Wrongful or unfair dismissal of a director
This guide is based on UK law.
Wrongful dismissal
A wrongful dismissal is a dismissal that breaches the terms of
the contract. If, therefore, a director is entitled to 12 months’
notice but is dismissed instantly without notice, the company will
be liable for damages; the director will be entitled to a payment
equating to the loss of salary and benefits over the 12 months’
notice period.
Any damages will, however, be subject to a reduction for
mitigation. A dismissed employee is legally required to take
reasonable steps to find an alternative job. If they succeed and
take up a new position during the notice period, any sum earned
will reduce the amount of their loss pound for pound. If a court is
not satisfied that an employee has complied with the obligation to
mitigate, this will be reflected in its award for compensation.
Successful wrongful dismissal claims prevent the employer from
relying on any provisions within the contract: if the employer is
held to have breached the contract, it cannot enforce terms such as
restrictive covenants, and these will consequently fall away. It is
largely because of this that, where restrictive covenants exist, it
is now standard practice to add a contractual payment in lieu
provision allowing the company to terminate instantly without
breaching the contract.
Unfair dismissal
Every person in Great Britain who has been employed for one year
or more has a statutory right not to be unfairly dismissed. This
right applies just as much to an employed director as any other
employee. Dismissal will only be found to be fair if:
- it is made for a potentially fair reason, such as redundancy,
poor performance or poor conduct;
- before dismissing or serving notice, the employer followed the
necessary fair procedure (see below);
- it is reasonable to dismiss in all the circumstances of the
case.
Until quite recently, unfair dismissal was not a significant
factor in the majority of cases relating to the termination of
directors’ contracts. This was because compensation for unfair
dismissal was limited when set against a director’s contractual
entitlement. The potential compensation recoverable for unfair
dismissal has now, however, significantly increased. In addition to
an entitlement to a basic award (which is still a limited amount
calculated in the same way as a statutory redundancy payment), an
employee who has been unfairly dismissed is entitled to a
compensatory award (dependent on their losses), the statutory
maximum for which is now £60,600.
A further significant change took place on October 1, 2004. As a
result of new statutory, disciplinary and grievance procedures, an
employer must go through a minimum disciplinary procedure before
dismissing someone. The procedure includes:
- calling the employee to attend a disciplinary hearing;
- providing the employee with details of matters to be discussed
before the hearing;
- notifying the employee of the decision made after the hearing
and providing the right to appeal.
If these minimum procedures are not followed, the dismissal is
automatically deemed to be unfair and the compensation awarded can
be subject to an uplift of between 10 and 50 per cent.
The appropriateness of unfair dismissal claims will, of course,
vary. A director is not entitled to double recovery in relation to
the same period of loss. This means, for example, that if a
director is being paid in lieu of a 12-month notice period (either
under an express clause or as a result of reaching agreement to
make a payment in lieu) and they can mitigate their losses within
the 12 months by finding another position, legal action will, from
a practical point of view, be irrelevant. The director could seek
to recover a basic award but this will be little more than a
nominal sum. As regards the compensatory award, the director will
not be able to demonstrate any losses: they will have been more
than compensated by the payment in lieu.
If, on the other hand, a director’s actual losses are likely to
exceed payments made in relation to their contractual entitlements,
an unfair dismissal claim becomes much more relevant. In these
circumstances, an employing company that has failed to go through a
fair procedure before giving notice could be in trouble. To avoid
the risk of litigation, it will be necessary for it to enhance any
proposed severance package by a sum in excess of contractual
entitlements to reflect potentially recoverable unfair dismissal
compensation.
Other
This article has dealt with the most likely actions when a
company dismisses a director. It is important to remember, though,
that others could arise – for example, the claim that a director’s
dismissal was on discriminatory grounds.
