If you are running a company then you’ll be wanting (and hopefully receiving) advice on both employment law and company law (as well as on the myriad other technical areas). As well as attempting to push your business’ growth and profitability you’ll also be looking to minimize the liabilities that your business could possibly encounter. One of these liabilities is the potential for unfair dismissal claims to be made against you by employees of your company. Directors of your company can, if they have a service contract, be employees and are therefore able (if they fulfil all the necessary statutory requirements) to make a claim for unfair dismissal against your company. In this post we’ll look at how this situation can be avoided if possible by offering 5 (hopefully) helpful tips:
- Minimise the number of directors in your company
- Don’t offer your directors express service agreements
- Minimise the fixed-term length of any service agreement contract
- If you wish to dismiss a director with a service contract do so fairly and reasonably
- If you do dismiss a director attempt to enter into a compromise agreement with them
1. Minimise the number of directors in your company
This is a relatively simple means of minimizing your liability – try to minimize, if possible, the number of directors on the board. If they’re not necessary and they’re not there then they can’t cause any trouble!
2. Don’t offer your directors express service agreements
This is another (relatively obvious) way of reducing the risk of the company’s directors making an unfair dismissal claim against it. Unless a director has a service contract with the company they aren’t deemed to be employees for the purposes of the Employment Rights Act 1996. As only employees with more than two years’ continuous service (from April 2012) can make a claim for unfair dismissal directors without a service contract will not qualify for this right.
3. Minimise the fixed-term length of any service agreement contract
Minimizing the fixed-term length of any service agreement offered can help to prevent unfair dismissal claims in one or both of two ways:
- It will make it difficult for the director to establish sufficient continuity of employment; and
- You may take steps to dismiss the director prior to their achieving the necessary two years’ employment without the repercussion of an unfair dismissal claim
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4. If you wish to dismiss a director with a service contract do so fairly and reasonably
If your company employs a director who has a service contract and sufficient continuous employment to qualify to exercise their rights to claim unfair dismissal then you must act carefully if you wish to dismiss them. Obtaining professional employment law advice from an unfair dismissal solicitor is advised. In order to avoid a (successful) unfair dismissal claim you must have a potentially fair reason for dismissal, make a decision to dismiss that is reasonable in the circumstances, and take steps to dismiss the director procedurally unfairly (including, for example, holding an investigatory hearing, hold a disciplinary hearing, allow the director to appeal the finding, and let the director know why they’re being disciplined).
5. If you do dismiss a director attempt to enter into a compromise agreement with them
If you do decide to dismiss the director then consider entering into a compromise agreement with them. This serves a dual purpose: it reduces your risk and also introduces certainty (regarding future litigation) into the equation. Although the wording of compromise agreements can be fairly simple it may be worth seeking expert compromise agreement advice from a solicitor.
Finally, please note that if a director qualifies to pursue a claim for unfair dismissal against you then there’s very little that you can do save attempt to offer them a compromise agreement. This is even the case if you’ve conducted a fair and thorough process in dismissing them. However, although you can’t stop the director making an Employment Tribunal claim following the right steps can significantly reduce their chances of success.