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The draft contract provided is intended to be a stand alone document. It is written for an executive director but it would be equally suitable for a senior executive. It is not a fully detailed contract but could be shortened considerably by incorporating, by reference, a company’s standard written policies on, for example, holiday, sick pay and company cars. If you want assistance in the preparation of an executive contract, please call us directly in order to advise us of your requirements.

Quick reference

Click the links for quick access to the relevant commentary:

background and form of agreement

other relevant matters

taxation

parties and job background

job title

duration of employment

job duties

mobility and hours of work

remuneration and benefits

holiday entitlement

incapacity

pension and other benefits

confidentiality

intellectual property

dismissal

post-termination covenants

Background and form of agreement

It has become common practice for senior employees to be offered a formal employment agreement or ‘service agreement’. Often a company has a standard form or series of standard form agreements which are offered to appropriate senior employees. A formal agreement may be offered to a senior employee for a number of reasons including:
(a) the perception that employment under a service agreement in itself reflects the individual’s senior status within the organisation;
(b) as a convenient means of recording specific terms which may have been agreed for the individual; or
(c) as a means of presentation of more complex contractual provisions which will normally be considerably more onerous and/or restrictive for the employee than may be the case with other less senior employees.

In practice, (b) and (c) could be achieved just as easily by recording the terms more informally – for example, in a letter or by referring to other documents such as standard terms of conditions of employment, a staff handbook or an unfair competition agreement. In essence, there is nothing magical about a formal employment agreement or ‘service agreement’, but rather it should be treated as a commonly used means of presenting contractual terms. The majority of clauses in the precedent are aimed at providing appropriate protection for the employer and it must be strongly arguable that, from the employee’s point of view, he may be better off with a simple letter stating his remuneration package and security of tenure provisions.

Whilst the precedent contains reasonably comprehensive provisions it is important that they should not be adopted wholesale but rather be tailored to meet the particular circumstances. Accordingly, consideration should be given to whether each clause of the precedent is appropriate for the circumstances envisaged. Please check with us before preparing such an agreement!

Other relevant matters

Formal employment agreements are normally executed by signature. Although executing them in this way is entirely satisfactory in most circumstances, execution under seal is necessary if the agreement contains any provision which will only be effective if executed under seal (e.g. where a power of attorney is created).

Taxation

No stamp duty is payable on a formal employment agreement whether or not it is executed under seal and whether or not it contains a power of attorney (Finance Act 1985, s 85 and Sched 24).

Parties and job background

It is usual for an executive to be employed by the company whose business he will manage. However, in groups of companies it is quite common for senior executives to be employed by the ultimate or an appropriate intermediate holding company, or in a subsidiary which has been designated as a group service company. Where this is the case, care needs to be taken to review the draft and adapt the contract as necessary, particularly clauses 13 and 15 of the precedent as the employer may not be the proprietor of the confidential information, intellectual property, or even the business in question.

Job title

The key issue with the job title is flexibility. From the employer’s viewpoint, the contract should allow the employer to change the employee’s job, at least to one of equivalent status. That can be achieved either by use of a generic job title (e.g. Senior Manager) or by providing in the contract for reassignment. The risk for the employer if he does neither of the above is that the employee could legally refuse a change. An imposed change could well be grounds for claiming constructive dismissal.

Duration of employment

Except in the case of appointments of ‘real’ directors (i.e. those who are appointed under the Companies Act 1985 as a company director), the employer and employee are free to agree whatever suits them. The fundamental choice is between a fixed period or an indefinite period terminable on notice, though both come in a number of variations.

1. Fixed period variations
(a) pure fixed term, e.g. ‘3 years from 1 September 2017 to 30 August 2020’;
(b) fixed term, subject to notice within the fixed term;
(c) renewable fixed term where usually (but not necessarily) both parties by mutual agreement can renew the contract;
(d) evergreen or ‘saw tooth’ fixed term where the period is automatically renewed, usually every year, unless one party objects.

