Common legal traps that catch directors when dealing with employees

While not every eventuality can be foreseen, the most common legal mistakes made by management tend to fall into eight broad areas, and can be avoided.

(1) Insufficient safeguards when recruiting employees

In the euphoria of finding the right candidate it is easy to overlook the question: “What happens if it goes wrong?” Directors need to ensure their business is protected from departing employees and can take action if necessary.

Employment contracts need to contain appropriate restrictive covenants, notice periods and garden leave provisions in order to protect confidential information, customer connections, goodwill and the workforce. Bonus policies should also make clear when payments will and will not be made to departing employees to minimise the scope for arguments after a termination notice has been served.

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(2) Not properly protecting company property

Not only it is important to ensure robust restrictive covenants are signed when an employee commences employment, but it is vital to regularly review and update them, especially when recruiting new employees or promoting existing ones. Where possible, directors should build in an automatic review of restrictive covenants and, if necessary, seek an employee’s agreement to new covenants based on their new duties and responsibilities.

(3) Treating bonuses as entirely discretionary

One of the most common mistakes is to treat bonuses as entirely discretionary. Even if it is stated in the contract, employees, and indeed the courts, often take a different view. Case law has established that directors do not have unfettered discretion when determining whether a bonus should be paid, but must exercise their discretion in good faith and on reasonable grounds. 

Management may also find it difficult to justify not paying bonuses if they have by custom or practice paid similar bonuses in previous years. In order to avoid bonus payments becoming part of custom and practice, directors need to go through the decision making process each and every time, be judicious in how they exercise their discretion and document and communicate clearly how their decision has been arrived at.     

(4) Avoiding dealing with performance and conduct issues

Managers and directors often avoid dealing with performance and behaviour issues to evade the awkward conversation and many believe the disciplinary process is cumbersome and ineffective. This often results in problems being ignored, which then drag out undermining business efficiency Developing good management habits, following disciplinary procedures and acting consistency all help deal with these issues effectively and fairly. 

It is also imperative to keep records of discussions and meetings with employees, who should be asked to confirm that they are accurate, so they can be referred to at a later date, if necessary.

Read more about avoiding overly generous sick pay and failure to protect data.

Image: Shutterstock

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