Exiting Executives

If permitted by the contract of employment, the company may make a payment in lieu of notice (“PILON”) and in such situations, the senior executive’s contract will terminate with immediate effect. As a result, there are no grounds for a wrongful dismissal claim and any otherwise enforceable restrictive covenants will remain binding.

Ideally, PILON clauses should be limited to payments for basic salary only. Otherwise, a senior executive may be entitled to receive a payment equivalent to all of the contractual benefits they would have received, had they worked their full notice period (for example salary plus bonus, car allowance, LTIPs, share options and any other premiums such as private medical insurance). It is therefore important to check the precise wording of the PILON clause in the senior executive’s contract. In addition, it is often preferrable for PILON payments to be made in instalments (assuming the contract allows), to avoid the company having to pay a large lump sum payment up front – this will be more palatable to an executive committee if the ex-employee then goes on to secure alternative employment shortly after their termination.

If the company terminates in circumstances where there is no
PILON clause (which can happen), then this would amount to a repudiatory breach of contract as described above and thereby releases the senior executive from any post termination restrictions or other onerous terms within their service agreement. However, payment of salary and other contractual benefits would minimise any risk of a contractual claim for damages.

An injunction is an order from the Court which puts certain restraints on a particular party, most often to stop senior executives from using or benefitting from confidential information relating to the company after their employment has been terminated. Most senior executives will, therefore, have post termination restrictions in their service agreements to prevent them from doing certain things for a period of time after their employment has ended which can be enforced through the Courts by obtaining an injunction.

In the UK, the most common post termination restrictions are:
• non-compete – prevents an ex-employee from joining a rival employer for a defined period of time after employment has ended;
• non-solicitation - restricts the ex-employee’s ability to contact customers or clients of a former employer with a view to obtaining their business;
• non-dealing – also restricts the ex-employee’s ability to deal with former customers or clients after termination of employment;
• non-poaching – this seeks to prevent ex-employees poaching former colleagues.

Depending on the circumstances of the dismissal, companies will have to decide whether to enforce these restrictions by seeking an injunction in the Courts. When enforcing a post termination restriction, a Court must consider the doctrine of ‘restraint of trade’ – any contractual provision which seeks to restrict an employee’s activities after termination will be void, unless the employer can show that it is seeking to protect a legitimate business interest and the restriction goes not further than reasonably necessary to protect that interest. Restrictions must therefore be drafted carefully, in terms of their applicability and duration.

The company will want to ensure that it is protected so far as possible in terms of its own business interests. This will
invariably mean ensuring that confidentiality is maintained, and that consideration is given to placing the senior executive on garden leave. Garden leave has the effect of reducing the senior executive’s exposure to business transactions, contacts, and trade secrets, but also that any time spent on garden leave reduces the period of restrictions post termination. If the restrictions in the senior executive’s contract are inadequate, then the company has the option of increasing their length or scope in a settlement agreement, however, companies will need to bear in mind that sufficient consideration (usually a financial payment which is subject to tax) should be given in exchange in order for these to be enforceable.

The primary statutory right for a senior executive is the right not to be unfairly dismissed. To qualify, the senior executive needs to have been continuously employed by the company or organisation for at least two years.

An unfair dismissal claim may arise where the company terminates a senior executive’s employment without a good reason, without following a fair procedure or otherwise acting unreasonably. The reason for dismissal will, therefore, often inform key aspects of the process – is it due to performance or personality? If the reason for dismissal is poor performance, then the senior executive’s ability to negotiate an enhanced exit package will be limited. Conversely, if the real reason is due to a personality clash or because their ‘face doesn’t fit’, then the risk of a successful unfair dismissal claim is higher (see further below). More often than not, compensation for an exit is more than the statutory cap for an unfair dismissal award and, for this reason, such claims are rarely an issue financially when it comes to exiting senior executives.

There are 5 potentially fair reasons for dismissal, namely conduct, capability (which breaks down into performance or ill-health), illegality (i.e., expired work permit), redundancy (which can also result out of a reorganisation, take-over, or merger) and some other substantial reason (a catch-all such as a client request for removal from post or personality impacting on the workplace and/or on colleagues). Without one of these reasons, any dismissal is likely to be substantively unfair.

