No Money-Back Guarantee – When Severance Agreements go Wrong

A case in the US courts involving the former CEO of McDonald’s may appear to have very little to offer in the way of lessons for regulated financial services businesses in the Channel Islands.

But the case against Steve Easterbrook currently in the Delaware court has a very clear lesson for regulated employers in Jersey and Guernsey about termination payments, internal investigations and governance.

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A case in the US courts involving the former CEO of McDonald’s may appear to have very little to offer in the way of lessons for regulated financial services businesses in the Channel Islands.

But the case against Steve Easterbrook currently in the Delaware court has a very clear lesson for regulated employers in Jersey and Guernsey about termination payments, internal investigations and governance.

Factual background

Mr Easterbrook, originally from Watford, rose through the ranks at various high street chain restaurants to take over at McDonald’s. He was very successful and reinvigorated the McDonald’s offering doubling the share value.

In November 2019 the board of McDonald’s terminated his employment following discovery of a non-physical consensual relationship (via text messages and video calls) between Mr Easterbrook and a colleague. That relationship was contrary to McDonald’s policy that prohibits any kind of intimate relationship between employees in a direct or indirect reporting line.

At the time of dismissal and for the purposes of allowing Mr Easterbrook to benefit from McDonald’s severance compensation scheme, the termination was determined to be “without cause”, (ie without fault on Mr Easterbrook’s part). The value of the severance agreement is reportedly in excess of $40 million (£35 million).

In January 2020 an anonymous tip-off to McDonald’s led to a new and more vigorous investigation into Mr Easterbrook’s behaviour. McDonald’s claims that this resulted in the discovery that he had had sexual relationships with several other members of staff during 2018 and 2019. Further, after the second sexual encounter with one of these individuals McDonald’s claims Mr Easterbrook approved a discretionary grant of restricted stock units worth hundreds of thousands of dollars to that person. McDonald’s is accusing Mr Easterbrook of lying, concealing evidence and fraud on the basis that (a) that Mr Easterbrook had deleted a lot of intimate photos and videos from his phone and, (b) when asked during the initial investigation about other sexual relationships with staff, he had lied to the investigator.

McDonald’s is now seeking to clawback the severance package saying that had they known about these other relationships then the board would not have agreed to the settlement terms and the termination would not have been ‘without cause’. Mr Easterbrook is countering by saying McDonald’s is a sufficiently large and sophisticated employer that it is inconceivable that it did not know about these other intimate relationships.

What are the employment law issues?

Setting aside the issue that this dispute is in the US and that it involves one of the most recognised brands on the planet, there are some basic issues here that are relevant to employers, boards and HR teams generally – and particularly those dealing with well-remunerated individuals in businesses that are sensitive about their reputations, and about confidentiality.

Relationship policies need to be carefully considered and drafted to ensure that they are justified and cover-off what the employer is trying to achieve. The aim of these policies is normally to prevent any actual or apparent conflicts of interest from arising. For instance to prevent someone making a large share or bonus award to someone they are in a relationship with. Failure to prevent this from happening could be very embarrassing for regulated employers.

Where an employee is exiting with agreed terms then a compromise agreement will be used to ensure the employee waives certain rights – and in that agreement there are contractual devices available to either side to protect their interests. The same type of clause will likely be found in any settlement agreement relating to an equity interest or other long-term incentive plan.

The device relevant here is a warranty - employers often seek to protect their position in relation to wrongdoing discovered after the event by requiring a warranty in the compromise or settlement agreement that states that the severance package is conditional on there being no circumstances of which the individual is aware which would entitle the employer to terminate their employment without notice. Breach of such a warranty may entitle the employer to the repayment of the severance money on the basis that the employee’s assurances were false.

What does the law say in Jersey and Guernsey?

Employment disputes like this rarely make it to the courts in the Channel Islands, and so there is not a significant amount of case law.

But in this area, there is a relevant judgment - a 2016 decision of the Royal Court in Guernsey (that is also likely to be persuasive in Jersey) - where after signing of a compromise agreement the employer refused to make the settlement payment on the basis that it alleged the employee had committed gross misconduct of which it was unaware at the time the employer signed. On the facts the employer lost that case as it was held that the complained of acts did not amount to gross misconduct. To determine this question the Royal Court asked “was the employee guilty of conduct so serious as to amount to a repudiatory breach of the contract of employment entitling the employer to summarily terminate the contract?” and on the facts decided that the conduct was not serious enough to amount to a repudiatory breach. Additionally the court found that the employer, albeit under the previous management, knew of the alleged misconduct long before the termination. The employer could not therefore withhold the payment.

What other issues are at play? Of interest is the wider context in which McDonald’s has decided to bring this claim. They have been subject to significant criticism of sexual harassment and poor practices in their business. In the US there is a class action by 5,000 female employees from across the US suing for sexual harassment. McDonald’s senior management has issued direct statements in which McDonald’s has recommitted to its values and standing up for those values as well as committing to addressing all harassment claims made by staff.

So it is interesting that rather than brush this under the carpet McDonald’s is choosing to have a very public attempt to recover the payment from its ex CEO - possibly indicating its belief that this stance will either not harm, or may even benefit, its reputation.

What are the takeaways?

The court battle over whether McDonald’s can clawback and set aside the multi-million dollar settlement to its former CEO will be as much about the wording of severance documentation, and who knew what and when they know it, as it will Mr Easterbrook’s behaviour - which takes us to the big learning point.

Prior to agreeing to any settlement payment, get the pre-signing investigation right – the importance of taking time, being thorough (even uncomfortably so) and, if necessary, engaging an independent resource such as an external lawyer to do this properly cannot be overstated. Even with the warranty it is a very expensive and uncertain exercise to try to get the settlement money back, and the legal cost for McDonald’s here will be running into millions of dollars. The 2016 Guernsey case, which concerned the recovery of only £30,000, left the unsuccessful employer paying both its own and the employee’s legal fees, being cumulatively over £186,000.

There are two further points – firstly, for publicity-conscious brands, it may be relevant to consider the market optics as well as just the legal issues. This case has certainly generated publicity, and is likely to continue to do.

Secondly, resist the temptation to look at issues in isolation, and be willing to consider whether there are ancillary issues to learn – at the very least, the details published so far have publically raised uncomfortable questions about the adequacy of the McDonald’s board’s governance and oversight.

There are a number of areas here in which specialist employment law advice can prevent expensive and reputation damaging issues further down the track – engaging employment lawyers to draft a close-relationship policy, to run investigations and to assist with exit negotiations and settlement terms can add mitigate damage as well as reducing management time and disruption.

Walkers’ employment law practice group in Guernsey and Jersey has experience in all of these areas, and we would be happy to assist and advise.

Sarah AshGroup Partner*T +44 (0) 1481 748
Victoria PrattSenior CounselT +44 (0)1481 748

Daniel ReadPartnerT +44 (0) 1534 700

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