Negotiating an executive employment contract

Be contractually savvy when negotiating notice and redundancy terms above statutory minimums

Moving to another employer will invariably involve certain risks. You need to work hard to minimise these risks and the key is preparation followed by comprehensive contract negotiation.

This will require careful consideration of the terms upon which you enter into the employment relationship.

Some of these terms are set out in legislation. However, this is not where the story ends.

There are 10 basic minimum standards set out in the National Employment Standards of the Commonwealth Fair Work Act 2009.

These 10 standards relate to maximum hours of work, annual leave, personal leave, parental leave, flexible working arrangements, community service leave, long service leave, public holidays, notice/redundancy and the requirement that you be given a Fair Work Information Statement.

These standards address issues that are obviously important. However, they are intended to provide nothing more than a basic set of conditions for all employees, irrespective of seniority or status.

For an executive, these conditions should be viewed simply as minimums below which you cannot fall. They should not be interpreted as terms which could not be improved upon or increased. This is particularly so as it relates to notice and redundancy.

Issues relating to notice and redundancy represent the “elephant under the rug”, and Australian executives negotiating an employment contract need to be contractually savvy when it comes to addressing these matters. In regard to these issues, the only meaningful “safety net” beneath you is the one that you can negotiate for yourself.

It is common for senior executives to be employed under employment contracts that are seriously deficient. For the most part, these contracts are heavily weighted in favour of the employer and leave the executive out on a limb. The problem with many of these employment contracts is not simply what they contain, but also what they fail to mention.

Importance of certainty and transparency in the employment contract negotiations

The point of having a contract of employment is to provide certainty in what is invariably a complex business relationship. You should not be afraid to negotiate an employment contract that fully protects your interests. However, you should be careful not to talk yourself out of a career opportunity and have a realistic appreciation as to how far you can push a prospective employer regarding terms of employment. Some employers will adopt a “take it or leave it” approach, while others are more willing to entertain amendments to the employment contract.

Even if you are unable to secure all of the benefits that you seek in the negotiating process, then at least you will know where you stand on those issues with respect to which you have been unsuccessful. This is better than labouring under a misapprehension as to what your real rights are on key issues.

The discussion set out below is intended to guide you through skill identification, budgetary considerations and a realistic appraisal of your market value.

This includes what you can expect to contribute to the company’s profitability. As part of this process, you are also encouraged to consider the lifestyle repercussions of any move.

Gathering information regarding your prospective employer

You need to find out what you can about your prospective employer. This is not easy. You should, of course, start with the company website, but the company will only be interested in presenting itself to you in its best possible light. You could consider a Dunn & Bradstreet company search or ASIC search with a view to determining whether any Directors of the company have been the subject of prosecution or civil penalties. You may also be able to gain some insights about the culture of the company and office realities by visiting such websites as “Glass Ceiling”. Even the comments of junior office staff may be revealing.

The interviewing process itself will provide opportunities to gather additional information regarding the prospective employer. This might include:

• An indication of staff turnover. If there is a high staff turnover, this may well indicate a serious problem in the management style of certain key executives.
• Insight into the management style of the senior executives and their personality quirks.
  On the assumption that you can meet the person to whom you would report if successful in the application, then the question is, would you be able to work with that person? This is not an easy question to answer on the basis of a brief encounter and you will need to be guided by your intuition.It would be helpful if you could meet as many of the key executives in the organisation as you can. You may be surprised at what is revealed to you during such discussions.This occurred to one of our clients who went through a series of successful interviews with the director and senior management and then on one occasion found himself alone with a senior Operations Manager. During the course of this meeting, the Operations Manager told our client that he would be “frankly mad” to come and work for the company because of its serious management problems, most of which had been disguised up until that point.

During the interview process, it is unlikely that you will be able to gain access to business and marketing plans or obtain specific details about the financial performance of the business.

After the interviewing process has concluded, you should take diary notes of all discussions that you have had with company executives or recruitment consultants.