2. Indefinite period variations
(a) same period of notice for both parties;
(b) different periods of notice for the parties – usually the employer’s period of notice is the longer;
(c) initial fixed term followed by notice – care needs to be taken to be clear whether notice can be given during the fixed term or only after it expires;
(d) different periods of notice in different circumstances.

In deciding which arrangement to adopt and the length of the periods, a number of issues need to be borne in mind.

Security and ‘golden parachutes’
First of all, the function of a long period of notice of dismissal is to give the employee security. Generally, a long notice period from the employer protects the employee by making him expensive to dismiss without notice, so deterring the employer from dismissing at all. Care needs to be taken in deciding this, and as appropriate account should be taken of the Greenbury Code.
Long notice periods also usually result in employees getting large compensation payments on wrongful dismissal. This objective could be achieved by a provision in the contract specifying the amount of compensation payable. This is known as a liquidated damages clause or, more colloquially, a ‘golden parachute’ clause. Where adopted, the employer should be allowed to dismiss without cause on short notice – say statutory notice – but this will trigger the entitlement to the compensation. As a contractual payment, the whole amount will be taxable and may be subject to National Insurance contributions. This course not only avoids a breach of contract (enabling restrictive provisions to be enforced) but also avoids many compensation disputes.

Pay in lieu of notice
Secondly, a period of notice from the employee that is longer than necessary to recruit and train his replacement is potentially expensive as resigners are often paid off in lieu of notice. But a longish notice period (between say 3 and 12 months depending on the circumstances) from an employee could well be enforceable and therefore a deterrent to would-be poachers.

Fixed-term contracts
Fixed period contracts are really only appropriate for temporary appointments (e.g. project work), or where the employer wants the employee to understand that his appointment is not permanent. To that end, renewal should never be automatic. Employers also need to be prepared in case the employee exercises his right to walk away at the end of the period.

The expiry of a fixed period contract without offer of renewal by an employer is just as much a dismissal for redundancy and unfair dismissal purposes as giving notice of dismissal. So, while no breach of contract claim arises if a fixed period contract is not renewed, a claim for redundancy pay or for unfair dismissal could do. It is possible to opt out of these claims, as regards expiry only, by written agreement. For redundancy the fixed term of employment has to be at least two years (ERA 1996, s 155 & 197(3)and for unfair dismissal one year (ERA 1996, s 108(1)) (subject to exceptions).

Duties

It is usual, in a full contract, to set out the employee’s legal obligations rather than his day-to-day functions. A contract would typically contain provisions telling the executive:
(1) his appointment is full time and exclusive, i.e. that he must work full time for the employer and cannot have another job at the same time;
(2) he must do his best, promote his employer’s interests and be a loyal and faithful employee;
(3) he is not allowed outside business interests. This is not mandatory, and employers take differing views but, in any case, the primacy of the obligations to the employer should be clearly laid down.

These objectives are achieved in Clause 4.1.

Mobility and hours of work

Many employers expect senior executives to move around the country or abroad as required. In the context of promotions, a contract without a specific power to physically move an executive’s place of work may work satisfactorily. But, as organisations reduce their ranks of managers, promotional moves will be less frequent and such a system may cease to meet an employer’s needs for mobility.

Care does need to be taken not to go overboard with these sorts of provision. In Meade-Hill v British Council [1996] 1 All ER 79 the Court of Appeal ruled as a preliminary issue that an unrestricted mobility clause was indirect sex discrimination against women and therefore unlawful unless objectively justified. The basis for the ruling was that more women than men are secondary earners and therefore women were less able to comply with that requirement than men. Furthermore, the case of United Bank Ltd v Akhtar [1989] IRLR 507, confirmed that an employer must not exercise a mobility clause in such a manner as to breach the implied duty of trust and confidence between employer and employee. If you are not sure what this means then please make sure that you check with us.

