Following his dismissal by Manchester United Football Club it has been reported that Louis Van Gaal is likely to receive compensation between £4.5 and £5 million. Any senior, well paid executive is likely to have a significant claim for compensation if they are dismissed in breach of contract. With stakes high, employers need to make sure they are properly prepared for a parting of the ways by drafting adequate protections in their employment contracts.
While football is notorious for its large remuneration packages, it is also an arena where relationships seem to break down more regularly than in other sectors. However, most companies put pressure on their senior employees to deliver results and a failure to do so often leads to a speedy exit.
Pressure from investors and the markets may mean that giving underperforming managers time to turn things around is often not practical; a large severance payment can therefore be a commercial risk worth taking.
What legal rights do senior executives have?
Just like football managers, senior executives who are employed under a contract of employment are employees like any other. The normal legal principles apply to them notwithstanding their rarefied position and large remuneration packages. They have both statutory and contractual rights and obligations.
Employees who have two years’ continuous employment have the right to bring a claim for unfair dismissal in the Employment Tribunal. However, this type of claim is fairly unattractive to higher earners as the amount of compensatory award which may be made is limited to the lower of one year’s salary or the current cap of £78,962.
Football managers are usually appointed for a fixed period. If an employer terminates a fixed contract early, or without notice when notice is required, the employee will have a claim for breach of contract in respect of lost salary and benefits.
If a claim for breach of contract is brought in the civil courts there is no upper limit on compensation. However, an individual must take reasonable steps to mitigate their loss by trying to find alternative employment.
Tips for employers
- Before employing a senior executive consider what might happen in the future: how could the relationship break down, what is the worst case scenario?
- Based on this, prepare for possible future termination as thoroughly as possible by making appropriate provisions in the employment contract.
- Contracts should provide clearly for what standards of performance are expected and the process to be followed if these are not met.
- Use objective criteria which are easily assessed as being met or not rather than subjective measures which may be controversial.
- Contracts should provide examples of relevant gross misconduct which would enable the employer to terminate without notice or payment in lieu of notice.
- If using a fixed-term contract consider if the ability to break the contract earlier by serving notice is needed.
- Keep notice periods as short as possible and make sure any payment in lieu clause is restricted to basic salary, i.e. exclude the value of other benefits.
- Bonus schemes should make clear the circumstances in which a bonus will not be paid, e.g. if the executive is working their notice.
- Consider whether it would be appropriate to agree a payment in the event of termination up front (a “liquidated damages” clause).
- Include an express clause enabling the employer to put the employee on garden leave so that they can be isolated from staff and clients while an exit is negotiated.
- Consider restrictions on talking to the press, making statements, etc. without the employer’s agreement.
- Any post termination restrictions should be reasonable and seek to protect the employer from a realistic commercial threat by the executive. This way they stand the best chance of being enforceable. If the employer is worried that the executive will leave to work for a particular competitor, specify that competitor in the restrictive covenant.
- Incorporate staggered payments into a settlement agreement which would stop being payable if the executive gets another job within a certain period of time.
- If negotiating a termination payment, ensure that reductions in the settlement agreement are made for mitigation and accelerated receipt.