Managing Senior Employee Exits: Legal Risk at Board Level
Article summary
- Senior exits carry higher legal risk than standard dismissals, with complex contracts, long notice periods, and bonus and equity entitlements at stake
- The Employment Rights Act 2025 is expected to remove the unfair dismissal compensation cap from 1ˢᵗ January 2027, subject to commencement regulations, sharply increasing the cost of a poorly managed exit
- Directors owe fiduciary duties under the Companies Act 2006 as well as employment rights; both layers must be addressed on departure
- Settlement agreements are the most reliable exit tool, but are only binding when strict statutory conditions are met, including independent legal advice
- Whistleblowing and discrimination claims carry uncapped compensation and day-one protection, making them the greatest financial risk in any senior exit.
Many boards assume that the seniority of a departing director simplifies the exit process, or that a generous payment will make the problem disappear. Employment law does not share that assumption, however. Senior exits are often contractually complex and require a strong understanding of statutory employment rights, fiduciary obligations, and, in regulated sectors, regulatory notification duties.
The Employment Rights Act 2025 heightens the risk considerably. From 1ˢᵗ January 2027, the qualifying period for unfair dismissal falls from two years to six months, and the statutory compensation cap is removed entirely. A senior executive earning a substantial salary who is dismissed without a fair process will, from that date, be able to pursue uncapped tribunal compensation for the first time.
Two legal identities
A board-level employee carries two distinct legal identities. As an employee, they enjoy statutory rights under the Employment Rights Act 1996. As a director, they owe fiduciary duties under Chapter 2, Part 10 of the Companies Act 2006, including the duty to act in good faith, to avoid conflicts of interest, and to exercise independent judgment. Terminating a board appointment does not end employment; ending employment does not remove a director from the board. Separate, documented steps are required for each.
The duty to avoid conflicts of interest under section 175 of the Companies Act 2006 survives resignation and applies to information and opportunities encountered during the directorship. Askews Legal’s company law solicitors regularly advise boards on managing this parallel risk. The departure checklist should include:
- Filing form TM01 at Companies House and updating statutory registers.
- Recovering company property, passwords, and system access.
- Addressing any shareholding under shareholders’ agreement provisions, including good leaver and bad leaver definitions.
- Notifying relevant regulators where the individual holds an approved function under the Senior Managers and Certification Regime.
The test courts will apply regardless of seniority
Unfair dismissal law applies to directors in their capacity as employees, and tribunals assess the reasonableness of the procedure followed, irrespective of seniority. Under section 98(4) of the Employment Rights Act 1996, a tribunal must be satisfied not only that the employer had a fair reason for dismissal, but that it acted reasonably in treating the reason as sufficient for dismissal. The ACAS Code of Practice on Disciplinary and Grievance Procedures sets the minimum standard, and a tribunal may uplift any compensation award by up to 25% for an unreasonable failure to follow it.
Where the reason is conduct or performance, the employer must undertake a reasonable investigation, hold a formal hearing with proper notice, allow the individual to be accompanied, give written reasons, and offer a right of appeal. The assumption that senior employees can be managed out informally is both common and wrong. A vague assertion of lost trust, without specific evidential support, will not carry weight before a tribunal. Gross misconduct should only be pursued where there is genuine, identified evidence of a serious breach; retrospective searches for a dismissible reason create unfair dismissal exposure and potential breach of contract liability.
Settlement agreements
A settlement agreement under section 203 of the Employment Rights Act 1996 provides the company with certainty and finality in exchange for an agreed financial package and waiver of claims. It is particularly appropriate where a formal process carries reputational risk, where the strength of any conduct case is uncertain, or where the individual holds confidential commercial information. For the agreement to be binding, it must be in writing, identify the specific claims being waived, and confirm that the individual has received independent legal advice from a named, insured adviser. If those condition are not properly met, the agreement is unenforceable.
