Few ways to avoid extravagant golden handshakes, say lawyers
REWARDING the sacked bosses of collapsed banks with multi-million euro pay-offs may seem abhorrent to the general public, but legal experts say there are precious few ways to avoid making contracted severance payments.
You might think that if a bank is dependent on billions of euro of state aid to keep afloat, then it could reasonably claim an inability to pay millions to a departing executive.
Not so, says Paul Glenfield, who heads up the employment team at lawyers Matheson Ormsby Prentice.
"Loss-making companies often make payouts," he says. "It's not a way out."
You might also think that if an executive presided over the demise of his bank, then that would rule out any golden handshake when he's forced to walk away.
But as Tony Layng of solicitors Kilroys points out, the legal test is much more specific. Severance packages can't be denied because executives were simply "bad" at their jobs.
Under the law, executives have to be found guilty of gross misconduct, ordinary misconduct (after warnings), substantial incompetence or "other fair and substantial reasons where dismissal is justified", in order to lose their packages.
When it comes to the most senior executives, companies typically take legal advice and try to make a "compromise agreement".
"In the case of the chief executive of a bank, legal advice may be that the financial problems were systemic, not due to any individual culpability," Mr Layng says.
The issue likely to prove most contentious in the short term is whether bankers forced out by the Financial Regulator for failing to meet new 'fitness and probity standards' can still claim severance packages.
The sensible assumption would be that if the regulator forces you out, then you don't get a payout. The legal situation is a lot more complicated though, because the regulator's relatively recent powers weren't anticipated when bankers' contracts were drawn up.
This means that while bank bosses of the future may be governed by contracts that include no payouts if they fail regulatory tests, today's executives may well not be.
"Removal of existing senior executives following "fitness and probity" reviews could well trigger payouts by banks in apprehension of wrongful or unfair dismissal claims," says Mr Layng.
"Each case would be specific to the particular facts and to the precise terms of the written contract of employment."
Mr Glenfield agrees that the situation is far from "clear cut".
"A bank would have to proceed very carefully in that situation [if someone was forced out by the regulator]," he says.
"It may be that because of a regulatory situation, a bank couldn't continue to employ someone, but that's not the same thing as finding someone has committed gross misconduct."
Mr Glenfield also points out that while the latest banking act contains measures to deal with bank bonuses, it contains nothing at all about limiting severance packages, perhaps recognising the legal difficulty of such a measure.