We provide strategic tactical advice to employers dealing with termination of employment. We plan with employers how to reduce the risks, costs and disruption to the business.
We do provide cost estimates before starting work. Please do give us a call to discuss your situation.
Reasons for picking us to handle termination of employment
- We will steer employers around the pitfalls which increase risk with for example redundancy or gross misconduct.
- Our experience covers the broader questions which can arise when dealing with shares and options held by departing employees;
- We work to keep employers out of the Employment Tribuanl but do have the employment tribunal litigation experience should the need arise.
Based on experience we have summarised below problem areas we see arise for employers:
Termination of employment contracts
By planning together, we reduce your risks when terminating an employment contract. This includes
- Required processes;
- Nature and extent of any investigations;
- Employee’s appeals;
- Termination requirements.
Help with difficult termination of employment cases
Typical “difficult” cases include:
- Prolonged sickness or absence: Employers need to be careful to avoid claims under the Disability Discrimination Act.
- Preserving the duty of confidentiality after the employment has terminated.
- Dealing with tax free payments under the settlement agreement.
- If a director resigns his office at Companies House he will remain as an employee unless the director’s service agreement says otherwise. This may not be what is intended.
- Bonus payments.
- Dealing with shares and options – see below.
Shares and options
There is no requirement to transfer shares or relinquish option rights unless expressly provided in the articles, shareholders’ agreement or employee share award documentation. If the employer strikes an agreement with the employee or director on termination of employment this should be recorded in a separate agreement.
Mixing capital payments with income payments is not a good idea from a tax perspective. Share based payments should not be dealt with in a settlement agreement. This is because payments made on share transactions can be brought within the capital gains tax regime which carries a much lower rate of tax.
Dealing with shares on termination of employment
The share purchase agreement can be entered into at the same time as the settlement agreement so that everything connected to termination of employment is wrapped up at the same time.
In public companies determining the value of shares is usually not controversial as the share price is in the public domain. However, in private companies the value of shares is usually up for negotiation. There are many ways to approach valuation each of which will depend upon the individual circumstances. Private companies can take advantage of the ability to buy back shares from an employee or a directors which can be tax efficient.
Any gain made by the director or employee is usually subject to capital gains tax. If the conditions are satisfied entrepreneurs relief will apply.
HMRC reporting on share payments
In most cases the employer will not have income tax or national insurance HMRC withholding or reporting obligations. PAYE does not apply. The payment of capital gains tax is a personal reporting and payment obligation for the director or the employee.
Share options on termination of employment
The position varies depending upon the reasons for termination of employment and the nature of the option. Different rules apply for each of unapproved options, HMRC approved option plans or EMI options. The rights applicable on termination of employment are usually detailed in the scheme rules.
The grant, exercise or cancellation of share options provided to employees or directors must be reported by the employer to HMRC. In some cases the employer will be required to operate PAYE. There are strict time limits which if missed will give rise to penalties.
The employer’s reporting obligation is in addition to the reporting and payment obligation of the employee.
Excluding liability for loss of share options
Option plans often include exclusion of liability clauses. The clauses are usually enforceable if they relate to shares. A well drafted clause will exclude liability for a share loss following any means of termination of employment be it lawful or not. An exclusion of liability for loss following termination of employment alone will not be enforceable. This is another reason why shares and options should not be dealt with in the settlement agreement.