If you are invited back for a second or third interview to discuss the details of your proposed employment contract, you should work through the Executive Employment Contract Checklist.

On the basis of the completed checklist, you should ask for a draft employment contract to be prepared. Once you are in receipt of the draft agreement, you should seek urgent legal advice.

While you might expect the contract provided to reflect what was discussed between the parties, this is often not the case. It may turn out to be a pro forma document that bears little resemblance to what had been agreed. It needs to be legally reviewed, particularly in light of the notes you took regarding what was discussed and agreed upon.

Preliminary considerations if it is a new employment contract with your current employer

When being presented with a new employment contract with your current employer, you should be mindful that you may be in an advantageous position under your current contractual arrangements. Indeed, it may be that the real purpose of being presented with the new contract is to extinguish the very rights that you currently enjoy and replace them with alternative terms and conditions that are decidedly inferior.

You may, for example, have valuable common-law rights that would be extinguished by the creation of such a new employment contract. The offer of a new contract by your current employer may, in fact, be a disingenuous attempt to manoeuvre you out of the company. Accordingly, it is essential to take legal advice before commencing that process.

In addition, Negotiating an expatriate employment agreement involves additional complexities that are not considered by this article. If faced with an employment contract of this type, it is even more important that you take prior legal advice.

With the above comments in mind, we will now step you through what we believe to be a systematic approach to employment contract negotiation and evaluation that will maximise your interests.

Miscellaneous issues to consider prior to negotiating your employment contract

Prior to entering into contract negotiation, you should consider the following:

Identify your skills

You need to make a realistic assessment of your current skills, experience and education and the contribution you could make in the proposed role. From this analysis, you can determine how your skills relate to the position you are applying for. You also need to make sure that your résumé and any covering letter that accompanies it specifically address the attributes which the successful candidate must have.
Remember, the position for which you are aiming should represent a logical career move and result in the strengthening of your résumé.

Will the remuneration package cover the real cost of moving?

Apart from the obvious need for budgeting to determine whether the remuneration package will cover living expenses, it is also important to have a realistic estimate of the cost of relocation if you have to move intrastate, interstate or overseas. That would include considerations of having to pay stamp duty on the purchase of another home.

Prioritise the significance of each contract term

You need to think in terms of the total remuneration package, which includes salary as well as non-cash items. During the pressure of negotiation, it is very easy to overlook the non-financial issues/components that go to make up an effective employment contract and this is particularly the case with expatriate service agreements. [See Checklist for negotiating an executive employment contract]

Using the checklist will help you prioritise the significance of each of the terms in the future remuneration package. You need to evaluate how important each component of the package is to you. These terms are likely to fall into three categories. These are:

• Essential
  i.e. a component that is fundamental and without which there is no point proceeding with the negotiations;
• Preferable
  i.e. a component that is important but not essential and one which you are prepared to forego in the interests of securing the appointment;
• Unimportant
  i.e. a component that has no significance or value to you or your family. Components of a remuneration package that fall into this category might nonetheless be “traded in” in exchange for a component that is of more value to you.
  

Determine your market value

It is essential that you know what the position itself is worth and what your level of skill and experience commands. There are a number of salary survey websites that could assist you in evaluating these issues that have been established by companies such as Hays Australia, Michael Page Australia and Hudson Australia.

Will you be adding value to the company?

You also need to consider what else you may be able to bring to the company above and beyond your ability to discharge the immediate duties and responsibilities. This might include a network of customers and suppliers who will follow you to the new company without your being in breach of any post-employment restraint.

Alternatively, it might include (because of your expertise and experience) an ability to rapidly grow the company (or a division of the company) in a way that the existing management team cannot. If you are in this position, this may have a significant bearing on your ability to negotiate a higher level of remuneration.

It is important that you are able to quantify your ability to add extra value to the company. This will greatly assist your objective in leveraging yourself into a higher remuneration bracket. You need to avoid creating the impression that you are simply “pulling figures out of the air” and that your case for an increased remuneration package or an accelerated bonus structure is based on real science.

