Senior Executive Termination Pitfalls in Taiwan

BY JOHN EASTWOOD, HEATHER HSIAO AND JEFFREY LIEN

It’s never pleasant when a company needs to get rid of a senior manager, but many practical issues arise when a termination has to occur. American companies operating in Taiwan and in the larger Asia-Pacific region have started placing greater emphasis on legal, ethical, and office-conduct compliance, and this increased scrutiny may turn up serious issues that must be addressed for the sake of the company’s culture and legal safety.

Sometimes companies may find that a manager’s skillsets – despite the company’s best efforts – have simply not kept up with changes in the company or industry. In these situations, companies often conclude that change is needed. When considering termination of a senior executive, however, companies need to take seriously the issues raised because the risks can be considerable.

What sort of risks? If a termination is not handled the right way, the costs of a termination can go way up. For example, a fired employee might file a civil complaint to demand reinstatement, which may include a demand for compensation for the entire period from the time of termination through to the end of litigation (or the employee’s reinstatement), with interest. For a senior-level executive, that can add up to a lot of money, given that a litigation case at the district-court level can last months and the completion of appeals may come more than a year later.

As a matter of principle, many companies will want to litigate cases where gross misconduct is involved, as they do not want to send a message to other employees that bad behavior or blatant incompetence can lead to a big payout. But where a manager’s performance has merely been consistently low but without any major mishaps, companies may be willing to be more flexible about settling the matter with a little extra payment.

Terminations of senior executives need adequate preparation to reduce risks of misappropriation of trade secrets, destruction of company data or other resources, or attempts to violate non-compete obligations.

Which law should be applied? Although a manager’s agreement may state that it is to be interpreted under the law of a specific U.S. state or another country’s laws, if the employee has been based in Taiwan, the local Taiwan courts and labor system will normally see the employee as having recourse to the laws and courts here.

The jurisdiction can affect many things, from basic labor rights to how post-termination non-compete obligations are handled. There may be specific situations in which aspects of a restricted stock-unit (RSU) award are subject to the securities laws of another jurisdiction, but employers should take care not to try to hide substantive employment and post-employment issues into the middle of lengthy RSU agreements dense with boilerplate stock-vesting and -transfer language. Do that, and you’re stuck asking the local Taiwan courts to enforce a non-compete that: 1) the employee never even knew about; 2) the employee never signed (RSU agreements are often forwarded as links); and 3) is often explicitly governed under the laws and courts in the country where the stock is on an exchange.

Do you need a reason for the firing? Although many U.S. companies assume that local managers can be considered salaried employees with a relationship that can be terminated “at will” at any time for any reason without having to establish just cause, the Taiwan legal system is quite different, even for executives from the United States. The first issue to be examined is whether the manager is considered a “mandate” or an “employee,” as that affects whether Taiwan’s Labor Standards Act (LSA) and its many employee-oriented rights will be applied to the relationship.

Mandate agreements are often used for top-level managers in a country. Essentially, such an agreement appoints the manager to his/her position and allows for removal with or without cause, which can avoid a lengthy, potentially expensive and embarrassing legal battle over the termination.

Such provisions often do not allow for severance pay, unless the agreement provides for it specifically. Typical problems include country-manager contracts that call the manager an “employee” throughout, refer to an “employment relationship,” or even state that the relationship is “subject to the terms of Taiwan’s LSA.”

Legal interpretations and court cases in Taiwan have also required that the mandated manager have independent discretion over the business. When persons appointed by multinational companies hold local titles in name only without any real managerial control, the manager may be considered to have full rights as an employee under the LSA.

Typical restrictions issued from regional or global headquarters may give the manager no control over local hiring and firing, or no control over office space or contracts with suppliers or distributors. The Taiwan courts have learned to spot situations where a manager is merely holding a title for the company’s convenience.

Simply put, if the manager is clearly on a “mandate” agreement and has significant discretion over the company operations, then the contract’s terms may allow for an easy termination. If there’s any doubt about the manager’s status, then the company should be ready to build the case for a termination as if the manager is an employee covered by the LSA.

Building the case for termination. The LSA serves as a basic set of minimum rights for employees, and those LSA rights will trump any contrary contractual provisions with the employee. Since the LSA limits the reasons for termination, companies should be prepared to cite a rational basis for the termination and to put together a good-faith set of evidence to support those reasons.

Article 11 of the LSA provides for all the softer reasons for termination involving business and economic justifications for layoffs, as well for unsatisfactory performance. If the rationale for the termination is to reduce the size of the workforce or eliminate the position, then the company should be ready to explain the business reasons why the step is necessary and why it could not find a position for the manager in another department.

Companies should be careful about their job postings before, during, and after any economic-related layoffs, as these will often be cited if a termination goes to court. Terminating a manager as an “eliminated position” will cause a company to lose all credibility in front of a judge if the company ran ads at the same time to fill that position. Keep in mind that terminated employees are often fast to spot help-wanted postings for their former jobs.

If the manager is not doing a good job, that should be documented in writing with objective criteria. Ideally the manager should first be given a chance to improve through a well-defined Performance Improvement Plan (PIP). That step provides a chance to repair the relationship and also serves as supporting evidence for the termination if the manager fails to reach the PIP goals. Oral communication about performance cannot take the place of written evaluation and feedback that could later be reviewed by a court if necessary.

LSA Article 12 covers all the termination situations where rules have been broken, deliberate misconduct has occurred, company property has been damaged, or the employee has been absent without good cause. If there is genuine serious wrongdoing justifying a termination, the company should conduct the financial audits, computer forensics, or employee interviews to confirm what happened. Upon confirmation of those facts, the termination should be handled expeditiously. Under the law, employers have 30 days to act on terminations of this sort, so it’s important not to take too long for regional or global management to consider the matter.

