As a director, you may have been involved in the process of making other employees redundant or it may be a new experience for you. Either way, individuals can be both directors and employees of a company, and as long as you are an employee, you have the same employment rights as any other employee.
This means that the procedure involved in making someone redundant is the same for employees at all levels, regardless of job title. If you are a director, who has been employed for two years or more, you have the right not to be unfairly dismissed, so there must be a genuine potential redundancy situation, and a fair and reasonable procedure must be followed before the redundancy is confirmed.
Gareth Dando, Partner at Ramsdens Solicitors, provides advice on redundancy pay for company directors.
Issues involving redundancy
One of the most important issues involving the redundancy of executive-level employees, and their departures in general, surrounds the issue of reputation management both internally and externally. One of the major negotiation points is often to try and agree on exactly what will be communicated upon departure to reduce the risks of any disputes later down the line.
It is likely that your contract will include terms about the confidentiality of company information and what you can do after you leave the company (often known as post-termination restrictive covenants). You’re unlikely to be allowed to take a product or financial details or lists of customers with you and that’s normally understood and accepted. What may be more controversial, particularly in the circumstances of redundancy, is any attempt by the company to enforce post-termination restrictive covenants that may stop you from working in the same industry. It’s vital to seek advice from a solicitor on whether these restrictions are legally enforceable or to try and negotiate with your employer over the extent of them. Companies are often happy to waive or reduce the scope of them in a redundancy situation.
It is also common for the employer to place the employee on “garden leave” for some or all of the employee’s notice period. This means that the employee continues to be employed and paid as normal but is not required to actually attend work during their notice. This provides some breathing space for the employer to speak to customers and staff and prevent any disharmony from continuing to have a disgruntled employee in the building.
If your employer decided to place you on garden leave, the length of any post-termination restrictive covenants should be reduced by the length of time placed on garden leave.
If you also hold shares in the company, how this will be dealt with will often depend on the terms of any shareholder agreement. It is usual for a redundant employee to be treated as a “good leaver” under such an agreement, which means you may retain the shares.
Handling benefits
Your benefits package may also include membership of a long term investment plan (LTIP), in which case, you may hold unvested share options at the time of being made redundant. If you do hold unvested shares, even if you are a good leaver, unless the company agrees, it’s likely you will lose any entitlement to the benefit of any unvested shares. In many cases, the value of any shares is likely to exceed any notice pay and statutory redundancy pay entitlements and so can be a major negotiation point.
If you’re entitled to be part of a bonus scheme, how the bonus will be dealt with on departure will usually depend on the terms of the scheme, and whether it is contractual or discretionary. Usually, bonuses are discretionary, so employees can face some difficulty in recovering a bonus, but it is not impossible. Even if the bonus scheme is discretionary, it is common that a departing director is given a pro-rata bonus payment.
Redundancy pay for directors
Directors who are employed by an insolvent company, which is then placed into liquidation, could also be entitled to statutory redundancy pay. In order to qualify for redundancy pay when a company is insolvent, the director will need to prove that they are an employee, for instance, by showing that they are on the payroll or producing a contract of employment – this does not have to be in writing, but a written contract would certainly assist. Among other requirements, the company must also have been incorporated for two years or more.
If you’re being made redundant and have been offered an enhanced financial package, it’s likely the company will ask you to sign a settlement agreement. This is a legally binding contract under which you will be asked to waive your right to claim against your employer. You’ll need to take legal advice on this for it to be binding, although the company will pay for most, if not all of your legal costs.
About the author
Gareth Dando is a Partner in the employment department at Ramsdens Solicitors. He acts exclusively in employment law for a wide range of employers, with a specialism in relation to professional sporting.