Protected conversations under section 111A of the Employment Rights Act 1996 allow an employer to open settlement discussions without that conversation being used in a subsequent unfair dismissal claim, provided there is no improper behaviour. Where a dispute already exists, the common law without prejudice principle runs alongside. Timing matters: an offer presented too early may invite escalation, while one made after procedural errors have occurred may be unaffordable. Employers should also understand the advantages and disadvantages of settlement agreements before committing to this route.
Whistleblowing and discrimination
Two categories of claim carry uncapped compensation and day-one protection. Dismissal connected to a qualifying disclosure under the Public Interest Disclosure Act 1998 is automatically unfair. Individual directors who play a central role in such a dismissal face personal liability: in Timis & Anor v Osipov & Anor [2018] EWCA Civ 2321, the Court of Appeal held two directors jointly and severally liable for damages exceeding £2 million. Any exit involving a recent formal or informal disclosure of wrongdoing should be assessed with particular care.
Discrimination claims under the Equality Act 2010 are similarly uncapped and carry no qualifying service requirement. Age discrimination claims have become increasingly common in senior exit cases, particularly where the individual is older, and a younger successor has been appointed. A transparent, documented process with a clearly evidenced business reason provides the most reliable protection.
Garden leave and restrictive covenants
Garden leave requires the individual to remain at home for their notice period, receiving full pay but performing no duties. An express contractual clause in the director’s service agreement is advisable; without one, courts will consider whether there is an implied right to work. Post-termination restrictive covenants must protect a legitimate business interest and go no further than reasonably necessary. Courts will not rewrite an overly wide covenant; they may however apply the “blue pencil test” to sever an offending element, but only if what remains is coherent. In Square Global Ltd v Leonard [2020] EWHC 1008 (QB), the High Court upheld a combined restriction of 12 months comprising six months’ garden leave and a six-month non-compete. If the company breaches the individual’s contract at the point of exit, it will ordinarily lose the right to enforce those restrictions.
Final words
Senior exits go wrong when decisions are taken quickly and without legal input. The law applies the same procedural rigour to a director’s dismissal as to any other employee’s, while adding contractual, fiduciary, and regulatory obligations that run in parallel. Early employment law advice, obtained before a decision is communicated, allows the company to select the right route, assess any conduct case honestly, structure the process correctly, and approach settlement from a position of integrity. The cost of doing so is modest relative to the cost of a well-funded, uncapped tribunal claim.
Frequently asked questions
Can we dismiss a director without a formal procedure?
No, unfair dismissal law applies to directors as employees. A tribunal will assess whether the employer acted reasonably regardless of seniority. From 1ˢᵗ January 2027, the qualifying period falls to six months under the Employment Rights Act 2025, and the compensation cap is removed, increasing the financial cost of procedural failure substantially.
What if the departing director has raised a whistleblowing concern?
A dismissal connected to a qualifying disclosure under the Public Interest Disclosure Act 1998 is automatically unfair, with no qualifying period and uncapped compensation. Individual directors involved in the decision face personal liability. Legal advice should be obtained before any step is taken.
When is a settlement agreement the right approach?
Where the strength of a conduct case is uncertain, where a formal process carries reputational risk, or where confidentiality is important, a settlement agreement often provides the most cost-effective outcome. It must meet strict statutory conditions under section 203 of the Employment Rights Act 1996, including a requirement for independent legal advice, and the timing and terms of any offer require careful judgment.
Will post-termination restrictions hold after a difficult exit?
Only if the company has conducted the exit lawfully. A breach of the individual’s contract at the point of departure will ordinarily discharge them from post-termination restrictions. Covenants must also be proportionate; a restriction that was reasonable when the director’s service agreement was signed may have become unenforceable if the role changed materially without amendment. For guidance on garden leave and restrictive covenants, our solicitors can advise on drafting and enforcement.
This article is for general information only and does not constitute legal advice. It reflects the law of England and Wales as at the date of publication. Individual circumstances vary, and you should seek specialist legal advice before taking or refraining from any action based on the content of this article.
