A bill called ‘Improving Accountability on Termination Payments’ had two readings in Parliament before 30th June.
The following are some of the important changes.
1. Matters that need shareholder approval
Now: The Corporations Act currently allows for termination benefits up to seven times a director’s total annual remuneration package before shareholder approval is required.
New: The payment allowed without shareholder approval "will be reduced down to one times their base pay – not annual remuneration, base pay’.
The definition of ‘base pay’ is still to be ultimately defined.
2. Who’s covered
Now: only termination benefits paid to company directors are subject to shareholder approval.
New: The range of personnel whose termination benefits can be subject to shareholder approval is expanded from directors to include senior executives and key management personnel.
3. Termination Benefits
Now: The definition contains a number of areas that have created perceived loopholes in the current law.
New: The following will be considered termination benefits:
- any kind of pension;
- any payment made in lieu of notice of termination;
- any amount paid as a voluntary out of court settlement;
- superannuation contributions in excess of the minimum statutory requirement; and
- automatic vesting or accelerated vesting of options on retirement from the office.
4. Penalties
New: the director or executive must repay any unauthorised termination benefits immediately to the company.
Breaches will be strictly dealt with and may include criminal sanctions resulting in prison time or severe fines.
The new rules will not apply to existing contracts unless a ‘variation of a condition’ is made. Alterations relating to remuneration are considered a variation of a condition.
The new arrangements will apply to new contracts or those that renewed or extended.
The Government has also foreshadowed the fact that the regulations can be used to expand the payment methods/benefits that require shareholder approval.
In a separate initiative, The Government has appointed Professor Allan Fels AO to assist the Productivity Commission to examine executive remuneration in general.
The Productivity Commission is required to provide its report by 18 December 2009 and may well impact on further decisions about Executive payouts.
What to do?
The general rule in employment law in Australia is that, if your contract doesn’t deal with the issue of notice, and you end up in court over your termination, the court will imply a term of reasonable notice. What is "reasonable" will depend on a variety of factors, but common-law reasonable notice can be quite generous and provide up to 12 months’ notice depending on your seniority.
There are other issues about contracts such as having a clear agreement on your title, duties and responsibilities; post-employment restraints preventing you from working for another employer in a similar industry; and any clause that says that the company’s Policies and Procedures Manual is incorporated into the terms and conditions of your employment. This may be just another way of saying that the company can vary the employment contract by simply amending its manual.
The key here is good drafting of contracts in the first place. Always obtain legal advice when the employment contract is being created, varied or terminated.