Whatever the reason might be, there are essentially two options – either a) follow a formal process or b) enter into settlement discussions.

If a formal process will be followed, consideration needs to be given as to whether there are internal policies or procedures governing the management of poor performance or sickness absence for example. Is there an appetite for patience within the business, will warnings be given or the chance for the senior executive to improve? What has been discussed with the senior executive already? If the Board are involved, to what extent can conversations about the senior executive be kept confidential?

These decisions will be factored into a future Employment Tribunal’s assessment of whether the process to dismiss was procedurally fair. As a minimum, companies will be expected to follow the Acas Code of Practice on Disciplinary and Grievance Procedures in all but cases of redundancy as well as the principles of fairness derived from UK case law. In order to avoid these processes, any settlement sum will usually factor in the senior executive’s ability to claim unfair dismissal as, invariably, when it comes to senior executives, a formal process is often not followed, with commercial reasons outweighing the legal process to ensure a fair dismissal.

A discrimination complaint may arise, for example, if the company terminates a senior executive for a reason that relates to 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 the grounds of fixed-term or part-time employment status. Significantly, unlike claims for unfair dismissal, there is no service requirement for bringing such claims and no cap on the amount of compensation an Employment Tribunal can award in a successful discrimination claim.

The Employment Tribunal may award compensation calculated by reference to any financial loss that a senior executive may have suffered as a result of the discrimination (including their termination), which may also include an award for injury to feelings (the current maximum is
£49,300), aggravated damages and losses for personal injury. However, there can be no ‘double recovery’ where losses are suffered as a result of unfair dismissal and discrimination.

Whistleblowing claims are increasingly being used by senior executives (particularly if they hold a regulated/financial or health and safety function) as a negotiating factor in increasing any settlement package. Senior executives who also make qualifying ‘protected disclosures’ to certain categories of person (i.e. employers) are also protected against dismissal and suffering certain detriments. Senior executives who disclose information which, in their reasonable belief, is made in the public interest and tends to show one or more types of wrongdoing (as set out in statute), are entitled to bring claims in an Employment Tribunal for uncapped compensation (and unlike ordinary unfair dismissal claims, there is no minimum length of service requirement).

It is unlawful for a company to make “a payment for loss of office” to a director unless the payment has been approved by a resolution of the members of the company. If approval is not obtained, the director is deemed to hold the payment on trust and the directors responsible for making the payment will be liable to the company for the amount paid. However, this does not usually present a problem in practice because the requirement for shareholder approval does not cover “payments made in good faith” arising out of an existing legal obligation, for example a PILON, damages for breach of contract or compensation for unfair dismissal or pension in respect of past service.

Shareholder approval is also required in certain other situations such as for a payment for loss of office to a director of the company in connection with the transfer of the whole or part of the undertaking or property of the company. Similarly, payment for loss of office to a director in connection with a share transfer, shares in the company or a subsidiary resulting from a take-over bid.

If a payment is made without having been approved in advance at a shareholders’ meeting, any payment is deemed to be held on trust for the company or the shareholders who sold shares as a result of the offer.

Terminating a senior executive’s employment does not necessarily terminate any directorships that they might hold. As there is no requirement for a director to also be an employee, it will invariably be necessary to obtain the senior executive’s resignation from any directorships that they hold at the time their employment is terminated or provide for their removal as a director if an agreement cannot be reached.

As long as the individual remains a director, they will be entitled to attend board meetings and access minutes and other paperwork related to their appointment as a director.

The concept of ‘termination at will’ is not something that applies in the UK. All employees, irrespective of

their seniority, are entitled to receive minimum notice periods which are set out in legislation and will depend on length of service. Often however, employment contracts will set out a longer notice period and all senior executives will invariably have a notice period which is longer than the statutory minimum, usually for a period of either 6 or 12 months. If a senior executive’s contract is terminated in breach of his/her notice provisions, then the company exposes itself to a claim for wrongful dismissal. The only exceptions are where the company is entitled to terminate the employee summarily due to gross misconduct, or otherwise under the terms of the employment contract.

