The media furore surrounding BP chief executive Tony Hayward’s handling of the Gulf of Mexico oil spill, and the debate about appropriate severance terms, are timely reminders of the issues employers often have to grapple with when dealing with difficult departures of senior executives.

The main question is whether executives should be compensated for their notice period; receive reduced compensation; or none at all.

Both private and public-sector employers have been attacked for paying “excessive compensation” in the face of apparently poor performance – but the criticism often loses sight of the reality of severance payments. Even if they are commercially negotiated to reflect issues such as the amount being discounted for early payment and so on, they are still based on contractual notice entitlements. These remain the starting point for a negotiation if the employer cannot argue that the executive’s performance is poor enough to justify summary dismissal without notice. This can be difficult to argue from a legal perspective and how this issue plays out may significantly influence the negotiation of an exit package.

Terminating for poor performance without notice could lead to a wrongful dismissal damages claim for compensation in respect of the notice period, even before considering unfair dismissal, unless the employer can establish that the executive has committed a breach of contract justifying summary dismissal. Executives may argue they performed their duties diligently but that the end result was inadequate for reasons beyond their control – maybe prevailing economic or market conditions, or because the problems that led to their removal were not under their direct control or arose from decisions which others took. On that basis, executives would argue they had fulfilled their obligations to the best of their ability and so had not committed any breach of contract and, as a consequence, severance compensation should be based on their entitlement to notice.

Employers could argue that executives’ performance has been so inadequate that they have not fulfilled their part of the bargain. There is a contractual obligation implied into every contract of employment requiring any employee to exercise reasonable care and skill in performing their duties. It may be difficult to establish that a breach of that obligation has occurred. It is inherently fact specific and poor performance or results may not of itself entail a breach. The express terms of the executive’s contract may not help much either. A contract that states the executive can be dismissed without notice for gross misconduct, gross negligence or breach of the individual’s obligations more generally, may still beg the question whether the executive’s performance is so poor as to constitute a breach of contract justifying dismissal without notice.

Arguments over an employer’s contractual ability to terminate without notice in cases of poor performance are only one aspect of severance negotiations. Other factors may complicate an employer’s approach to an issue on the cusp between poor performance and breach of contract, such as the ability of executives to mitigate their loss by obtaining alternative employment. The fact that there is scope for dispute over poor performance has led to employers trying to introduce express clauses into senior executives’ employment contracts particularly to address this issue. An employer will be in a stronger position in a difficult negotiation if the executive’s contract provides that the employer is entitled to terminate employment without notice if the executive has not performed to the standard required, or a standard that can reasonably be required, by the employer.