There is no doubt however that, in appropriate cases, mobility clauses can be validated, but, an employer does need to be able to justify imposing a change in working patterns, for example at senior management levels where company policy is to move executives around.

On working time, it is usual to specify that overtime will be worked whenever necessary without extra pay. With reference to the Working Time Regulations and their controls on working time, it might well be prudent at least to obtain the employee’s consent to exceeding the maximum 48-hour average working week.

Remuneration and benefits

With regards to fixed salary and bonus/commission the key issues are:
(a) to make clear which elements of remuneration are fixed and which are fluctuating;
(b) to set out the arrangements for reviewing pay.
As to (a), fixed salary needs to be clearly distinguished from bonus or commission. Any guaranteed minimum bonus/commission and any time limit on the validity of this guarantee should be clearly specified. The status of bonus/commission as contractual or discretionary should also be stated. An employee will have no legal claim to discretionary bonus, at least until one has been declared in his favour.

Contractual bonus/commission arrangements should, among other things, specify when payment will be made and what happens if an employee leaves before payment is due. See the commission scheme precedent at Schedule 2 of the Executive Contract for an example of this.
Employers should leave themselves an escape route to enable cancellation and replacement of schemes.

Salary reviews

The other key issue is salary reviews. Employees expect their contracts to provide for regular reviews at least. Some employees may negotiate for guaranteed increases, usually linked to the Retail Prices Index, to maintain the spending power of their salary. A promise to review is just that – it is not a promise to increase, just to reconsider the amount of pay. Failure to carry out a review in a reasonable time or without giving the matter due consideration would be a breach of contract, so a promise of an annual review cannot be taken lightly. Equally a review clause would not allow an employer to reduce basic salary; a specific power in the contract would be necessary for this.

Company car

Anything that is said about the company car should dovetail with the employer’s car policy, unless it is intended to create a special deal for the employee, in which case the contract needs to set out all the special arrangements. An example of a specific car policy is included in the precedent at Schedule 3.

If employees are offered a choice between a company car and a cash allowance to provide their own, they need to remember the lease, hire purchase or loan agreement they enter into to buy a car will be a personal obligation which will continue if they lose their job. Their compensation claim will include the car allowance only for the notice period, not the lease or loan period, leaving them with a very expensive commitment they may be unable to meet.

Holiday entitlement

Holiday arrangements need to be clear. Control is exercised by the employer requiring holiday dates to be agreed. In particular, arrangements regarding the carrying forward of unused holiday entitlement and entitlement to accrued holiday pay, if any, on termination should be set out. Morley v Heritage plc [1993] IRLR 400 establishes that if a fully detailed contract is silent about payment in lieu of untaken holiday, none is due.

Holiday entitlement should comply with the Working Time Regulations (minimum holiday entitlement – check our information about the new regulations or give us a call).

Incapacity

All employees are eligible to receive statutory sick pay (“SSP”), if qualified, for up to 28 weeks at the prescribed rate. The rate is reviewed annually. At least for white collar workers, few employers consider paying only SSP a fair bargain and therefore most will operate a more generous regime for employees. These arrangements need to be clearly documented. There is no particular reason why senior executives should be treated better than ordinary employees in this respect.

Some employers insure against long-term sickness, and include employees in their insured schemes as a benefit in kind. This is covered in Clause 11 of the Executive Contract. In relation to an arrangement such as this the company policy documents need to encompass the limits on benefits in this situation for example, what will happen to benefits in kind, like company cars, during absence, and further, what happens if the employer terminates the employment because of absence caused by sickness.

Pensions and other benefits

In some organisations, fluctuating earnings are not pensionable. It is best practice to make this fact clear in the contract as well as in the pension scheme documents. Where both pension and life cover are provided through the employers’ pension scheme, the contract should refer the employee to the scheme itself to avoid creating a promise which conflicts with the scheme rules.

