The high profile resignation of George Entwistle as Director-General of the BBC, after only 54 days in the job, highlights how security of tenure is now rare for many directors. His even higher profile pay-out of £450,000, a year’s salary, illustrates that a director has rights that cannot be disregarded by his employer.
If you are an executive director who is employed by a company, you have the same employment rights as any other employee. This means that if you are dismissed and the company does not have a potentially fair reason or follow a fair procedure, you can claim for unfair dismissal, subject to having sufficient continuous employment. As a director you can also claim wrongful dismissal or breach of contract if the company does not give the proper notice set out in your service agreement. If you suspect that your dismissal is because of discrimination, you can claim for this too.
In addition to the employment law issues mentioned above, you may also have to face the following:
- your removal as a director of the company and any companies in the same group. You might be asked to resign; if you refuse, the company can remove you but this is more complex. Your resignation or removal will need to be registered at Companies House;
- transfer of any shares you might hold in the company. The procedure for this should be set out in the company’s articles of association or shareholders’ agreement;
- being put on ‘garden leave’ for the duration of your notice period, where you remain employed and bound by the terms of your service agreement but are not required to attend work;
- dealing with any share options;
- negotiating any severance package;
- subscribing to a confidentiality agreement to keep information, intellectual property rights and client connections secure. This might be done through the service agreement, if it is still in force, or through newly agreed provisions such as a compromise agreement.
A fair reason
The potentially fair reasons for dismissal are based on conduct, capability, illegality, redundancy or some other substantial reason justifying dismissal. If you are dismissed as a director you will first need to obtain advice about whether the reason for your dismissal falls within this list. If not, you may have an unfair dismissal claim.
The most common reasons for executive terminations include redundancy following a reorganisation or takeover, poor performance and a personality clash. Often the reason given is that the rest of the board has lost confidence in the director and this may fall within conduct, capability or some other substantial reason. The company will need evidence to support its allegations. If the reason is gross misconduct, the company can dismiss you without notice but should still follow a fair procedure.
Following a fair procedure
In order to defend an unfair dismissal claim, the company will need to follow a fair procedure and show that it acted reasonably in all the circumstances. This will involve following the ACAS Code of Practice on Disciplinary and Grievance Procedures. In a matter of poor conduct or performance, the company will have to investigate, give you details of the allegations against you, then hold a hearing where you can put forward your side of the story, inform you of the outcome and give you the chance to appeal. If the allegations are serious, you may be suspended while this takes place. Because of the high profile nature of a director’s role, many companies prefer to avoid going through a potentially damaging and lengthy disciplinary process and instead may offer you a compromise agreement.
If you are dismissed without notice or in the absence of a fair reason you could be entitled to compensation. The maximum amount of compensation that can be awarded by an employment tribunal for unfair dismissal is currently £85,200 (£87,700 from 1 February 2013). This is made up of a compensatory award of up to £72,300 intended to compensate you for the loss suffered and a basic award of up to £12,900, which is calculated according to your age, pay and length of service. This cap does not apply to whistle-blowing claims or some unfair dismissal cases. A tribunal can award up to £25,000 for breach of contract if you have not been given enough notice and this will be based on your net pay and benefits for your notice period. If your notice claim is worth more than this, it has to be brought in the High Court or County Court. Compensation for discrimination is unlimited and includes an element for injury to feelings.
A compromise agreement may be used to settle all employment claims that you have as an employee against your employer. In return for giving up your rights to claim compensation, you receive a payment from the company. To be binding, you have to take independent legal advice on the agreement and it is usual for your employer to contribute towards the cost of this.
A compromise agreement can deal with matters such as an agreed reference, the wording of a statement to third parties, any benefits you will continue to receive and what happens to your pension rights.
If you are asked to enter into such an agreement, you should take independent legal advice as soon as possible. Any discussions should be held on a ‘without prejudice’ basis and you should still be able to initiate legal proceedings if the negotiations break down.
If you are going through a disciplinary or dismissal process, you should take legal advice at an early stage so that you are aware of your rights and the options available to you. We can assist you with this and can also help you negotiate a severance package and represent you if you decide to take legal action against your employer.
For more information please contact David Hacker.