Jonathan Maude, an employment partner at law firm, McGuireWoods, on the things to consider when dismissing senior members of staff
The upswing in the economy and market confidence probably means that we are likely to see an increasing number of senior executive terminations. In anticipation of renewed economic growth, businesses are likely to make sure their houses are in order and this may mean restructuring and changing the leadership in organisations. This is where employment regulation and the commercial needs of the business may diverge. Employment regulations require processes to be undertaken to ensure that dismissals are fair whereas the business may not commercially be inclined, or able, to follow through with those processes.
The main regulatory constraint in relation to dismissals is that of unfair dismissal. This means that employers bringing about a dismissal need to: first, have a fair reason for that dismissal, and second, to ensure that a fair process is followed by the employer in coming to the conclusion that dismissal should result.
Employers can rely on five reasons for dismissal and these are: redundancy; capability; conduct; contravention of a statutory enactment; and “some other substantial reason”. Unfortunately, simply needing to ensure the company’s “house is in order” does not fall into one of the recognised “fair” categories.
In addition, the process which needs to be followed often involves a number of layers of management within an organisation. Any process will usually involve a line manager and will need to provide for rights of appeal to more senior layers of management. As such, businesses can “run out of room” in ensuring there are enough senior people available to enable the process to be followed appropriately.
When going through the process, employers should approach any dismissal with an open mind. The outcome should not be predetermined. Accordingly, where the business need has dictated that an employee should go, it is difficult for the company to then show that it has followed a process with the appropriate level of open mindedness.
As a result of all of the above, it is therefore sensible to try to have “off the record” discussions with senior staff to try to see whether a settlement might be possible, rather than to go through with a drawn out and effectively pointless process. Recent legislation has introduced the idea of “settlement agreements” but there are still risks for employers in having these discussions, and notwithstanding the recent legislative changes, employees may still look to rely on comments made by employers if they want to challenge the employer. Accordingly, it is important to be aware of what is said in such meetings notwithstanding the fact that it may be held in an “off record” manner.
The most effective, and risk averse, course is to advise the employee of the need to restructure with a consequent effect that their role may be at risk of redundancy. The redundancy process can be started but the employer should then be open to have settlement discussions at the same time. In this way, if a satisfactory outcome cannot be achieved then the employer can revert back into the formal process and proceed with the formal redundancy route. In this way, the employer can attempt to limit any damage being done by attempting to resolve matters amicably at the outset.
It is generally accepted that reaching a settlement is in the interest of both the company and the employee, as the reputations of both can be preserved. Also, the employee can benefit from certain things that can be achieved through settlement which may not otherwise be available by way of litigation. For example, the wording around announcements and references can be agreed and confidentially issues can be addressed which is likely to be to the benefit of both the employer and the employee. This would extend to not just the confidentiality of the terms, and possibly fact of, settlement but also to business information and contacts which the employer wishes to protect following the termination of the employment. By documenting this in a settlement agreement all parties can be clear as to what is, and what is not, expected going forward.
In addition, favorable positions in relation to incentives can be approved. For example, the executive can be treated as a “good leaver” in relation to incentive arrangements, which would not otherwise be possible if litigation were pursued. A note of caution here for the employer, however, is to ensure the internal appropriate approvals are obtained before commitments are made. Depending upon the size and nature of the business this may involve remuneration committee approval, or trustee approval, depending upon the incentive in issue.
An amicable settlement must be in the best interests of both the employer and employee but the mechanics of getting there and the eventual terms need great consideration.