Evaluate the lifestyle repercussions

It is not enough to have considered the real cost of moving as suggested above. You also need to consider what this prospective move may mean for your life and that of your family. These considerations may include separation from close friends and relatives, disruption of schooling for children, excessive commuting times, the loss of a social network, impact on health etc. It may be that, when you add these factors into the equation, you are better off remaining where you are.

Information gathering post interview

If you can determine by LinkedIn the name of your predecessor or any other former employee, you might consider contacting that person and, on a confidential basis, asking for an off-the-record comment about the company and its management.

Remember, you are interviewing the company as much as the company is interviewing you. Do not simply take at face value the information you are given, and be ready to ask questions and probe for inconsistencies. This, of course, needs to be done without conveying the impression that you are uninterested in the position or are suspicious about what you are being told.

A number of our clients have sought our advice after uprooting themselves and their family and moving interstate/overseas. This was after having undertaken what they had imagined to be a comprehensive due diligence examination of the company. To their horror, they found that they had effectively been lied to and the picture painted by senior company executives/recruitment consultants about the state of the company had been completely false. This risk can never be completely avoided but you should always do your best to minimise it.

Will your transfer of employment involve loss of your spouse’s income?

It is not uncommon that acceptance of an employment offer will mean relocation to a distant location. This, in turn, may mean that your spouse is forced to resign his or her employment or forego a business opportunity in order to accompany you.

If you are in this position, this means that you have even more at stake in ensuring that the new position is the correct one for you.

It is also important that you bring to the attention of your prospective employer what your spouse is having to give up to accompany you. Your correspondence should make it clear that acceptance of any offer of employment by you will mean an additional loss of family income.

You should be specific as to what the loss will be and confirm this in writing so as to underscore the critical nature of the decision you are taking. However, it is critical that this is expressed conversationally and does not sound like you are foreshadowing subsequent legal claims.

It is possible that, for those executives who are in a position to do so, you may be able to negotiate a sign-on bonus to the value of – or at least that in part offsets – the financial benefits you may lose in accepting the offer.

What if you are approached by a prospective employer or recruitment consultant?

It can be very flattering to the ego to be approached by a company or recruitment consultant who seeks to “poach” you from your current employer. This approach may come at a time when you are feeling highly dissatisfied with your current work situation and may seem like a heaven-sent opportunity. After all, this prospective employer appears to acknowledge and value your experience and skills enough to make contact with you.

In these circumstances, it can be very easy to short-circuit the due diligence examination suggested above. That would be a mistake. You should certainly thank them for their approach, but nonetheless make sure that you do your best to find out what you can about the prospective employer.

A Competition and Consumer Act 2010 claim?

Some of the situations described above may give rise to a misrepresentation action under section 18/31 of the Competition and Consumer Act 2010. In these types of legal action, it is essential that you are able to prove that the misrepresentation was actually made and that you relied on that misrepresentation in making the decision to accept the offer of employment.

The inability to prove that a misrepresentation was made is the reason why many such claims are not viable.

It is for this reason that it is important when representations have been made to you that you confirm them in writing. If you can persuade the recruitment consultant/company executive to provide such confirmation then so much the better, but this may not occur.

It is often far better if you send a confirming e-mail, but it is essential that it does not sound like a legal letter or that you are attempting to “set up” the company for a subsequent legal argument. The tone of the correspondence needs to be conversational and nonthreatening, but should make it clear that what was said/sent to you is important to your decision to accept any offer. It is prudent to avoid the use of the word “representation” as this is a loaded legal term and will probably trigger alarm bells in the recipient. We suggest you take legal advice when composing this type of correspondence.

Carefully guard your privacy

You need to be careful to ensure that your current employer does not find out that you are in the marketplace for another position. This means that you should not communicate to recruitment consultants etc. using your work computer or leave any documentation on your desk that could be seen by a co-worker. Neither is it advisable to confide with any work colleague as to your intentions.

