No one wants to waste time on employment documentation. But, it is a necessity for running a stable workforce. Off the shelf templates are attractive, although often prove to be a false economy when you come to rely on them. We put in place the basics you can rely upon.
Without a contract, employers are exposed. There is a presumption against employers in law. We cover off obligations at all stages from:
- Commencement of employment;
- Flexibility for effective management during employment;
- Restrictions designed to prevent anti competitive behaviour; and
- Obligations upon termination of employment.
Matters not automatically implied
Some really important clauses employers need are not automatically implied into employment contracts or director’s service agreements. If the employer is to have any protection specific wording is needed. Core clauses where the employer will be at risk include:
The duty of confidentiality
- Special protection needs to be included in the employment documentation to protect trade secrets, know how, customer and supplier details.
No automatic protection for IP and trade secrets
- There is no protection for the intellectual property used in the business such as the database, clients, products, designs and copyright without specific contractual agreement. The company’s exit will be jeopardised if it does not have suitably drafted agreements with enforceable technology IP protection clauses.
Anti competition provisions not automatic
- There is a balance to be drawn between the right of an employee or a director to earn a living and the right of the employer to protect itself from unfair competition when the individual leaves. Employment documentation which does not hit the fine balance may be unenforceable. This is a fast moving area of employment law.
Monitoring of employees
- Employers cannot access emails automatically even if the emails are on the work system. Employees have privacy rights. However, a line in the employment documentation notifying the employees that the employer will be monitoring then gives employers much more power.
Termination of employment
We review what will happen if the you need 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.
Special considerations for directors
Special thinking is required if you are dealing with directors. We set out below some of the issues we find employers should be aware of.
The board’s demographics and voting rights can change the course of the business without your control. Unless specifically stated, all directors have one vote. There are alternatives. It is possible to confer a director with a casting vote. The use of a casting vote prevents a deadlock at board meetings.
Without specific restrictions in the director service agreement, a director can hold multiple appointments. Multiple appointments are common amongst NEDs. The service agreement can restrict the director or non-executive director’s activities.
Conflict between a shareholder and a director
A director, who is also a shareholder, can be in conflict. It is recognised that these two positions are separate. A shareholder director is required to ensure that his interests in the company as a shareholder do not overlap with the duties (as a director) owed under the Companies Act 2006. In practice the dual positions can easily be blurred giving rise to a breach of the director’s duties. Decent board minutes are helpful in defending decisions and avoiding conflict.
The share element should be kept separate from the director agreement as they generate different rights. Blurring these rights can put the company at a disadvantage. Often shareholder approval is needed for the share issue.
The general rule is: the longer the notice period, the longer the director can be kept out of the market following termination. However, this increases dismissal costs.
Depending upon seniority, notice periods of 6-12 months are not uncommon. The risk is the director claims a breach of contract, which would make the post termination restrictions unenforceable.
- A solution we consider is the use of so called garden leave clauses – these enable the employer to keep the director out of the office without running the risk of breaching the service contract.
Power of attorney
We recommend the company reserves a power to sign on behalf of a director. We draft these powers into the director’s service agreement and explain when you use them. A power of attorney is particularly helpful in cases where there is a forced transfer of shares following resignation.
- In practice, the person who controls the bank controls the company. No-one considers this issue when everything is going well. However, after a “falling-out”, the company may find that the hostile director controls the bank mandate. This can be covered off in the directors’ service agreement.
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.
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.
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.
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 risk extends to personal service companies which HMRC can look through.
Robust tax indemnities will be needed by the employer. In some cases the risks may be too great for the employer to take and the individual should be paid via payroll.