In the absence of an ability to terminate summarily, the company will have to pay damages to the senior executive to put them in the position that they would have been in had the contract been terminated in accordance with its provisions. In other words, the senior executive will be entitled to receive compensation to reflect the value of any salary lost and any other contractual benefits to which they would have been entitled, had they been allowed to work out their notice period.

A wrongful dismissal claim may also arise where the company has “constructively” dismissed the senior executive either through its actions or omissions. This arises where the company has committed a repudiatory breach, that entitles the senior executive to resign in response with immediate effect and seek damages to reflect any losses that he/she has sustained (which may also include a claim for constructive unfair dismissal). The repudiatory breach must be ‘fundamental’ and one that also demonstrates that the company no longer intends to be bound by one or more of the senior executive’s contractual terms.

If possible, companies will want to avoid breaching the senior executive’s contract of employment, since it will usually contain post termination restrictions which the company will be unable to enforce if, for example, the contract is terminated by the company without giving the senior executive the correct notice.

The general rule is that a senior executive who is wrongfully dismissed is entitled to claim damages representing the pay and benefits that they would have received had they been able to work their full notice period.

The senior executive will be expected to mitigate their loss by attempting to seek alternative employment. This can give the company some room to negotiate a settlement sum, however, a poor performing senior executive may be less likely to obtain employment in the short to medium term, thereby limiting the company’s leverage to negotiate a lower figure.

When assessing the level of damages payable, the company will need to consider the following:

• salary increases during the senior executive’s notice period – are these contractual?
• bonuses - an Employment Tribunal may compensate for loss of bonus (including for discretionary bonuses if these are paid as a matter of custom and practice).
• share options – the issue here usually being options that would have vested during the relevant period of notice had such notice been given.
• pension scheme benefits - compensation for loss of this can be considerable, for example under a defined benefit pension scheme.
• loss of other benefits such as a company vehicle, private medical insurance, permanent health insurance and life assurance.
• accrual of holidays during notice period – most companies do not allow this; however, it is often a matter for discussion between the parties.
•“Golden Parachute” clauses – although rare these
days, it is worth checking to ensure that the senior executive is not entitled to receive a payment and/or benefits in the event of termination following a takeover.

The UK has implemented a number of statutory rights that seek to protect employees or groups of employees irrespective of the contractual position that may have been agreed between the parties. Many of these rights, which are numerous, have been introduced following legislation by the European Parliament and are, therefore, common throughout the European Union although the method of implementation by individual member states may differ.

Since Brexit and the UK’s withdrawal from the European Union, steps have been taken to enshrine many of these statutory claims in domestic law. However, we anticipate that over the coming years, the scope of statutory claims arising on the termination of employees and senior executives may change depending on the circumstances of the dismissal.

Unfair dismissal

The primary statutory right for a senior executive is the right not to be unfairly dismissed. To qualify, the senior executive needs to have been continuously employed by the company or organisation for at least two years.

An unfair dismissal claim may arise where the company terminates a senior executive’s employment without a good reason, without following a fair procedure or otherwise acting unreasonably. The reason for dismissal will, therefore, often inform key aspects of the process – is it due to performance or personality? If the reason for dismissal is poor performance, then the senior executive’s ability to negotiate an enhanced exit package will be limited. Conversely, if the real reason is due to a personality clash or because their ‘face doesn’t fit’, then the risk of a successful unfair dismissal claim is higher (see further below). More often than not, compensation for an exit is more than the statutory cap for an unfair dismissal award and, for this reason, such claims are rarely an issue financially when it comes to exiting senior executives.

There are 5 potentially fair reasons for dismissal, namely conduct, capability (which breaks down into performance or ill-health), illegality (i.e., expired work permit), redundancy (which can also result out of a reorganisation, take-over, or merger) and some other substantial reason (a catch-all such as a client request for removal from post or personality impacting on the workplace and/or on colleagues). Without one of these reasons, any dismissal is likely to be substantively unfair.

Whatever the reason might be, there are essentially two options – either a) follow a formal process or b) enter into settlement discussions.

