Directors & Senior Employees

Recruiting Senior Employees

Given the kudos that directors and other senior personnel often bring to an organisation, companies spend a great deal of time and resources (for example, headhunting fees) in attracting the very best individuals.

Once formal offers of employment have been made, detailed discussions are likely to follow both about the role and the remuneration package. Not surprisingly, perhaps, pay and benefits will be uppermost in the mind of the individual, whilst the business will be focusing on the value the individual is likely to bring to the business.

A common mistake is that insufficient attention is given to making sure informal negotiations are translated into a properly drafted service agreement. Pay reviews, performance related bonuses, share options, permanent health insurance, PMI and company car benefits all need careful drafting.  So too will notice provisions, garden leave, confidentiality clauses and restrictive covenants, particularly if the business wants to maximise its control in the event the employment relationship is terminated.

Terminating the relationship

What are the warning signs that something is afoot. Perhaps the individual is starting to work from home more; maybe there is excessive email traffic; increased off-site meetings, or a deterioration in the working relationship? Whether or not one gets advanced warning about a senior manager who is planning to leave or, alternatively, the Board decides to dismiss an individual (perhaps a trust and confidence issue), it has got to be right tactically.

If it’s clear the employment relationship needs to be terminated should the business negotiate a mutual exit, or does it commence disciplinary proceedings instead – in which case, is it better to dismiss summarily, exercise a contractual PILON clause, or place the individual on garden leave? The inter-relationship between these options, and the implications for deciding on which one (or a combination of them) to use needs to be understood. For example, dismissing an individual in breach of contract will almost certainly mean that any restrictive covenants will be unenforceable.

Other considerations come into play if the individual is also a shareholder. Both the company’s Articles of Association and any Shareholders’ Agreement will need to be reviewed in order to see what rights and obligations exist. Are there any good leaver/bad leaver provisions and what about compulsory share transfer clauses?

Post termination issues

Having got a senior manager physically out of the business (whether on garden leave or following dismissal), attention invariably turns to severance terms and the structure of any Settlement Agreement if one is to be used. What are the individual’s contractual and statutory claims, and what about his duty to mitigate? These are all matters that should be considered before dismissal given the financial implications of being wrong-footed.

If the employment relationship ends badly, or if the manager leaves with the intention of competing or otherwise damaging the business commercially, what options are open to the business? In the absence of enforceable restrictive covenants, can it rely on express or implied duties of confidentiality? What about database rights or trying to establish quasi-fiduciary duties in circumstances where the individual wasn’t a statutory director but nevertheless was still a senior decision maker?

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