Conscious Uncoupling: What To Consider Before Dismissing A Senior Executive

by Reed Smith

While it may be best employment practice to dismiss an employee by (1) identifying a fair reason and (2) following a fair (and sometimes protracted) process, this may not make commercial sense when it comes to terminating a senior executive. Where a business has lost faith in its leadership, or simply wishes to make a clean break, following a lengthy process can be unsettling to the business and put it at risk. It is advisable, however, to think strategically about how to put the business in the best position before taking steps to remove a senior figure. We set out some suggestions below.

Think about cost. Cost will usually be the first point to consider. The executive’s negotiating power for any settlement will be determined by his/her potential claims: usually unfair dismissal and any contract claims. Compensation for unfair dismissal is capped unless this can be linked to allegations of discrimination or whistleblowing, so this is something that the executive may raise as a negotiating tactic. The impact of any exit on incentive arrangements is likely to be a primary concern for a senior executive particularly if this affects how he/she will be categorised in terms of “Good Leaver/Bad Leaver” status.

Protect the business. Safeguarding confidential information from misuse by the executive will be of paramount importance. The business should consider whether the executive’s access to systems should be removed immediately. Any settlement negotiation is likely to include how confidential information, such as contact lists, should be protected and whether any restrictive covenants in the executive’s contract should be amended.

Choose your speed. The relationship between the parties, the reason for the exit and the scope for the executive to damage the business will determine the method of termination. A quick exit may minimise disruption, allow a swift change in leadership and protect the business in one scenario, whereas in another a smooth handover over some months may be preferred. If the executive is to work his/her notice period, it may be useful to put an incentive in place to ensure that this is effective. In some cases, the business may decide to enter into an investigation into the executive’s conduct or give the executive the chance to improve performance which will draw out the process.

Remember the contract. Think about the mechanics of the exit. The contract should be checked to determine the length of notice, whether there is a fixed term in place and whether the executive may be put on garden leave.

Be wary of email. The exit of senior executives is more likely to take place by brief and frank discussions rather than following a detailed procedure. Be aware that email exchanges will be made available to a court/tribunal in the event of any litigation. A decision will also need to be taken about how the departure is communicated internally and externally, and this will often be agreed in any settlement agreement.

Consider company law issues. If the executive is a board member he/she will need to be removed from the board as well as being dismissed as an employee. Think about whether shareholder approval will be needed for any pay-out. Sums paid may also need to be disclosed in the company accounts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

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