If a formal process will be followed, consideration needs to be given as to whether there are internal policies or procedures governing the management of poor performance or sickness absence for example. Is there an appetite for patience within the business, will warnings be given or the chance for the senior executive to improve? What has been discussed with the senior executive already? If the Board are involved, to what extent can conversations about the senior executive be kept confidential?

These decisions will be factored into a future Employment Tribunal’s assessment of whether the process to dismiss was procedurally fair. As a minimum, companies will be expected to follow the Acas Code of Practice on Disciplinary and Grievance Procedures in all but cases of redundancy as well as the principles of fairness derived from UK case law. In order to avoid these processes, any settlement sum will usually factor in the senior executive’s ability to claim unfair dismissal as, invariably, when it comes to senior executives, a formal process is often not followed, with commercial reasons outweighing the legal process to ensure a fair dismissal.

Award for unfair dismissal

If a dismissal is shown to be substantively and procedurally unfair, a senior executive would be entitled to claim a basic
award (which is calculated in the same way as a statutory redundancy payment based on their age and length of service) and a compensatory award, which is capped at the lower of a year’s salary or the applicable statutory limit as at the date of termination. The cap is increased in April each year and is currently £105,707 (April 2023). An Employment Tribunal must make an award which they think is “just and equitable” and this can be increased by as much as 25% for a failure to comply with the Acas code of practice mentioned above.

Alternatively, if settlement is the preferred route, then the package on offer is likely to be the main driving factor in achieving a swift and amicable exit. There will need to be a quantification of basic entitlements such as salary and contractual benefits, whether bonus payments are being forfeited, and the impact of termination on share options and equity arrangements, if applicable. A business may want to reduce the costs involved in dismissing a senior executive by terminating employment before eligibility kicks in.

The value of any package may not only be financial and may include the transfer of company property such as a mobile phone, laptop, or company car. Another major factor to consider will be the tax treatment of any termination payments. Contractual PILONs and post-employment notice pay are both subject to income tax and employer / employee National Insurance Contributions, whereas only the first
£30,000 of any ex-gratia payment is free of income tax.

Depending on the reasons for the exit, a senior executive may also want to agree the wording of a reference or company- wide announcement in advance which should always comply with any regulatory requirements that may apply. Once the settlement agreement has been drawn up, all communications relating to it should be marked as ‘without prejudice and subject to contract’ to avoid the content being disclosed in future litigation.

Discrimination, whistleblowing & other statutory claims

A discrimination complaint may arise, for example, if the company terminates a senior executive for a reason that relates to 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 the grounds of fixed-term or part-time employment status. Significantly, unlike claims for unfair dismissal, there is no service requirement for bringing such claims and no cap on the amount of compensation an Employment Tribunal can award in a successful discrimination claim.

The Employment Tribunal may award compensation calculated by reference to any financial loss that a senior executive may have suffered as a result of the discrimination (including their termination), which may also include an award for injury to feelings (the current maximum is
£49,300), aggravated damages and losses for personal injury. However, there can be no ‘double recovery’ where losses are suffered as a result of unfair dismissal and discrimination.

Whistleblowing claims are increasingly being used by senior executives (particularly if they hold a regulated/financial or health and safety function) as a negotiating factor in increasing any settlement package. Senior executives who also make qualifying ‘protected disclosures’ to certain categories of person (i.e. employers) are also protected against dismissal and suffering certain detriments. Senior executives who disclose information which, in their reasonable belief, is made in the public interest and tends to show one or more types of wrongdoing (as set out in statute), are entitled to bring claims in an Employment Tribunal for uncapped compensation (and unlike ordinary unfair dismissal claims, there is no minimum length of service requirement).

If a dismissal is shown to be substantively and procedurally unfair, a senior executive would be entitled to claim a basic
award (which is calculated in the same way as a statutory redundancy payment based on their age and length of service) and a compensatory award, which is capped at the lower of a year’s salary or the applicable statutory limit as at the date of termination. The cap is increased in April each year and is currently £105,707 (April 2023). An Employment Tribunal must make an award which they think is “just and equitable” and this can be increased by as much as 25% for a failure to comply with the Acas code of practice mentioned above.

