All the King's Horses and all the King's Men could not put the contract together again...

©Micha Klootwijk 123rf.com

"The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty, "which is to be master - that's all."

The Labour Appeal Court recently quoted Lewis Carroll in determining a dispute centring on the meaning of the phrase "severance pay" in an executive employment contract. The judgment issued not only makes for delightful bedtime reading but also serves as a timely caution to authors of employment contracts. Human resource practitioners, inhouse and external employment counsel may benefit from the court's guidance.

The issue

At issue was whether a clause entitling an executive employee to severance pay should be interpreted to allow such payment whenever the employment relationship comes to an end, or only under circumstances where (in law) severance pay would typically be payable. The employment agreement created a contractual entitlement to severance pay in certain circumstances. The employee would be entitled to severance pay - calculated using an agreed formula - where:

• her employment is terminated for any reason other than dishonesty;
• the entity is sold to another party (other than the employee);
• her employment is (otherwise) terminated.

The employee resigned then sued the employer for payment of untaken annual leave and the severance pay provided in the employment contract. The employer's appeal on the leave issue succeeded with the LAC directing that matter to be determined afresh in a new trial.

In respect of the severance pay aspect, the LAC heard argument that the phrase should be given its ordinary, employment law meaning, on the one hand, or be read in context of the agreement and given a specific meaning, on the other hand. The court favoured the latter approach, stating that "[a]n analysis that begins by plumbing into the depths of the traditional usage of the phrase "severance pay" instead of beginning with the whole text, in context, in order to divine what work the phrase is required to do, is an approach from the wrong way around."

Statutory entitlement

Severance pay is a statutory entitlement that arises when an employer terminates the services of an employee due to the employer's operational requirements. Such requirements include redundancy, reduction in force and colloquial retrenchment. In World Luxury Hotel Awards and De Wet (CA17/2016, 15 December 2017) the employer argued that the contractual entitlement to severance pay falls due when the phrase would traditionally be in effect: where the employer terminates the employee's employment (due to its operational requirements).

Considering the context of the bespoke agreement, the court concluded that the wording used allows for a claim of severance pay even where the employee resigned. The clause, properly interpreted, created an entitlement for such payment even where the employer did not terminate the agreement. The court (correctly) stated that the clause "[w]here the employees (sic) employ with the firm is terminated, the employee shall be entitled to a payment of a lump sum …" does not mean that the payment is only due where the employer initiates the termination. Employment can be terminated, using the language of the clause, even where this is done at the behest of the employee.

Plain English

Having completed our usual end-of-year navel-gazing, we return to office brimming with resolutions for the new year. Perhaps one such action ought to be to take greater care in how we capture the intentions of employers and employees in employment contracts. Boilerplate clauses and template agreements serve valuable roles in streamlining global human resource operations, but should be used with trepidation. Drafters should rather use plain English - in active rather than the passive voice - to crisply capture the consensus reached, and avoid legalese wherever possible.

Thinking about the intended meaning of a clause may result in an additional 30 minutes of work, but can prevent costly litigation and reputational damage. Understand exactly what the parties want to record in the agreement, why they wish to do so and then ensure a third party can gain the same intention from reading the final agreement. Avoid liberally adapting old templates for a new purpose - capture the essence in a blank document then consider whether you can redraft using an existing agreement or whether you require a new, tailored document. Critically, consider the purpose of the agreement or clause.

Like Carroll wrote: “If you don't know where you are going any road can take you there”.