• Employers should review and update their employment contracts to entitle them to absorb any superannuation increases.
• Recent changes in legislation that provide for more favourable tax treatment on ESS interests has made ESS arrangements more attractive to employers.
• Section 200B of the Corporations Act limit termination benefits payable to anyone who holds ‘managerial or executive office’.
• Failure to obtain shareholder approval for a benefit that exceeds the allowable amount without shareholder approval, and that is not an exempt benefit constitutes a contravention of the Corporations Act.

The structuring of remuneration and benefits in employment contracts can present both opportunities and risks for organisations. This article explores the limitations on the way in which remuneration and benefits can be structured, and how best to maximise any opportunities available in the way in which employment contracts are framed.

CONTRACT TERMS AND SUPERANNUATION INCREASES

Increases to the percentage of superannuation payable to employees raises questions of whether such increases add to the overall salary burden on an employer, or are absorbed within the total salary package of an employee.

The extent of superannuation contribution increases has been a matter of policy debate for some time. The required contribution has increased from 9.25% to 9.5%, and is currently set to increase to 12% by 2025, through staggered increases beginning in 2021, although this may change again if different policy objectives are adopted. The impact of such increases depends on the way in which the relationship between salary and superannuation contributions is defined in the relevant industrial instrument and/or the contract of employment. For employees whose employment is governed principally by their contractual terms, the wording of the salary and superannuation clause will determine whether the increase can be absorbed.

Overall, annualised salaries or total remuneration packages have the advantage of giving an employer certainty that increases in superannuation contributions will be contained within that salary package. Salary reviews present an opportunity for updating contractual terms to reflect this, where agreement can be reached on this point.

EMPLOYEE SHARE SCHEMES

Employee share schemes (“ESS”) are a mechanism by which a company provides shares or rights to acquire shares (options) to its employees. Giving employees a stake in the business can be an effective recruitment strategy to attract talented employees. But it is also an effective retention strategy, as employees often need to remain with the company over the longer term in order to realise the gains from their shares or options. This is particularly relevant to the start up sector, where it may take some years for the profitability of the venture to emerge, and retaining its best performing employees through more lean times is critical for the success of the company.

In June 2015, Federal legislation reversed a number of unpopular provisions in respect of taxation on ESS interests. Key changes include deferral of tax and concessions for start-up companies. This more favourable tax treatment has made ESS arrangements more attractive to employers especially start-ups, as a means of recruiting and retaining key team members, rewarding hard working employees, and providing these employees with a stake in the company’s success.

The main changes that employers should be aware of include:

• the taxing point on the exercise of ESS rights has changed from when the right vests to when the right is actually exercised by the employee; and
• tax deferral if there is a disposal restriction. Start up companies should be aware that there are additional tax concessions for employees with ESS interests in their start up companies, including:
• for shares acquired at a discount, the discount is exempt from income tax;
• the shares will be subject to capital gains tax only on disposal

These changes apply to ESS interests issued on or after on 1 July 2015. Employers should consider whether ESS can play an effective role in their recruitment and retention strategy and if their shareholder agreements are up-to-date. It is essential to obtain specialist taxation advice in relation to any ESS.

TERMINATION BENEFITS FOR SENIOR MANAGERS AND EXECUTIVE EMPLOYEES

A core limitation on the way in which remuneration and benefits can be structured is the manner in which the provisions of the Corporations Act 2001 (Cth) (“Corporations Act”) seek to ensure that departing executives are not excessively rewarded in the form of a “golden handshake”. Section 200B of the Corporations Act imposes limitations on the termination benefits payable when senior employees leave a managerial or executive position. A termination benefit can only be paid beyond a specified cap if shareholder approval is received, or the benefit is otherwise exempt. The specified cap is 12 months base salary. Base salary is calculated as the average of the last 3 years’ average annual base salary.

A good understanding of the circumstances in which shareholder approval is required and what exemptions are available under the Corporations Act facilitates compliance with the requirements of the Corporations Act and helps employers avoid any potential prosecution arising out of the giving of non-approved termination benefits. In a recent example, the Court traced such a benefit and required repayment in full by the former senior employee, which highlights the need for close attention to these requirements in negotiating and managing termination arrangements.

COVERAGE 

The first point for consideration is the type of positions to which the requirements of the Corporations Act apply. The scope of who holds a ‘managerial or executive office’ is broader than merely executive or non-executive directors. It includes:

• a retiree who has held a managerial or executive office at the time of the termination of employment or engagement or within the previous three years;
• in the case of a listed company, a person who holds a position that has been listed in the directors’ report for the prior financial year; or
• in the case of an unlisted company, a director or any other position in connection with the company’s corporate affairs such as key senior management personnel.

TYPES OF BENEFITS 

The types of benefits captured under the legislation have been interpreted broadly to give maximum effect to the intent of the legislation. Any payment, rights or interests in property and other legal and equitable rights in connection with the termination are considered benefits as well as pensions (other than superannuation), restraint or non-compete payments and payments relating to out of court settlements. For example, payments structured as notice, severance or a non-deferred bonus triggered on termination would be covered.

CONSEQUENCES 

Failure to obtain shareholder approval for a benefit that exceeds the cap, and is not an exempt benefit, could result in a prosecution and the imposition of a penalty for a breach of the Corporations Act.

In the case of employees, recent litigation shows that Courts are prepared to order that an employee repay the whole amount to the employer, even the amount of the benefit that falls below the cap. It is in the interests of both the employer and employees to ensure that any termination benefit is under the cap, or complies with the relevant provisions.

In the aforementioned recent example an executive employee, Mr R, and his service company, Butmall Pty Ltd (“Butmall”), were ordered to pay back nearly $680,000 in termination benefits after Mr R resigned from his position as Managing Director of the Queensland Mining Corporation (“QMCM”). Various payments outlined in the settlement deed between Mr R, Butmall and QMC were found not to be exempt benefits, including purported superannuation contributions that had not accrued and payments to Mr R’s accountant purporting to be remissions to the ATO which were said to be held on trust by the accountant. The Federal Court commented that payments for annual leave, long service leave, bonuses, allowances and share options could not be included in the calculation of Mr R’s base salary for the purposes of determining the cap.

In the event of a breach of section 200B of the Corporations Act, the amount of the benefit is said to be held on trust by the employee to be paid back to the employer by virtue of section 200J. This includes any payments that are held on trust, such as the payments held on trust by the accountant for the ATO in this case. This highlights that despite payments being held on trust for an unrelated company, payments made to an executive employee can still be traced and subject to a demand for repayment.

ACTION REQUIRED 

Employers should consider carefully whether the terms in their employment contracts or service agreements relating to remuneration or benefits payable to senior employees of the corporation in connection with termination may fall foul of section 200B of the Corporations Act, and seek appropriate legal advice where necessary. This will minimise the risk of exposure to penalties resulting from a breach of the Corporations Act.

CONCLUSION 

Employers should be aware of not only the limitations on the ways in which remuneration and benefits can be structured, but also the opportunities that can arise from careful drafting of the terms of their employment contracts. Incorporation of superannuation increases into an employee’s annualised salary presents an opportunity for employers to ensure that any increase in superannuation is captured within the existing salary arrangements. Employers may also wish to consider the termination benefits payable to an executive in connection with termination to ensure that they do not fall foul of section 200B of the Corporations Act and risk a penalty being imposed. Finally, recent tax changes giving more favourable tax treatment to employee share schemes make then a useful mechanism for attracting and retaining talented employees.