- Alex Kleanthous
- Updated: Tue, 10th Jan 2017
Employment documentation makes life easier for employers. Off the shelf templates are attractive, but as we explain, can be a false economy. We support employers and resolve problems.
Our employment documentation services include:
We provide you with the right level of protection according to the seniority of an employee. We cover off obligations at all stages from:
- commencement of employment;
- flexibility for effective management during employment;
- providing for enforceable restrictive covenants; and
- obligations upon termination of employment.
Considerations for directors
Directors in law have two capacities – that of an employee providing services and that of an officer of the company holding a directorship. In practice the role of directors gives rise to additional considerations when drafting the director’s service agreement such as:
- Fiduciary duties – directors have responsibilities and fiduciary duties which extend beyond the duties an employee owes to his employer.
- Post termination restrictions – the obligations which can be imposed upon a director can be more far reaching than those imposed upon less senior staff.
- Resignation as a director – unless the service agreement deals with resignation as a director the termination of employment may not give rise to an automatic termination of directorship. If the service agreement, articles or shareholders’ agreement do not cover resignation of directorship the position under the Companies Act is that at least 51% of shareholders have to vote on dismissal.
- Private companies – in practice a private company needs to consider obligations and duties under the articles and shareholders’ agreement at the same time as dealing with the service agreement. If the director is a shareholder the rights attaching to shares on termination of employment will need to be reflected in the articles or shareholders’ agreement.
We look at the sector in which the business operates. For the employment documentation to be effective and attract the right people it should reflect the special risks relevant to the type of business and the sector it operates in. For example:
- High tech businesses – protection of the intellectual property being developed or monetised is of great importance. To achieve an exit for an intellectual property business the employer must ensure that all IP created has been assigned to the employer.
- Creative industries – protection of the copyright and branding can be important and require special care.
- Financial services and hedge funds – regulatory requirements and duties to satisfy the industry requirements arise which would not be so important to other business sectors.
Altering an employment agreement
When making changes to an employment agreement we find there is less scope for arguments from employees if the changes have been agreed first.
Termination of employment
We review what will happen if the employer needs to terminate the relationship. We consider for you:
- Will you want to get the employee out of the business quickly because leaving them there could be a risk– in this case we will draft a garden leave clause. A garden leave clause means you can exclude the employee from the business without risking breaching the restrictive covenants. Enforcement of restrictive covenants will be easier with garden leave clauses.
- Do you want to be able to end the contract quickly– in this case we will draft a payment in lieu of notice (PILON) clause. A PILON clause provides flexibility for employers. Employers can use the PILON to keep the employee out of the market and stop him joining a competitor for the length of the non compete. This assumes that the non-compete is enforceable. However, it does mean notice payments will be taxable.
- H3 New tax regime for notice pay – From 6 April 2018, payments made in lieu of notice will be subject to income tax and NICs. There will be no exception for non-contractual payments – usually described as damages for loss of notice. To add flexibility it’s sensible to include PILON clauses as the tax free benefit will disappear from April 2018.
We prepare employment policies appropriate for your business. These are usually contained in staff handbooks or other reasonably accessible documents.
Our suggested policies will set out the standards expected of employees. Experience shows that employment policies educate the staff which in turn improves performance.
Certain employment policies are required by law
There are certain policies are required by law such as disciplinary rules and procedures. There are also policy areas that, although not compulsory, can bring significant protections for employers such as data protection and bribery.
Should the employment policy be contractually binding?
We will carve out certain policies from being contractually binding. The reason is to avoid creating more onerous conditions for employers than is necessary.
We recommend which policies should form a binding contractual commitment which employers must stick to, and which policies are best left as non-contractual to build in flexibility for the employer.
Review of employment policies
We review or prepare employment policies ranging from the disciplinary and grievance policy through to policies relating to equal opportunities, employee monitoring, anti-bribery and corruption, whistle blowing and health and safety to name a few.
We implement employee share plans. Our skill is we set out terms designed so that the employer avoids giving away more equity than is needed to achieve objectives. Common objectives are finding a suitable exit within a set time frame.
Implementing employee incentives
- Have you got the position for leavers covered off? Is the distinction between a good leaver and a bad leaver designed so as to encourage desired performance?
- Can you claw back payments if matters such as over stating profits come to light after payment of the bonus?
- Are you able to defer incentive payments where performance is below target?
- How will discretion work in practice? A well drafted bonus or commission plan will achieve the impact of being motivational but at the same time limit the employer’s liability to pay out for poor performance.
- How will the employee share plan be designed?
Special issues for private companies
Taxation of share awards in private companies is particularly complex. In practice, employers will need to help employees with the reporting of share awards. In cases where the shares carry value the question arises of how tax liabilities will be funded.
It is the taxation issues which drive many employers in the private sector to consider tax efficient arrangements such as:
Bonuses remain popular. We discuss which type of bonus is most likely to work for the business. The solutions we recommend and draft do vary. For example:
- For some companies a bonus is seen as the only effective motivation as they do not have the requisite shareholder approval to issue equity incentives to their employees. They may peg the bonus to shareholder value and implement a phantom share option bonus to achieve this.
