employment. These sources not only include the employment contract and the Fair Work Act 2009 (Cth), but also aspects of the Corporations Act 2001 (Cth) and other legislation.
Employers and Boards need to be familiar with these forms of regulation and should understand how they impact on all aspects of an executive’s employment, from negotiating contractual terms to termination of employment, and the importance of obtaining early strategic advice.
What are the key terms in an executive employment contract?
It’s important to have a well drafted executive employment contract that clearly identifies rights and obligations, both of the employer and the executive. This will create certainty for both parties and help to prevent or minimise any disputes, or breaches of provisions.
The primary purposes of an executive employment contract are to:
- Communicate information about the terms and conditions of employment
- Provide clarity to both the employer and employee about their rights and obligations
- Exclude any unwanted terms
- Facilitate executive performance and create systems to measure and encourage improved or higher performance
- Protect the legal interests of both parties, particularly in the termination of employment and its consequences
Position and duties – The executive’s role and the nature of the duties that they will
be required to perform in that role should be clearly outlined in the employment contract. This is important because it provides the basis for, and scope of, the employer’s rights to direct the executive to carry out the executive’s duties and obligations.
Hours of work – An executive’s working hours in accordance with the relevant legislation should be specified in the employment contract, even though executives will often work longer hours. If they are not, this may impact on the calculation of the executive’s entitlements including their leave entitlements.
Remuneration and other benefits – The employment contract should contain a term specifying the components of the executive’s remuneration package. It will include salary and superannuation, and may also include benefits such as bonuses, incentives or employee share options, the provision of a mobile phone or company vehicle and other forms of remuneration such as salary sacrifice.
To avoid any uncertainty or potential disputes about remuneration, the following matters should be included in the terms:
- Any key performance indicators used to determine remuneration to be paid
- The frequency of payment
- How payment is to be made
- Whether certain payments such as bonuses or incentives are discretionary or obligatory
- When and how performance reviews, which link to salary increases, are conducted
- How superannuation is calculated
Termination provisions – Termination provisions of an executive employment contract are some of the most critical provisions, particularly if the employment relationship has broken down and the parties are looking to enforce their legal rights, rather than continue the employment relationship.
Protecting your business – There are many aspects of the business which require protection from adverse consequences arising as a result of misconduct by an executive. Employers should therefore incorporate a range of terms into executive employment contracts which are designed to protect the various interests of the business during and after the executive’s employment such as conflicts of interest, secondary employment, protection of confidential information and intellectual property, and restraint of trade.
Given the complexity of executive employment contracts, it’s worthwhile consulting an experienced and highly skilled HR professional to support you through the process. If you need help developing an executive employment contract, get in touch with our team now.
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