We understand no two employment contracts are ever the same, and this is especially true when it comes to senior executive employment contracts – which can be far more complex due to the substantial pay, benefits and rewards which can include bonuses, commissions and share options (which may be linked to good leaver status) along with post termination restrictions. In addition, the employment relationship can also be underpinned with a directorship and shareholders agreement too.
We advise executives on the terms of employment and more importantly upon termination and the financial implications thereto. We regularly handle settlement agreements for individuals in the City within the finance sphere including traders, fund managers, senior brokers, and directors.
We also regularly advise executives on their post termination restrictions, particularly if they seek to set up a potential competing business or work for a direct competitor.
We are more than happy to offer a no-obligation discussion upon your terms of employment or exit package.
Please contact our specialist employment solicitors for a confidential and no obligation discussion on
0203 669 2216 or email firstname.lastname@example.org
Termination, Negotiation and Claim guidance for Senior Executives
Reason for termination
The reason for termination is vital as this will influence the claims that you may be able to bring as a result of the termination and any exit package. For example, it will affect whether, as a matter of contract law, whether you are entitled to notice and whether, under unfair dismissal law, the dismissal is potentially fair or automatically unfair. These issues will, in turn, impact on the way in which the dismissal is handled and the level of any settlement that the employer may decide to offer.
The reason for termination may also be relevant in relation to the triggering of good leaver/bad leaver provisions in a share plan or in the company’s articles of association, if you hold any share options or shares.
Possible reasons may include:
- Gross misconduct or other grounds for summary termination. Although it is comparatively rare, employers occasionally want to dismiss a senior executive with immediate effect because the employee has committed an act of gross misconduct or other repudiatory breach of contract. Alternatively, the service agreement may expressly provide for summary termination if certain specific events occur (such as the employee being disqualified from acting as a director, or being convicted of an offence of dishonesty). In such cases the employer may dismiss with immediate effect without breaching the contract, but may still face an unfair dismissal claim if the proper procedure is not followed.
- Redundancy. In some circumstances the employee’s role will have become redundant, for example because there is no longer a requirement for a certain position following a restructuring, takeover or merger. If there is a genuine redundancy situation, the employee will be entitled either to work out or to be paid for their notice period, and to receive a redundancy payment. Redundancy may also trigger other contractual benefits that do not apply to other terminations, such as stock options or an enhanced early-retirement pension. If a proper procedure is not followed or if dismissal is not reasonable in all the circumstances, the employee may be able to bring an unfair dismissal claim.
- Poor performance. This is probably the most common reason for dismissal when dealing with a senior executive and the most likely to attract attention in terms of any termination settlement reached. Unless it amounts to gross negligence (which in the case of a senior executive would be extremely unusual), poor performance is very unlikely to constitute a ground for summary termination, so the employee will be entitled to be dismissed on notice or be paid for their notice period. Again, if a proper procedure is not followed or if dismissal is not reasonable in the circumstances, the employee may be able to bring an unfair dismissal claim.
- Clash of personalities. Sometimes it becomes apparent that there are irreconcilable differences between an employee and the remainder of the board, or that the board has simply lost faith in the employee. Unless this is a result of a repudiatory breach of contract by the employee, summary dismissal will not be justified. Although having a difficult personality is not of itself a fair reason for dismissal, it may manifest itself in the workplace in such a way as to justify dismissal for conduct, capability, or “some other substantial reason”, provided a fair procedure is also followed.
The claims that could arise in each case are explained in more detail below.
Considering termination: possible claims
In determining the level of any severance package, the employer usually considers the claims that the employee could bring. The most likely claims are:
- Contractual claims for wrongful dismissal
- Statutory claims (the most relevant of which are for compensation for unfair dismissal and discrimination, and for a statutory redundancy payment).
However, other claims such as whistleblowing, for example, may be relevant in the particular circumstances.
This claim most commonly arises where the employer terminates the contract in breach of the contractual obligation to give notice. Unless the employer was entitled to terminate without notice (for example, where there has been gross misconduct), it will be liable to pay damages to put the employee in the position they would have been in had the contract been terminated in accordance with its terms. Therefore, damages will reflect the net value of salary and any other contractual benefits to which the employee would have been entitled had they been allowed to work out their notice. Occasionally, it may be possible for an employee to obtain damages for loss sustained beyond the notice period.