- In other companies, the board decide that motivation takes the shape of cash based bonuses plus bonuses in the form of equity.
- In larger quoted companies there is a drive to encourage employees to invest their cash bonuses into longer term share based incentives for which additional awards are potentially available. They may implement an LTIP to secure the position.
Contractual bonus or not?
The bonus design does need to be twinned with the employment contract. One of the design choices open to employers is whether the bonus will be discretionary or not? The employer’s obligation to pay out often rests on the interpretation of how discretion works in the particular bonus plan and how discretion can be used.
Employees do challenge the use of discretion in cases where there is any wriggle room. The easiest way for an employer to avoid a dispute is to think about the genuine intentions at the start.
The right contracts are important to enable profitable business for both parties but with an eye for a worst case scenario, and when things have deteriorated to the extent that you are looking back to the contract, the parties are rarely on good terms. In an already contentious situation, both sides are scrambling around for loopholes.
Questions for employers running a bonus scheme to consider
Employers should consider the following when implementing and running any form of bonus:
- Is there any cap?
- Is the reward for meeting the target to be pro-rated if there is some external and unavoidable event that causes performance to stop mid-way through the year?
- Is a date set to adjudicate on meeting the target?
- What happens if there is breach of contract – will that result in payments otherwise due no longer being due?
- Are there potential penalties for non-performance as opposed to incentives for targets met?
- Who is going to decide whether the performance target has been met?
Cash, shares or other awards may be recovered if the power has been reserved under a clawback provision in the employment contract. Circumstances giving rise to a clawback are either the company having to restate its accounts to a material extent or the employee has committed serious misconduct discovered after the award is made.
Clawback provisions should be drafted carefully so as to not amount to a penalty clause. Penalty clauses are not permitted under UK law. If this is found to be the case, this part of the clause will be void and unenforceable.
Clauses which provide a pre-determined and quantifiable loss are usually enforceable.
Malus clauses relate to both short term cash bonuses and Long Term Incentive share Plans (LTIPs). These allow an employer to revise, defer or refuse bonus payment or share awards if performance is below target.
Settlement agreements for employers
You may have no protection as an employer once an employee has left. The risks include derogatory comments particularly on social media, poaching staff, customers and exploitation of intellectual property to name just a few. Employers can protect themselves under a settlement agreement.
Refresh of key clauses
Often the employer uses the settlement agreement to secure obligations from an employee not included in the original employment agreement. For example if the confidential information clauses are not up to scratch or the post termination restrictions are out of date they can be re-stated in the settlement agreement.
Tax on settlement payments
If you are making a payment for various types of losses and claims the layout of the settlement agreement will be important for tax. If you do not operate the tax on the termination payment correctly you run the risk of HMRC assessing the employer to further tax, interest and penalties for making an incorrect return to HMRC. Different types of payments carry different basis of taxation.
Up to £30,000 can still be paid tax free on termination of employment. We will review to ensure you fall within the framework required to qualify for making a tax free payment.
Departing employees and directors who are shareholders
If the employee is a shareholder there may be a requirement for a share purchase or transfer, or a company share buy back. In practice, whilst a contract of employment or directorship is a separate agreement to the contract governing shares, the two are wrapped up at the time of agreeing any settlement agreement. We will provide solutions for both aspects so that the employer receives complete recommendations on how to proceed.
The company and individual may agree that the contract is a consultancy not employment.
Solutions for risks under consultancy agreements
- The employer could find itself and not the consultant liable for income tax and national insurance under PAYE plus penalties and interest for late reporting. HMRC powers have been increased and contractors are a focus area currently for HMRC. We draft indemnities for the employer.
- The Employment Tribunal determine that the consultant is an employee and enjoys the rights enjoyed by employees such as the right to receive compensation following unfair dismissal.
- The agreement with the contractor should deal with post termination restrictions.
- Of importance is the need where intellectual property has been created for the employer to capture an assignment of all intellectual property rights to the business. Assignment can be included in the body of the consultancy agreement or dealt with separately. Dealing with IP infringements rest on establishing ownership so it is important not to overlook assignment.
- Rights dealing with termination of the contract should be set out.
Employment documentation track record
Some of our recent instructions include:
- Drafting commission and bonus plans for a franchise selling business.
- Review of staff handbook for an Australian company coming to the UK to trade and seeking to harmonise policies.
- Drafting policies on social media and use of internet for an on-line gambling company.
- Drafting and negotiation of settlement agreements for a large range and variety of clients.
Our specialism is our knowledge of employment law in the wider ambit of commercial life. We work with businesses of all sizes, from large companies with HR teams to smaller businesses.
Our clients use us to review and update employment documentation, draft and negotiate settlement agreements, share purchase agreement and share buy backs. Our tax expertise means that we always consider all tax implications where appropriate.
We tailor documents to your business, adding value which standard templates lack. Our work includes an analysis of risk, skilled drafting and practical advice on implementation.