Alternatively, if settlement is the preferred route, then the package on offer is likely to be the main driving factor in achieving a swift and amicable exit. There will need to be a quantification of basic entitlements such as salary and contractual benefits, whether bonus payments are being forfeited, and the impact of termination on share options and equity arrangements, if applicable. A business may want to reduce the costs involved in dismissing a senior executive by terminating employment before eligibility kicks in.

The value of any package may not only be financial and may include the transfer of company property such as a mobile phone, laptop, or company car. Another major factor to consider will be the tax treatment of any termination payments. Contractual PILONs and post-employment notice pay are both subject to income tax and employer / employee National Insurance Contributions, whereas only the first
£30,000 of any ex-gratia payment is free of income tax.

Depending on the reasons for the exit, a senior executive may also want to agree the wording of a reference or company- wide announcement in advance which should always comply with any regulatory requirements that may apply. Once the settlement agreement has been drawn up, all communications relating to it should be marked as ‘without prejudice and subject to contract’ to avoid the content being disclosed in future litigation.

In rare cases, a senior executive may be redundant. If a senior executive is made redundant, they are entitled (if they have two or more years’ service) to not only receive contractual notice but also a statutory redundancy payment (which is helpfully capped according to a prescribed formula). In the grand scheme of things, this amount is currently relatively low at £19,290 (April 2023) (again, this amount is updated annually each April).

Importantly however, while redundancy is a potentially fair reason for dismissal, a fair process must be followed. If not, the senior executive may have a claim for unfair dismissal. Some companies have a contractual redundancy policy setting out how redundancy payments are calculated, and if so, it may be the case that the senior executive can benefit from its terms.

Where a restructure takes place involving the potential redundancy of the senior executive and a minimum number of 20 or more employees, the company will also need to participate in a process of collective consultation and follow due process, including notifying the relevant government bodies. For these purposes the definition of redundancy is wide and can include contractual variation processes. Failure to undertake the correct process can lead to a “protective award” being made of up to 90 days’ actual pay (where there is no statutory cap on a week’s pay). Such award could include bonuses that may have accrued over that period. Once again, the reality is that a settlement package may well factor in any potential protective award.

If the senior executive is also a director of the company, then it is important to take into account the following:

1. the senior executive should resign from any directorships held in the company and any associated companies. Usually this will be included as part of the settlement agreement.

2. the listings rules require a listed company to notify a Regulatory Information Service of the removal, retirement or resignation of a director as soon as possible and by no later than the end of the business day following the decision.

3. invariably an announcement is agreed as part of the settlement terms. However, if settlement terms cannot yet be agreed the announcement should still take place. The overriding obligation is to issue the announcement as soon as possible and this cannot be postponed due to arguments over the announcement wording or the terms of any settlement package.

4. shareholder approval of the termination payment may be required in a general meeting.

5. if the senior executive holds shares for the company as a nominee or as a qualification, such shares should be transferred as the company directs. Again, this should be part of the settlement agreement. Settlement sums may have to be disclosed in the company accounts and, if the company is a quoted company, settlement sums will need to be identified in the directors’ remuneration report. A listed company must have a remuneration policy approved by its shareholders every three years. Further, the company must set out on its website what payments a director has received or may receive in the future.

6. irrespective of whether the company is listed or not, announcements should be agreed if possible. It goes without saying that the contents of any announcements should not be libellous or misleading, and they should be consistent with any agreed reference (which are increasingly limited to confirming job title and dates of employment).

All employees in the UK have:

• contractual rights - largely governed by the contract of employment but are also subject to certain implied terms;

• statutory rights - derived from the laws of the UK, such as the right not to be unfairly dismissed or discriminated against for certain prescribed reasons; and

• common law rights - established by case law and precedence, such as the right to a safe place of work.

The termination of an employment contract can be communicated verbally or in writing. Service agreements for senior executives will invariably provide that to validly
terminate the contract, it must be in writing - and good practice would be to do so.

Given their level of seniority within an organisation, senior executives may also benefit from other contractual provisions outside of their contract of employment, such as bonus or commission schemes, long term incentive plans or other equity arrangements. These documents and the rules they set out will also need to be factored into termination discussions.