Employment law areas to consider
Recruiting the right senior executive can be an immense benefit to a company if they bring the right mix of skills, experience, and contacts to the business. It is not uncommon for the recruitment process to include some informal occasions, at which terms, conditions and incentives might be discussed. Failing to capture such casual agreements and to spell them out in detail in the employment contract can lead to problems down the track if there is a misalignment of understanding.
Remuneration packages and contractual terms for senior executives can be complex. So, investing time and resources in the negotiations and in setting out the agreed terms in writing is well worth it.
Not doing so can prove costly, damaging to the business or the individual’s future opportunities and at worst, ends in litigation.
Directors and Companies Act 2006
The Companies Act 2006 sets out directors’ duties and the law on directors’ involvements in companies, and our corporate team can advise on all aspects of Companies Act requirements.
In this article, our Employment Team highlight a number of key elements in any senior executive’s contract and remuneration package, and point out the employment law considerations.
Buy out from earlier role
In negotiating a package to move on from another organisation, executives may effectively ask their new employer to ‘buy them out’ from their existing role. This ‘golden hello’ is effectively compensation for any lost remuneration or benefits that would have been received if they had not jumped ship.
Other incentive-based schemes, such as share option schemes and long-term incentive schemes also need to be carefully drafted, particularly for any ‘good leaver’ or ‘bad leaver’ provisions, which determine the executive’s entitlement on exit.
These are usually dealt with separately to the employment contract, and executives should obtain tax advice on these schemes.
The remuneration package may include other entitlements such as permanent health insurance, life assurance, private medical insurance, a car and associated running costs.
Any conditions attached to receiving such benefits, whether related to a time period or performance, need to be set out in detail.
There is a general implied duty to act in good faith towards the employer, which mostly ends when the employment ends, but contracts frequently restrict an executive’s outside business interests and activities in more precise terms.
Often more contentious, are any restrictions on exit. These covenants aim to prevent the executive from doing certain things after they have left the company which could be damaging to the company. These include working for competitors, poaching business or staff, accepting work from a client of the former employer or setting up in competition. To be enforceable, these restrictions must only go so far as necessary to protect the company’s legitimate business interests and must not be an unlawful restraint of trade.
On a related note, companies frequently seek a warranty that the executive is free to work for the company and will not be in breach of any court order or contractual restriction with a previous employer. This is to protect the company in case it gets pulled into any litigation and accused of inducing the executive to breach their previous contract. However, it should also be noted that even if a director may not have any restrictive covenants in place and would not be in breach of any court order or contractual restrictions, the director may be subject to fiduciary duties (such as duty of loyalty to the organisation). Such duties would not prevent the director from resigning from his office, but may be in breach of fiduciary duty even after his resignation if he takes advantage of a maturing business opportunity to which he was led by virtue of his position with the company.
Pitfalls to avoid
Problems typically arise when it is not clear exactly what has been agreed between the executive and the company. This may be because the detail was not worked through at the start of the relationship or was not set down properly in writing, or a combination of the two. For example:
- What benefits or bonus, if any, is the executive entitled to receive when given a payment in lieu of notice?
- Can the company withhold a payment in lieu of notice if it discovers it could have sacked the executive for gross misconduct?
- Is it clear in what circumstances an executive would be a bad leaver or a good leaver for determining the price paid to a departing executive for their shareholding?
- Are the restrictive covenants specific to the individual’s activities, going no further than necessary to protect specific legitimate business interests?
- Do references to a long-term incentive or bonus scheme inadvertently create a contractual right or limit the discretion of the board?
How we can help
We advise both companies and executives on negotiating packages and ensure the agreed terms are properly captured to minimise the risk of a future dispute. For further information, please contact the employment team on 01733 882800 or email [email protected].
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