First step: check the agreements
Collect the suite of documents that set out the executive’s rights and obligations on departure. These may include:
- the contract of employment or service agreement;
- commission or bonus agreements; and
- corporate documents, such as a restricted share scheme agreement or a shareholders’ agreement.
If some of the arrangements were never set down in writing, please get in touch and we can advise you on how to decipher what was agreed with the executive and how to deal with any gaps in the paperwork.
Check the important terms
The agreement with the executive should include key provisions protecting your business, and these typically include provisions on confidentiality and intellectual property. The agreement may also restrict the executive’s actions after leaving your business. These restrictions can stop them from approaching your customers or poaching your staff for a defined period. These will need to be checked by your solicitor, to ensure they are enforceable.
The contract may allow you to place the executive on ‘garden leave’ during their notice period. This can be helpful to restrict their contact with customers and suppliers while you negotiate their exit.
Sometimes these provisions may have been missing from the outset. Other problems can arise if a long-serving employee’s contract has not been updated to keep up with changes in their role or the business environment.
Even if the agreement does contain the appropriate clauses, the executive may argue that they have been released from their contractual obligations if the business breached the contract with the executive, for example by giving too little notice or if it seriously mistreats the executive.
If provisions are missing or need to be bolstered, possibly because of a breach by the business, they can be dealt with when negotiating the exit package which is made binding through a settlement agreement.
The departure of a senior executive can be commercially highly sensitive. To ensure a swift and amicable exit, a deal is often struck off the record and set down in a settlement agreement.
You will want to avoid rewarding failure, but you may choose to negotiate a severance package as the price for a quick and quiet departure.
There are many advantages to using a settlement agreement; primarily avoiding a protracted risky dismissal and preventing claims against the business.
A settlement package will need to be agreed in exchange for the executive giving up any rights to bring claims against the business, for example for unfair dismissal. Non-cash benefits such as continued medical insurance or keeping a work mobile phone, can be useful sweeteners. Other loose ends can be tied up, such as what happens on departure to social media accounts used by the executive for business purposes.
Settlement agreements typically include confidentiality clauses, which are also known as non-disclosure agreements or gagging clauses. There are limits on how far these can go, for instance they cannot be used to prevent the executive from whistleblowing. The Government has expressed its intention to legislate to restrict the use of confidentiality clauses, for example to enable departing employees to speak to their health professional. It is not known when or if these changes will come into force.
We can advise you on whether a director’s severance package needs to be approved by the shareholders.
Announcements and references
Agreeing a departure announcement for customers and colleagues and including this in the settlement agreement, can avoid mixed messages. An agreed reference is a valuable part of a severance package. We can help you to ensure that the wording is on the right side of the law on negligent misstatement.
Reasons for departure
Being clear at the outset about the reason for departure is crucial. It will influence whether you want to go down the settlement agreement route, as well as determine the executive’s entitlements.
Benefits on exit
Other than in the rare case of gross misconduct, the executive will be entitled to notice, or a payment in lieu of notice. Depending on the reason for leaving, they may also be due to receive:
- a redundancy payment;
- enhanced early retirement benefits;
- bonus or commission; and
- payments triggered by the good leaver / bad leaver provisions if they have a shareholding or share options.
If they are a member of a limited liability partnership (LLP), they may be entitled to a share in the LLP profits.
Good leaver / bad leaver
Good leaver / bad leaver provisions determine the price paid to a departing executive for their shareholding. The ‘good leaver’ is rewarded by favourable terms, such as full market price, as these provisions typically incentivise the executive to stay in the business for a minimum period, to work hard and benefit from the growth of the business when leaving.
‘Bad leavers’ usually receive a discounted price, because these provisions aim to deter an executive from leaving before the agreed date and from poor performance or misconduct.
If these provisions are not clear, it may be necessary to negotiate an agreed leaver status with the executive at the time of departure and confirm this in a settlement agreement. This should avoid a future court claim.
Removal of directorship
Finally, if you wish the executive to resign as a director, make sure that this is included in the settlement agreement, particularly if this is not addressed in the service agreement.
How we can help
We can help you with all aspects of document drafting, exit strategy and can support you as you negotiate an agreement to make any departure as painless as possible. Please contact a member of our employment team on 01905 721600 or email firstname.lastname@example.org
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.