This article is the fourth and final in a short series which has discussed some of the aspects that need to be addressed when removing a director from a private limited company. In this article we consider the employment law perspective, where the director is also an employee of the company. We strongly recommend that, if you are considering the removal of a director, you consider each part of this series as the themes of the parts are linked.

Where a director's employment needs to be terminated, the company invariably needs to prioritise protecting its reputation, confidential information, Intellectual Property and/or other assets. Timing is usually key to successfully achieving this and exiting the director as quickly as possible is normally important, but it is crucial that the company prepares for exiting the director before taking action.

One of the first steps for the company will be to identify who has the appropriate authority to make the decision to terminate the employment. This can be especially relevant if the company is looking to terminate a CEO/ managing director.

The terms of the director's service agreement are also relevant, particularly in respect of provisions on notice pay, garden leave, restrictive covenants and summary dismissal. It is useful to ensure from the outset of any employment relationship that the service agreement is drafted with a termination event in mind.

The reason for the termination must be identified in cases where the director has been employed by the company for more than two years. This will usually determine what process is best to follow. Reasons can range from gross misconduct or redundancy, which are usually easier to justify, to more challenging scenarios of poor performance or a clash of personalities. The company will need to ensure as far as possible that whatever process is followed does not constitute a breach of contract and jeopardise the validity of any restrictive covenants on the director.

Where there has been a serious misconduct by the director, the company will need to consider if summary dismissal is appropriate, particularly if this is relevant to the application of "good leaver" or "bad leaver" provisions in the shareholders' agreement.

Even if there is a potentially fair reason for terminating the director's employment, the company may not have the appetite and/or resources to undertake the necessary process and/or there may be concerns about the outgoing director challenging their dismissal by bringing a claim against the company in the Employment Tribunal.

An alternative way forward which is worth exploring during the planning phase is offering the director the opportunity to leave the company's employment on agreed terms and without the need for any formal termination process. The terms on which the director's employment would terminate would be set out in a settlement agreement which the director would need to enter into. In addition to compromising any potential Employment Tribunal claims, the settlement agreement can include terms on payment in lieu of notice, garden leave, share treatment, compensation, legal fees and other 'sweeteners'. The agreement will also need to make provision for ongoing restrictive covenants, intellectual property, confidentiality and publicity. It is likely the director will be anxious about his own reputation and may look for the agreement to set out terms of an agreed reference and public statement in respect of the reason for the departure.

Provided certain conditions are met, it will be possible to have a 'protected conversation' with a director which will not then be capable of being referred to should the director go on to raise a claim against the company in the Employment Tribunal. During such a conversation there can be a frank discussion with the director about the concerns that have come to light about his continued employment with the company and the offer to leave the company's employment on agreed terms can be made.

The director will need to obtain independent legal advice on the proposed settlement, and will not be able to agree it immediately. The company will therefore have to consider whether it is appropriate for the director to have some paid time away from the business to take legal advice on the terms offered. The company will need to consider how to manage some practical issues around this also, such as director's access to IT systems, their passwords, keys to the building, ensuring return of company property, credit cards, and the director's access to bank accounts. There will also be considerations around the messaging that is used internally and externally as to the director's whereabouts during the intervening period.

There is no guarantee, of course, that the director will agree to such a package, and the company may have to ultimately revert to a termination process but if an exit on agreed terms can be reached, it allows for an orderly exit of the director from the company thereby enabling the rest of the management team to priortise running the business.

This article highlights some of the areas relevant to terminating the employment of a director. If you have any questions in relation to the matters discussed in this article, or wish advice on this, please contact a member of Brodies employment team who would be happy to assist.

Parts 1 to 3 of this series are available on our Brodies insights page and at the following links: 

Part 1 - Procedural concerns 

Part 2 - Potential Statutory Claims 

Part 3 - Directors who are shareholders and/or creditors