The senior executive team at Farrer & Co has extensive experience of guiding business leaders and other senior executives through the process of leaving their employer, including negotiating exit terms. For senior leavers, an exit agreement is typically documented under a settlement agreement, setting out the terms agreed and including a waiver of claims from the executive to the employer. We recommend that senior executives consider the following points when negotiating exit terms.
1. Understand your legal position before you decide on your strategy
There is little point in, for example, threatening a claim of unfair dismissal if the proposed package offers in excess of what you would achieve in an employment tribunal if you were to pursue your claim. Make sure you know the strength of your legal position under your employment contract, any bonus scheme, and any long-term incentive schemes before you take a position from which you may need to row back.
2. Decide on your strategy and approach to the negotiation before you make your first move, taking into account your position in the round
There are a number of questions which should be considered at an early stage. Do you have strong legal claims such that it is appropriate to set those out to your employer so that they understand their potential liabilities, or is a better approach to seek an amicable exit, avoiding legal threats, in the first instance at least? Will an aggressive approach backfire, causing the decision-makers to harden their approach? Who are the decision-makers, and what considerations will they be taking into account? If decisions need to be taken by the remuneration committee, how best can you exert leverage to maximise the chances of a good outcome? If your employer needs ongoing cooperation from you in relation to ongoing work this may give you extra leverage, depending on how long they need your help. Timing is also sometimes important, is there a deadline by which time your employer would prefer to have concluded the negotiation? If so, consider whether the deadline enhances or weakens your position.
3. Look beyond the contract and consider the impact any statutory claims may have
What is the reason for your departure and do you have statutory claims which may affect the compensation you can reasonably expect to negotiate? Compensation for unfair dismissal claims is generally capped but you should at least consider whether you could have an uncapped statutory claim. For example, have you reported wrongdoing in the public interest which has triggered the termination of your employment? If so, you might have a whistleblowing claim. Likewise, is your dismissal in breach of the Equality Act 2010 (for example, because it amounts to discrimination on the grounds of a protected characteristic such as sex, pregnancy and maternity, race, disability, sexual orientation, gender reassignment, religion or belief, or age) which could also give rise to an uncapped claim?
4. Consider whether negotiations are better handled between lawyers or directly between you and your employer
Sometimes it can be helpful to agree the terms in principle with your employer prior to instructing a lawyer to negotiate on your behalf. Other times, it is better for your lawyer to kick off the negotiation, particularly in contentious situations where your legal position is strong.
5. Decide your priorities and do not lose sight of them. For many of our clients, reputation is paramount
Remember that threats of litigation may well sound hollow, given that (save where arbitration applies) cases are generally held in public and could be reputationally damaging for you, even if you are vindicated. On the other hand, your employer may also be keen to minimise publicity or for your departure to be seen as amicable. If possible, try to get advance sight of and an opportunity to comment on any announcement regarding your departure. You may also wish to feed into communications with colleagues and other key stakeholders. Sometimes timing will be very tight, particularly if you are a director of a listed company, where any decision that a board member is to step down needs to be announced promptly in accordance with stock exchange rules. Make sure that there are appropriately drafted non-disparagement and, where relevant, confidentiality obligations in the agreement.
6. Understand any statutory restrictions or any corporate governance considerations
If you are a director of a quoted company, payments for loss of office will need to be disclosed and must be consistent with the terms of the company’s remuneration policy. If you work within financial services, the relevant remuneration code may need to be taken into account, including the possibility of some of the termination payments being deferred and / or paid in shares.
7. If you are in a regulated position, make sure you understand how your departure will be communicated to the regulator
If you are employed in financial services and hold a senior manager function, a notification will need to be made to the regulator regarding your departure. If there is any doubt as to the reasons to be provided to the regulator regarding your departure, you will want to check what information will be provided. For those employed in financial services, consider whether there are any issues that may need to be reported in a regulatory reference, including anything which may be relevant to your fitness and propriety, as you will need to navigate carefully any disclosures which are made in your discussions with new employers.
8. Consider whether to request career transition support within any package
Provided that the certain conditions are met, it may be possible for payments for outplacement counselling or other coaching to be exempt from income tax. So, if you are looking for career transition support as you consider your next move, it is important that this is addressed in the settlement agreement.
9. Do you need tax advice on the payments due to you on departure, particularly cross-border advice?
In some jurisdictions (particularly the US) consideration may need to be given on the timing of payments to ensure that penalty tax is not inadvertently incurred. Do not assume your employer has handled matters in the most tax-efficient manner. Ensure that your legal fees are covered under the settlement agreement to make use of a tax exemption for UK tax for payments made to your lawyer under a settlement agreement for legal costs incurred in connection with termination of employment.
10. If you are a director, ensure that the settlement agreement records ongoing provision of directors' and officers' liability insurance
In addition, if you already benefit from indemnity arrangements, ensure that those continue beyond termination, and that the settlement agreement does not inadvertently supersede the terms of any ongoing indemnity.
11. Make sure you understand the scope of your post-termination restrictions
Restrictions on what you can do after your employment ends may be contained in a variety of documents including your employment contract, settlement agreement or in deferred compensation schemes. These could prevent you from joining a competitor, dealing with clients of your employer, and soliciting staff for a period of time after termination. Consider whether there is scope to negotiate a reduction or waiver of any of your post-termination restrictions or whether any ambiguities could helpfully be resolved in the settlement agreement.
12. Look to the future
Always consider where you want to be in 6-12 months’ time. If your priority is securing another executive position relatively quickly, then it may not be in your interests to become embroiled in a drawn-out legal dispute, even if there is a potential financial upside. Alternatively, if you are considering retirement or some time out, then you may be prepared to hold out for a better deal. It is generally a good idea to sense-check your decisions against how they will likely affect where you wish to be in a year’s time, rather than make important decisions in the heat of the moment.
Our market-leading senior executive team frequently assists clients negotiating exit agreements. Our clients include public company directors, founders, directors of private companies (often in private equity backed businesses), bankers, other professionals in financial services and other C-suite executives across industries. There is no one-size fits all approach to our advice. We offer personalised, tailored advice to our clients based on decades of experience acting for the most senior individuals within corporates across many different sectors. For more information view our senior executive brochure here.
If you require further information about anything covered in this briefing, please contact Eleanor Rowswell or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2022