Directors and Senior Employees

Recruiting Senior Employees

Given the kudos that directors and senior employees often bring to an organisation, a lot of time and resources (for example, headhunting fees) are spent in attracting the best individuals.

Once formal offers of employment have been made to the successful candidate, detailed discussions are likely to follow about the role and remuneration package. Not surprisingly, perhaps, pay and benefits will be uppermost in the individual’s mind, whilst the business will be concerned about the value the individual is likely to bring to the business, together with operational structures.

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 do notice provisions, garden leave, confidentiality clauses and restrictive covenants.

Terminating the relationship

What are the warning signs that something the working relationship is deteriorating? Perhaps the individual is starting to work from home more; maybe there is excessive email traffic; increased off-site meetings, more sickness?

If the employment relationship needs to be terminated swiftly should the business negotiate a mutual exit through without prejudice discussions, or does it instead commence disciplinary proceedings (typically poor performance or a breakdown in trust and confidence) in which case, is it better to dismiss summarily, exercise a contractual PILON clause, or serve notice and place the individual on garden leave? The inter-relationship between these options, and the implications for deciding which one (or a combination of them) is best used needs to be understood. For example, dismissing a senior manager 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 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 employee successfully 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 needs to be compromised, and what further obligations need to be extracted as part of the deal – for  example fresh restrictive covenants and/or confidentiality? These are all matters which should be considered before terminating the employment relationship.

If the employment relationship ends in dispute, or if the senior employee leaves with the intention of competing or otherwise damaging the business commercially, what are the options? 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 was not a statutory director but nevertheless was regarded as very senior with extensive decision-making powers?

Not surprisingly, perhaps, recruiting and dismissing directors and senior employees is generally costly and, as a result, comes with associated increased risks. It is an area of employment where it really does pay to take advice and plan well in advance.

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