In our experience, few executives are allowed to remain on with their current employer once it becomes known that they are in the market.

In addition, if the prospective employer already knows or has dealings with your current employer then you should stress to the prospective employer/recruitment consultant that your present application for the new position has not been discussed with your current employer and that it is essential that it remains strictly confidential.

Evaluate post-employment restraint provisions

There is little point entering into negotiations with another employer if your existing contract of employment contains a post-employment restraint that purports to prohibit you from working or otherwise being associated with the prospective employer. These restraints need to be taken seriously and their operation and enforceability is dealt with elsewhere on this website (see Restraint of Trade). You need to take legal advice on this issue.

Don’t resign prematurely

It is preferable not to resign from your current position until you have an unconditional offer of employment from the new employer and a draft of the proposed employment contract that is acceptable to you.

You should not underestimate the amount of time needed to successfully negotiate an Executive Service Agreement. You do not want to be in the predicament where you have resigned from your current position only to find that the negotiations with respect to your future employment have broken down.

It is for these considerations that we believe resignation before you have resolved the new employment contract is premature. In addition, you should do all that you can to leave on the best possible terms with your present employer.

You also need to be mindful that your new employer may be insisting on a probationary period in the contract. This means that your future contract may be terminated on short notice. That also raises questions as to the unfairness of being subject to restraint provisions as a probationary employee. It is possible to step around that problem by the insertion of appropriate restraint of trade payment provisions in the employment contract. That issue is dealt with in our article on Restraint of Trade.

The negotiation process – build rapport and ask specific questions

You need to use the interviewing process to continue to build your knowledge of the inner workings of the company.

The first interview

This is an opportunity to sell yourself and build rapport with the interviewer and find out as much as you can about the company. Allow the interviewer to outline the salary and other benefits first as this may give you better leverage.

If, during the course of this interview, you are pressed for a salary figure, provide a salary range and say that you would need to discuss in greater detail the components of the package.

Your objective should be to get yourself onto the short list. In order to do this, you need to build interest in you and keep them engaged.

The second/third interview

Once it becomes apparent that you are on the short list, you should work through your Employment Contract Checklist and focus on those issues that relate to:

• the remuneration package and the components that go to make up that package;
• duties, responsibilities and Key Performance Indicators etc. The discussion on these issues should be specific. You should be wary of any proposal that would allow the employer to unilaterally change these components without your prior agreement;
• clarifying the person to whom you will report and the staff who will report to you etc.

Establish a clear position description

With respect to all three of the above issues, your objective should be to establish a clear position description.

You should not be put off with reassurances that these issues can be resolved after you have commenced employment. By then, it may well be too late.

With respect to the Employment Contract Checklist, it is essential that you reach agreement on the following issues:

• Clarification on the employing legal entity. You should be very careful if it is being suggested that you are to be employed by a foreign legal entity. If that is the case, ask if the local Australian entity could guarantee the obligations of the foreign entity.
• Which legal system is to govern the interpretation of the contract? If you are to be employed within Australia, then nominate the State/Territory in which you reside. If you are to be employed overseas, then this becomes more complex but alternative solutions do exist that can help redress the balance.
• A clear understanding of how the remuneration package is to work, its components, the currency of payment and the tax laws that are to apply.
• Be wary of any post-employment restraints, particularly those that purport to apply during any probationary period.
• If moving interstate or overseas, never agree to any arrangement under which you pay your own relocation expenses which will be reimbursed to you on successful completion of any probationary period of employment. Another variation on this problem is agreeing to the reimbursement of relocation expenses if you resign your employment within a specified period of time after commencement. Clauses that operate in this fashion need to be carefully considered and legal advice taken. Otherwise, you may be at risk of suffering significant financial losses.

This list is by no means exhaustive.

Explore non salary components if the company is closed on the question of salary

If the offered salary package is inadequate, continue to express enthusiasm for the position but ask if there is still room for movement in the package. Express your concerns about the inadequacy of the offered figure and make your point regarding your market value from your own salary survey research and your anticipated contribution to the company.

