How to terminate a senior executive without breaking the law

The resignation of Thames Water CEO Sarah Bentley was in the news recently. She resigned with immediate effect, a few days after it emerged that the leakage rate from the company’s pipes was at a five-year high. Senior exits are also topical either on their own or as part of a senior management team reshuffle.

In this article, employment partner Marie van der Zyl looks at the process that a company should follow to either negotiate or achieve a senior exit, on the best terms whilst maintaining the reputation of the company.

There are times when a company decides the individual must go ‘now’ at all costs but the company will be so much better off having a valid strategy at the outset.

Why follow a fair process

It’s important to follow a fair and legal process to mitigate potential claims and other legal risks. Even if the senior employee does not have two years’ employment (for a claim of ordinary unfair dismissal), they may have other claims including discrimination claims and sizeable contractual claims for loss of benefits. There may also be valuable post-termination restrictions in favour of the company which may be lost if a compliant process is not followed.

Preliminary steps

Here are some general steps that employers should take when considering terminating a senior employee:

• Review the employment contract: Start by reviewing the employment contract including any provisions related to termination, notice periods, post-termination restrictions, severance pay, commission, bonus or any other benefits, including share options. It is important to understand the contractual obligations and rights of both parties. Where there are allegations of gross misconduct, check if the contract provides for contractual suspension which has the advantage of taking the senior employee out of the business immediately, pending investigation.
• Assess the reason for termination: Ensure that the company has a potential valid reason for terminating the senior employee. Legitimate grounds for termination may include poor performance, misconduct, violation of company policies, breach of contract, redundancy, the need for restructuring or some other substantial reason. It is important to obtain relevant documentation and evidence to support the basis for the decision.
• Follow internal procedures: Get advice to ensure that the company follows internal policies and procedures, that the employee is aware of their rights to be represented at disciplinary meetings and that records are kept at all stages. This should involve consulting with HR and seeking legal advice. All too often there may be a lack of investigation and disciplinary hearings. In the absence of gross misconduct allegations, the company could decide to implement a performance improvement plan for poor performance. This may not be viewed as good for the business.

By that time the relationship may have broken down and consideration should also be given to entering into a protected or without prejudice conversation, as is appropriate.

The parties may then achieve an agreed exit under a settlement agreement providing clarity for the business and managing the external messaging. As well as provisions for financial compensation and benefits, agreed leaving statements can be included, as well as extended health benefits and outplacement. A senior exit can look seamless and amicable, and save substantial legal costs. If the senior employee is a board director or shareholder, there will also be additional considerations.

Dismissal after a disciplinary process  

• Check if the contract provides for dismissal on notice or pay in lieu to ensure there is no breach of contract which may invalidate the enforcement of post-termination restrictions. The employee may also submit an appeal and consideration may still be given to offering a settlement agreement to provide finality.
• Arrange a termination meeting (if possible) to directly communicate the decision and ensure there is a prepared termination letter. Conduct any meeting in a private and professional manner, ensuring that the senior employee understands the reasons for termination and any next steps. As well as return of property this should include explaining continuing obligations, regardless of the reason for dismissal, e.g. the duty of confidentiality, which is indefinite, and data security.

• Support to remaining staff should be given after the termination. The company should offer assistance and explain any changes to the remaining employees who may have been affected by the departure of the senior staff member and any adverse external publicity.

A senior exit can be a major change for any business and legal advice should be sought at the earliest opportunity to manage the process. These are just a few of the issues to consider and every situation will be different.

If you have any questions about a senior exit, please contact Marie van der Zyl.