It’s also important for employers to try to understand whether the violation has caused any serious loss or potential future harm and to consider whether further legal action is warranted. In some cases where a company has taken no legal action against an employee who has committed fraud, embezzlement, or other serious wrongful acts, the judge examining a reinstatement claim by the employee may want to know why the company did not take such further legal action.

Good work rules are key

Since Article 12 terminations may be for serious breaches of the labor contract or work rules, it is useful have local work rules that cover a wide range of behavior with explicitly or by reference to local or global conduct rules. Often the initial basis for an investigation into misconduct turns out not to be the final reason cited in the termination notice, as it may be easier to establish those other offenses. Common examples where well-drafted corporate rules are helpful include clear prohibitions against:

  • Use of company email systems for obscene or bigoted jokes, images, videos, or other inappropriate communications. Years ago, we handled a case in which a multinational’s top-level managers had been emailing pornographic video links and images to one another. Once the company became aware of this, they started monitoring the email and internet activity of the involved managers to build up a damning file of evidence.
  • Interference in an ongoing investigation. In the abovementioned email situation, one of the senior employees disciplined was local in-house counsel, who wasn’t sending or receiving the inappropriate emails. Instead, he decided to warn the local managers that their emails were being monitored by the headquarters. In-house counsel did that by writing an email to those managers. (Let that sink in for a moment.)
  • False or misleading expense reports. This routinely is a problem among senior managers. Examples that show up over and over include submission of pricey dinners, travel or inappropriate entertainment as “customer” or “supplier” related expenses. Frequently, managers will try to get subordinates on board by including them in the inappropriate expenditures, thus sharing the guilt.
  • Failure to follow proper company approvals for authorization of extraordinary bonuses. Managers will sometimes be found awarding themselves “overtime” or “special bonuses,” often including themselves into a group of persons receiving such “incentives” in an effort to muddy the waters and hide their personal benefit. Normally companies have procedures requiring that any such payments to a manager be approved by the manager’s own supervisor.
  • Unapproved absences. Managers sometimes abuse their discretion to come and go from the workplace by using absences for non-work purposes. These can be tricky cases to prove. For example, after one multinational found that its country manager was leaving every afternoon to take his secretary to a nearby motel, the employer felt it would be going too far to send investigators to follow them each day. Instead they found other grounds for the termination. However, in a different company, a senior manager was caught pretending to be visiting suppliers in Southern Taiwan while actually on an unauthorized holiday trip overseas. As the overseas trip violated the company’s leave-taking rules and involved fundamental dishonesty to management, the conduct was used as part of the termination proceedings.
  • Sexual harassment and business entertainment at sexual-oriented venues. Besides stipulations under Taiwan law, where a lot of progress has been made in recent years, many global companies outright prohibit unwelcome verbal, physical, or other conduct that might create an offensive or hostile work environment. Many companies also include clear prohibitions against business entertainment at inappropriate venues with a clear sexual content. While there are many legitimate karaoke “KTV” chain venues where the only harm is to the attendees’ eardrums, there are also “hostess KTV” locations and similar venues offering services that rightly horrify HR professionals. Companies have repeatedly caught employees trying to characterize such venues as “the customer’s idea” and then found that no customers were present.

When a case comes before them, judges will often want to know more about a company’s rules and disciplinary procedures. While many multinational senior managers are fluent in English, it is still a good idea for companies to demonstrate that they have made their rules and procedures available as conveniently as possible, that all personnel acknowledge receipt of the rules, and that periodic training is done. Companies may consider translating their most important rules or conducting local-language training programs about their important rules.

Termination procedures: What to do. Once the basis for the termination has been thoroughly documented and determined, you’ll want to consider how and when to carry it out. Some companies will opt to send over senior APAC regional managers or HR, while others will ask the employee to go to the regional or global headquarters. Again, you’ll need to be careful that for-cause terminations falling under LSA Article 12 are completed in a timely manner.

Keep the termination procedures short and simple but be prepared to explain the reasons for the termination and the company’s legal basis for the termination. Explanations for terminations should be fair, to the point, and professional – when a company tries to add spurious or undocumented claims of “misconduct” or “incompetence,” it increases the likelihood that the manager will react emotionally and may consider challenging the termination to clear their name. As employers, we can all take a lesson from Motley Crue’s song “Don’t Go Away Mad (Just Go Away).” We want the termination meeting to be an end and not a beginning.

If there are any payments in lieu of notice, severance, or other payments to be made to the terminated manager, those should be presented at the same time with a document to sign demonstrating acceptance of that payment as final. A termination agreement providing for mutual non-disparagement, waiver of any claims, and confidentiality of the terms of settlement can also be useful.

On the day of termination, it’s important not to let a terminated senior manager have access to the email or other communication mechanisms of the company. The managers already should not be using their own computers and mobile phones for company business, and company-owned devices should be collected when notice is given.

It’s not uncommon for employees about to be fired to try to circumvent the process by avoiding meetings and phone calls or even taking lengthy sick or other personal leave and to deny receiving the termination notice. Companies should be prepared to document the efforts to reach them, including courier, fax, email, attested letter, voicemail, and text messages. In some extreme cases, the employer will go to the employee’s home to ensure personal delivery. All such efforts should be documented.

If an investigation process has resulted in obtaining personal information of the manager that has no connection to his work with the company, then the company should make arrangements to either return or delete such data. Company or personal mobile phones or computers will sometimes end up holding photos, financial data, or other information that may be protected under Taiwan’s strong laws governing personal data protection. Companies should take great care that no such data is copied, transmitted, or reviewed without clear written permission from the employee to do so.

– John Eastwood is a partner, Heather Hsiao a senior associate, and Jeffrey Lien an associate at the law firm Eiger, based in Taipei.

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