Listen carefully to the response and note the non-verbal cues.

If the response suggests that the company is closed on the question of salary, then explore further the non-salary components set out in the checklist.

It may be suggested to you at this point of the negotiations that the company place you on a bonus or commission scheme. For this to be of any value to you, it must be nondiscretionary, based on clear key performance indicators which are achievable and not subject to the performance of any other division of the business or the company as a whole. Many company bonus schemes are highly discretionary, making any payout speculative at best. If the payment of the bonus is dependent on the performance of somebody else who does not report to you, then you would have to question the value of that incentive.

Request an offer of employment together with the proposed draft contract

On the assumption that the final interview ends on a positive note then that should result in a Letter of Offer being made.

When you receive the written offer/contract, check to see that it actually reflects what was discussed and agreed. At this point, it is essential that you take legal advice.

Make sure that there has been no attempt to “switch” the employing legal entity on you. In other words, if all of your negotiations have been conducted with or on behalf of the Australian entity, then that is the entity that should be making the offer of employment.

It can happen that negotiations are conducted with an Australian legal entity that has joint-venture operations overseas and that the letter of offer is received from the overseas operating subsidiary or joint-venture vehicle.

This can leave you potentially exposed if you need to commence legal action against a foreign company that may or may not have any assets in that foreign jurisdiction. Commencing proceedings in a foreign jurisdiction will also require the engagement of a lawyer licensed to practise in that jurisdiction.

If the company insists that the offer is with the overseas operating subsidiary then that may leave you in a difficult position. You may be able to address the problem by a clause that states that the employment contract is nonetheless governed by Australian law and by a mediation clause to deal with any disputes.

You should not accept any offer of employment with a foreign entity without taking prior legal advice.

Once you have received the letter of offer and draft employment contract, that will need to be reviewed by your lawyer. Any review of these documents will probably need marked-up changes.

Your employment contract forms the basis upon which you derive your livelihood and funds your lifestyle. Seen in this context, it is one of the most important contracts that you will ever sign. Short of actually talking yourself out of the career opportunity, you should make every effort to ensure that the employment contract is the best it can be.

Final comments

To successfully make the transition from one employer to another requires a lot of preparation and work. It also requires timely legal advice. If the process is incorrectly handled, it can cause a severe career reversal and financial losses that can be measured in hundreds of thousands of dollars.

While looking for another position, you should never place in jeopardy the employment relationship that you already have.

You should certainly never resign from your current position until you have an unconditional letter of offer and a draft contract of employment that you are happy with. You should not underestimate the amount of time that is needed to properly complete the process.

Although it is not always possible, you should endeavour to leave your current employer on the best possible terms and avoid giving short notice. It is a small world, and you just never know when you may need them in future.

You should not allow yourself to be rushed into signing an inadequate employment contract. The more patient that you are prepared to be, the more likely it is that you will finish up with an agreement that protects your interests.

You can gain considerable insight about a prospective employer from the nature of the proposed employment contract provided to you.

Many employers appear to adopt a “one size fits all” approach to their employment contracts and appear to have given little thought to the relevance of many clauses in the agreement, particularly if it relates to a senior employee. Similarly, the position description will often reveal a lack of thought as to how the offered role is to fit into the organisational structure and what the key purpose of the position is and to what extent it appears to overlap with other roles.

For those executives who are contemplating a transfer interstate or overseas, the stakes are even higher. You should note that, if you are an expatriate executive, the Executive Employment Contract Checklist is not primarily designed to assist you in negotiating a contract of that nature. In that case, please refer to Negotiating an Expatriate Employment Agreement for more information.

Although it is important that you negotiate your own employment contract, when it comes to documenting the agreement finally reached, this should only be done using the resources of an experienced lawyer.

If you are seeking legal advice on a proposed executive employment contract, please don’t hesitate to contact us.