- within Media, Telecoms, IT and Entertainment topic(s)
Highly paid executives were never meant to be the greatest beneficiaries of the Government's reforms to unfair dismissal law. The value of their remuneration packages can make the current cap on unfair dismissal loss (GBP123,543) look modest. With the cap being abolished from January 1, 2027, the door will be wide open to claimants whose ongoing alleged losses far exceed this figure.
An employment tribunal does not just look at the remuneration package at the time of exit when assessing loss, it factors in future loss in a more speculative way. This includes the value of lost stock, stock options, bonuses, long term incentive plans and pension loss.
This has major ramifications for every business with highly paid employees. However, this seismic change should be particularly noted by investors includingventure capitalists and private equity firms. Where shares or options are linked to employment, any unfair dismissal from January 1 could include the value of lost equity and stock options. Businesses have often relied on being able to do a swift severance deal if that performance falters or there is a change in the strategic direction. But the days of the swift severance deal are numbered.
Is there a solution for business? We think there is as the law now stands. An employment law provision that was thought to be obsolete, allowing employees to have “employee shareholder status” in return for waiving their right to bring an ordinary unfair dismissal claim, can provide a solution. Provided strict statutory conditions are met, the parties may enter into an employee shareholder agreement. The conditions that must be met are:
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The terms must be expressly agreed by the parties.
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The employee must have received fully paid-up shares worth at least GBP2,000 at the time the agreement was entered into.
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There must be no additional consideration provided by the employee.
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The employee must be provided with a written statement setting out prescribed matters.
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The employee must have received independent legal advice paid for by the employer.
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There must be a seven-day cooling off period once the agreement is signed.
Helpfully, a 2019 Employment Appeal Tribunal case involving an executive who unsuccessfully tried to challenge his employee shareholder status/right to claim unfair dismissal, stated that “a purposive construction of section 205A meant no more than interpreting the exemption from statutory protection narrowly and ensuring strict compliance with the pre-conditions for employee shareholder status”.
It feels like a bold solution, but unless and until the Government actually repeals this provision, it is there for the taking. We strongly recommend investors consider this route before committing to significant new investments, and that employers of highly remunerated employees consider requiring it as part of a job offer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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