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Legal advice for company directors being made redundant

Gareth Dando, Partner - Ramsdens Solicitors

As a company director, you may have already been through the redundancy process otherwise this may be the first time you are facing it. Either way, it’s important to be prepared. 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.

The process of redundancy is the same for all members of a company, regardless of the level of their job title. If you have been employed as a company director 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.

Issues to consider when being made redundant

Reputational management

Reputational management, both internally and externally, is one of the most important factors to consider when it comes to the redundancy of executive-level employees. One of the major negotiation points is often to try and agree exactly what will be communicated upon departure, to reduce the risks of any disputes later down the line.

Confidential company information

Your contract will likely include terms about the confidentiality of company information and what you are able to do after you leave the company. Examples of sensitive information that are understood and accepted to be surrendered include lists detailing product or financial information.

Restrictions

What may be more controversial, particularly in relation to the redundancy process, is any attempt by the company to enforce post-termination restrictive covenants that may stop you from working in the same industry. If these restrictions are being imposed upon you, it is vital you seek the advice of a solicitor to understand 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.

Garden leave

It is common for an employer to place an 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 space for the employer to communicate the redundancy to customers and staff, and prevent any disharmony from continuing to have a disgruntled employee in the building.

If your employer has 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.

Shares and benefits

If you are a shareholder in the company, the terms of any shareholder agreement will determine how these will be dealt with. Usually, a redundant employer will be treated as a ‘good leaver’ under such an agreement, meaning you may retain the shares.

Furthermore, your benefits package may include membership in a long term investment plan (LTIP), which means you may hold unvested share options at the time of being made redundant. If you do hold unvested shares, it’s likely that you will lose any entitlement to the benefit of any unvested shares, even if you are a good leaver, unless the company agrees. In many cases, the value of any shares is likely to exceed any notice pay and statutory redundancy pay entitlements, making it a major point of negotiation.

If you are entitled to a bonus under a company scheme, the way the bonus will be handled on your departure will usually depend on the terms of the scheme, and whether it is contractual or discretionary. Typically, bonuses are discretionary, so employees can face trouble in recovering a bonus; however, it is not impossible. In cases where the bonus is discretionary, it is common that a departing director be given a pro-rata bonus payment.

Redundancy pay entitlement

Directors who are employed by an insolvent company that is then placed into liquidation, could also be entitled to statutory redundancy pay. In order to qualify for redundancy pay, the director will need to prove that they are an employee by, for instance, providing evidence that they are on the payroll or by producing a contract of employment. This does not have to be in writing, but a written contract would certainly assist your case. Another requirement is for the company to have been incorporated for at least two years.

If you are being made redundant and have been offered an enhanced financial package, it is likely that 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 will 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.

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