A wrongful dismissal claim may also arise if the employer commits a repudiatory breach of contract that the employee accepts by resigning (usually without notice). This is generally referred to as a constructive dismissal. A repudiatory breach of contract is one that is so serious that it either goes to the root of the contract or demonstrates that the employer no longer intends to be bound by one or more of the contract’s essential terms. Changes to terms relating to pay will normally amount to a repudiatory breach of contract. A repudiatory breach entitles the employee to resign without giving notice and to claim damages as described above.
A claim for unfair dismissal may arise where an employer terminates an employee’s employment without a potentially fair reason. There are five potentially fair reasons on which an employer can rely when seeking to show that it dismissed an employee fairly: conduct, capability, redundancy, illegality and “some other substantial reason”. There are also a number of circumstances where dismissals will be automatically unfair.
Even if an employer has a potentially fair reason for dismissing the employee, they must also have acted reasonably in relying on this reason in the circumstances. In other words, the dismissal must have been both procedurally and substantively fair.
Usually employees need a minimum period of qualifying service with the employer in order to bring an unfair dismissal claim. However there is no minimum service requirement if the dismissal takes place for one of a number of specific reasons set out in the Employment Rights Act 1996.
An employment tribunal will award such compensation as it thinks is “just and equitable”, having regard to the employee’s financial loss arising out of the dismissal, and excluding any compensation for injury to feelings, subject (in the vast majority of cases) to a statutory upper limit or “cap”. An employee who is successful in an unfair dismissal claim is also entitled to a basic award. This is calculated on the basis of age, salary and length of service.
An employee is dismissed by reason of redundancy if they are dismissed for one of the following reasons:
- The employer has ceased or intends to cease to carry on the business for the purposes of which the employee is employed.
- The employer has ceased or intends to cease to carry on the business at the place the employer is employed.
- The employer’s requirements for employees to carry out work of a particular kind or work of a particular kind at the place where the employee is employed has or is expected to cease or diminish.
A redundant employee who has at least two years’ continuous service at the termination date is entitled to a statutory redundancy payment, calculated by reference to weekly pay, age and length of service. Weekly pay is capped for these purposes.
In practice, the amount of a statutory redundancy award will not make up a significant proportion of a severance payment to a senior executive. However, there may also be an entitlement to a contractual redundancy payment. This may be calculated on the basis of the statutory redundancy payment, but without the limit on a week’s pay, or on some other formula. If the payment is calculated on the basis of the employee’s age, but does not mirror the statutory scheme, it may be unlawful. If the employer fails to follow a fair procedure, the redundancy may result in an unfair dismissal.
An employer may face a discrimination claim if it terminates an employee’s employment for a reason that relates to the following “protected characteristics”: age, sex, race, disability, sexual orientation, gender reassignment, marriage and civil partnership, pregnancy and maternity, or religion or belief. It is also unlawful to discriminate on grounds of fixed-term or part-time status. Consequently, an employer considering dismissing a senior executive should give careful consideration to how the termination is documented and to the procedure that it adopts when carrying out the dismissal if it thinks there is a risk of a discrimination claim.
There is no limit to the amount of compensation a tribunal can award in a discrimination claim. Compensation is calculated by reference to the loss the employee has suffered by reason of the discrimination and an award for injury to feelings will also usually be made. Substantial loss of earnings awards are possible in the case of highly paid employees and will not necessarily be limited to the contractual notice period, although the employee will have a duty to mitigate their loss by seeking alternative employment.
Age discrimination and retirement
Before 6 April 2011 it was relatively rare for senior executives to bring age discrimination claims, largely because it used to be possible to retire someone lawfully at the default retirement age (DRA) of 65. However, following the abolition of the DRA on 6 April 2011, this changed. In the absence of a fixed (compulsory) retirement age that can be objectively justified, the dismissal of an employee because of age will constitute direct age discrimination, as well as giving rise to a potential claim for unfair dismissal. In response, most employers have chosen not to have a fixed retirement age. This means that, in order to dismiss an older employee, employers will have to rely on one of the five potentially fair reasons for dismissal. This increases the scope for older employees to allege that their dismissal is tainted with age discrimination (whether the reason given is redundancy, poor performance or some other reason).
If you are facing a possible termination or need advice on a termination package, please contact our specialist employment solicitors for a confidential and no obligation discussion on
0203 669 2216 or email email@example.com