Life cover for very highly paid individuals may well only be available above the insurer’s ‘free cover’ limit after medical examination. This need not be reflected in the contract itself provided the scheme rules or policy terms are incorporated by reference but the employee does need to be told this, in writing, at the outset.

Confidentiality

Every employee is automatically subject to a duty not to use or disclose confidential information he learns at work for unauthorised purposes. That duty lasts for so long as the information in question is confidential even after the end of the employment.

The courts will not allow an employer to protect everything under the cloak of confidentiality. Mere trivia and experience gained through time served cannot be protected from being used or passed on, nor, obviously, can information which is already widely known and applied outside the employer. But things like secret product formulae, sealed tender prices and new product plans are confidential and protected by the law. A confidentiality clause is nevertheless worthwhile: first, because it will put the employee on notice of his duty; secondly, because it may, by careful drafting, reinforce or perhaps even establish the confidential nature of certain information in that particular workplace. The courts have said that the proper way to ensure the protection of confidences is by a non-competition covenant.

The examples given in Clause 13 are suggestions only and the categories should be tailor-made for each employer.

Intellectual property

Employees often create valuable intellectual property rights in the course of their employment (e.g. an invention). But having clear ownership of a manual about the working of a particular process could be almost as important as owning the patent for the process itself. Generally these rights belong to the employer under the Patents Act 1977 for inventions or the Copyright, Designs and Patents Act 1988 for copyright and design rights.

It should however be borne in mind that with effect from 1st January 2005, s. 10(1) of the Patents Act 2004 inserted a new provision at s. 40(1) of the Patents Act 1977 which provides that a patented invention can qualify an employee for compensation regardless of whether it is the patent or invention itself which would potentially benefit the employer

In addition to warning employees and so reinforcing their duties, specific provision can help to ensure the employer’s rights (e.g. the opportunity of patenting an invention) are not lost.

However extensive provision of this sort is probably unnecessary as a general rule except for employees engaged in, for example, research and development, design, or journalism or technical writing.

Dismissal

While the law always allows an employer to dismiss an employee without notice or pay in lieu for gross misconduct, and treats a contract as terminated by frustration if an employee dies or is permanently disabled, the law is not otherwise particularly helpful to employers seeking a way out of a contract of employment without giving full notice or paying compensation. A well drafted contract therefore anticipates this by providing a list of circumstances where the employer can dismiss without notice or pay in lieu. The following list is fairly standard:

  • gross misconduct or gross incompetence
  • repeated material breach
  • absence due to illness for longer than a specified period
  • bringing himself or the employer into serious disrepute
  • becoming bankrupt
  • conviction of a criminal offence.

The more important, secure and well paid the employee, the wider the grounds for dismissal should be. Compensation running into hundreds of thousands of pounds or the enforceability of restrictive covenants can turn on these provisions.

Care also needs to be taken to avoid falling into the trap of having contractual disciplinary rules and procedures. These could prevent an employer from dismissing at all, or require a long, drawn out process for dismissal. It is therefore wise to include a provision stating that none of the employer’s normal disciplinary rules and procedures will apply. However, you need to make sure that the statutory minimum requirements still apply. Please check with us if you are at all unsure in this regard.

The provisions in clause 16.2 speak for themselves. Getting the balance right is important to both sides, as these provisions are the employer’s way out of the contract without notice or compensation.

However, both sides need to be aware a dismissal under one of these provisions can still be an unfair dismissal, under which an employee could seek reinstatement. Also, in sickness absence cases, the employee’s right to full pay during his statutory notice period under ERA 1996 s. 88(1)(b), , even though the contract has been lawfully ended, must be remembered.

Employers should also note that in circumstances where the employee’s actions amount to less than gross misconduct, they should ensure that they follow the correct statutory Disciplinary and Dismissal procedure when dealing with an ‘Executive’, indeed, as they would in dealing with any other member of staff. Again, PLEASE check with us in this regard.

