How to manage the departure of senior leaders
The exiting of founders and senior executives can be a significant challenge for start-ups and small businesses. It’s hard to get the process right and it’s difficult dealing with the emotive issues which are an inevitable part of senior executive departures.
The legal complexities can be tricky especially if the staff member has been in post longer than 2-years. But there are also wider concerns to deal with such as the impact on the business, reputational concerns and managing team members who suddenly find themselves without a team leader.
Our job is to help you understand the risks and follow a pre-planned process for senior executive departures, whilst being aware of any sensitivities. Handling such exits thoughtfully and carefully gives the business the best chance of avoiding disruption, upset and negative impact in the business.
Why you might exit a senior member of staff
Exiting a senior member of staff is sometimes performance related. However, it could equally be down to conduct issues, personality clashes, a restructure or even different views on how to run the business.
The reason for the termination is important as it will determine how the process should be managed, due to the impact on contractual entitlements and risk of legal claims.
The three key legal considerations of a senior exit
Does the individual have 2 or more years’ service? If so, you need to have a “fair” reason for the dismissal. The law has only five reasons that are considered fair (such as conduct, capability and redundancy). Then you need to understand what a “fair” process looks like for that type of dismissal.
Are you familiar with the terms of the individual’s employment contract. What are their contractual obligations and entitlements on termination? Are there other contractual terms that apply, beyond the employment contract (such as a shareholders agreement or options agreement)?
What additional risk factors, if any, are present? For example, could discrimination, whistleblowing, or H&S allegations be an issue?
The starting point when looking to exit a senior employee
As employment lawyers, the first question we would consider is how much service does the individual have? It is the first question because it is often key to the risk profile of the dismissal.
Standalone unfair dismissal rights only kick in after two years’ service. Before that point, provided there are no additional risk factors, termination should be fairly straightforward. The obligation on the employer is to provide: 1. notice (or payment in lieu); and 2. payment in lieu of any accrued but untaken holiday.
Beyond two years’ service things get a little bit more complicated.
The process for senior executive departures
Under two years’ service
If there is no unfair dismissal nor any other claim to consider, then the legal procedure required for a senior exit will be minimal.
It is useful to have documented business reasons (so that you can rule out allegations of discrimination) and, from an employee relations angle, it is usually better to deliver the news verbally first, if possible, and then to follow up in writing. But beyond that no formal procedure is required.
After two years’ service
If there is the potential for an unfair dismissal claim, then a procedure must be followed, and this will play an important part in achieving a lawful dismissal. There are different procedures depending upon the fair reason for the dismissal.
For example: Conduct dismissals require a thorough investigation followed by a disciplinary hearing, Capability dismissals require a reasonable period of formal performance management, and Redundancy dismissals will require consultation meetings with the individual before reaching a final conclusion. In all cases the employee will have a right to be accompanied at the meetings by a colleague or TU representative. They also have the right to reasonable notice of the meetings in writing, an explanation of what the meetings are for and any relevant documentation to help them prepare for the meeting, as well as the right to appeal any decision to terminate employment.
Quickly you can see that the procedures required for a “fair” dismissal under statute do not always fit the style or the speed with which a business would naturally like to deal with its senior executives, so there can be an awkwardness to going through these procedures with senior leaders because they do not seem feasible or appropriate.
In some situations, it can be preferable to find a “workaround” to the stilted statutory fairness requirements by holding ‘without prejudice’ conversations and entering into settlement agreements with departing employees. However, note that this will necessitate the employee taking independent legal advice around the terms of any severance arrangements.
If you do decide to make a severance offer, plan in advance what your financial offer is going to be and what, if any, perks will be included. What a good offer looks like will depend on the circumstances and the potential claims that the individual has and it can sometimes be the non-financial elements that are most persuasive. Think about the timing of the offer and what terms you may be prepared to negotiate versus those that are key.
Forfeiting process in favour of speed will sometimes create more legal risk, so we would always recommend seeking advice early to ensure that the right balance can be achieved. Likewise, if any additional risk factors are present, it will be crucial to seek timely advice to protect the business.
Other considerations in a senior exit
In many businesses the exit of a senior employee also necessitates their removal as a shareholder and as a director.
Removal as a director – if well drafted, the employment contract will contain an obligation on the individual to resign their directorships on termination of employment. However, if no such contractual obligation exists, the company will need to seek the individual’s agreement to do so, or else have to resort to the statutory procedures for removing a director.
Dealing with the shareholding – the business will need to consider the value of any shares and/or options held by a departing executive. Will they be a Good or Bad Leaver, and what does that mean in relation to their ability to retain shares or forfeit them, and at what value? Is there any discretion built into the shareholders agreement or options plan that could be used by the company as leverage to secure a smooth handover and trouble-free exit?
Final points to note
Well drafted service agreements, shareholders agreements and options plans, which give consideration to and include beneficial and protective termination provisions, will provide a strong foundation for the business when dealing with senior executive departures, so that they can be managed as smoothly as possible. Our Employment and Corporate teams can help set you off on the right path by putting in place robust employment contracts, shareholders agreements and options plans from the outset.
Our team of experienced employment lawyers is helping start-ups and scale-ups every day, so we know well the challenges and complexities of managing senior executive departures. If you need any help with a senior exit or other related issue, please don’t hesitate to get in touch.