Essential Webinar Series for Employers: Handling senior exits

With businesses now building back up following the pandemic, focus has moved onto ensuring organisations are as efficient, effective and resilient as possible. Key to this is ensuring the correct leadership team is in place, that managers are fully equipped to handle issues and that employees feel valued and supported.

As a result, and in order to continue supporting our clients during this difficult time, we are running three short webinars to offer practical advice for those now building back better.

This was our second session in this series and focused on the employment issues arising out of exiting senior managers from the business. The key takeaway points are set out below:

Initial stages

• It is important to establish the reason for the proposed termination as this will affect the way in which the dismissal is handled, the potential claims that the senior manager may have and therefore the level of settlement to be offered.
• The reason for termination may also be important in terms of good leaver / bad leaver provisions in a share plan or the Company’s articles of association.
• It is important to consider not just the legal approach but also practical issues such as how quickly the exit should happen, what disruption will be caused to the business by the senior manager’s exit and how this risk can be minimised, whether by the use of garden leave, post termination restrictions and/or succession planning.
• Initial discussions are often badged as without prejudice, but this rule can only be relied upon where there is an existing dispute. An alternative is to hold a pre-termination negotiation under section 111A Employment Rights Act 1996. However, this will only protect negotiations in respect of ordinary unfair dismissal claims.

Risk areas

• If the exit is not handled correctly there are several potential claims which it might be possible for a senior manager to bring against the Company.
• These include claims for wrongful dismissal - based on a breach of the employment contract - unfair dismissal, redundancy, discrimination and/or whistleblowing.

Tricky issues

• There are several areas which can increase the potential exposure of the Company if not handled correctly.
• As a starting point, it is important to consider the terms of the senior manager’s employment contract both to decide what their entitlement is in terms of notice or payment in lieu of notice, benefits, bonuses and share options but also to understand what protections are in place for the Company, such as post termination restrictions or garden leave provisions.
• It is rare for a Company to want a senior manager to work out all of their notice period, but it is important that the Company does not breach the terms of the employment contract if it wants to rely on any post-termination restrictive covenants. In such a situation it may be preferable to place the senior manager onto garden leave where there is a contractual right to do so.
• The tax treatment of any payments being made to the senior manager should also be carefully considered. Payments are likely to fall into one of three categories, namely: earnings which are taxed in the normal way with deductions for income tax and national insurance contributions; post-employment notice pay which should also be taxed as earnings; and termination awards, the first £30,000 of which can be paid free of tax.
• Where it is a company director who is departing, it is important to consider whether shareholder or other governance approval is needed in order to affect the departure, as well as ensuring that the director resigns from any directorships which they hold. Where a director is unwilling to do so, the employment contract should be checked to see whether there is a power of attorney which would allow the Company to affect the resignation on behalf of the director.
• Most share plan rules provide that share options or awards are lost on termination, but it is possible to agree the position relating to share options and awards in a settlement agreement. In cases where shares are to be transferred or sold back to the Company, the articles of association and/or investment agreement should be checked to identify any procedural requirements.
• Employees will usually want to agree the terms of any reference and/or announcement with the Company as part of exit negotiations. It is important that any reference is not misleading, and any announcement is consistent with the terms of the reference.

Financial services considerations

• Where a Company is subject to financial services obligations they are required to assess the fitness and propriety of senior managers both when recruited and annually. If a senior manager fails to meet the required standard, then the Company is required to report this to the relevant regulator.
• Remember that where a Company is subject to financial services obligations they must take particular care in giving references since they have an overriding obligation to provide specified information about the employee to the relevant regulator, in particular anything which might impact on the manager’s fitness or propriety.