Pay in lieu of notice

Employers may often need to dismiss quickly when they do not have a legal case for dismissing summarily. A pay in lieu of notice clause enables that dismissal to be effected without a breach of contract, so saving any restrictive covenants. These would otherwise fall on a breach of contract by the employer (General Billposting Co Ltd v Atkinson [1909] AC 118). Such a payment will be fully taxable and National Insurance contributions may also be payable. The payment will usually be calculated by reference to the pay the employee would have earned if he had worked out the notice to which he was entitled.

Abrahams v Performing Rights Society [1995] IRLR 486 emphasises the importance of careful drafting to ensure the making of pay in lieu is an option, not an obligation, for the employer. In that case, the employer had to pay out in full under the pay in lieu of notice clause, even where the employee had mitigated his loss; thus the employee gained a windfall.

Garden leave

This term, thought to derive from the Civil Service, is used to describe the situation where the employer suspends the employee, usually during the notice period, on full salary. That such provisions work is no longer doubted but as shown in GFI Group Inc v Eaglestone [1994] IRLR 119 the courts exercise discretion in deciding when, and for how long, they will enforce garden leave by injunction (see also Credit Suisse Asset Management Ltd v Armstrong [1996] IRLR 450). Primarily, this seems to be because the courts are determined to prevent employers using garden leave to achieve that which would not be permissible through restrictive covenants. Such a clause must therefore be considered in conjunction with the notice period, and any restrictive covenants.

The advantage is that the employee remains under contract and therefore barred from working for anyone else at all. Of course, he has to be paid under PAYE etc, but it is a very useful option to have in your armoury if you are an employer when it comes to handling a dismissal or resignation where the employee is likely to join a competitor.

However, a further point to note is that simply because a Contract of Employment contains a garden leave clause this does not mean that a non-competition clause should not also be present (see TFS Derivatives Ltd v Morgan QBD 2005 IRLR 246).
Clause 16.5 is such a ‘garden leave’ clause. While strictly optional, every contract should contain one.

Consequences of termination

Clause 16.7 deals with the consequences of termination. Employers should have procedures for dealing with exits to make sure everything is recovered.

Post-termination covenants

In general, employees are free to compete with their former employer once their employment has come to an end. As long as they have served out their notice, or been paid off in lieu, and so long as they do not use confidential information, they can set up in competition or join rival organisations and poach customers, suppliers and employees freely (provided they do not encourage them to break any relevant contracts).

Self help is however permissible and the courts will uphold agreements between employer and employee to the effect that the employee will not compete or poach customers. Lawyers call these ‘restrictive covenants’. The basic position is that restrictive covenants are void as being contrary to public policy and if an employee contests their validity, the onus is on the employer to establish that the covenant is justifiable – the agreement will only be valid if it is there to protect trade secrets or customer connections (legitimate business interests) and the restriction itself is no wider than reasonably necessary for that purpose.

Reasonableness is judged in terms of the duration of the restriction, the geographical area and business activities covered. Restrictions should therefore be tailor-made for each employer and job. Restraints against soliciting business from customers, or dealing with them or competing in a defined territory or going to work for a competitor are all, in principle, enforceable in appropriate cases. There is however some uncertainty about restrictions on soliciting other employees as the courts have yet to settle the law on this point. Again, you must contact us if you have any concerns in this regard.

Length of restraint period

As a general rule of thumb restraints should only exceed six months in exceptional cases, and the shorter the restriction the more chance it has of being upheld. It is not necessary for enforceability, nor is it normal, to pay the executive while a covenant operates.

Constructive dismissal

A dismissal in breach of contract (or a constructive dismissal) will disentitle an employer from enforcing restraints (General Billposting v Atkinson [1909] AC 118) even if the restraint is drafted to apply in such a case (Rock Refrigeration Ltd v Jones [1996] IRLR 675).