Employment

The key differences will depend on the jurisdiction in which the senior executive currently works or is otherwise familiar with. That said, common areas of difference include:

• Probationary periods: unlike jurisdictions such as France where probationary periods are restricted in length, there are no restrictions in the UK. Sometimes employers ask senior executives to sign up to probationary periods of up to 12 months (during which time they can terminate the employment on short notice). Where possible, senior executives should negotiate a shorter probationary period or agree that one will not apply at all.
• Family leave: employees in the UK are, generally, eligible for generous amounts of time off for maternity and/or adoption leave (both 12 months) and paternity leave (where it is possible for the mother’s partner to share her leave (for example, both parents taking 6 months off)). However, pay during these periods is limited and, except for the first 6 weeks of leave (where employees will typically receive 90% of their pay), employees will only be entitled to receive a small statutory payment, unless their employer offers enhanced pay as an employee benefit.
• Bonuses: UK law does not oblige employers to operate bonus schemes (as the law in, for example, Hong Kong can sometimes provide). Senior executives will need to agree any bonus or employee incentive arrangements separately with the employer.
• Notice periods: unlike in the United States it is common for UK senior executives to be subject to long notice periods (normally around 6 months). Employers will normally reserve the right to make a senior executive ‘work out’ his/her notice, put them on garden leave, or pay them in lieu of notice.
• Termination payments: except where an employee’s employment is terminated due to redundancy, UK employees are not entitled to a severance payment on termination like they are, for instance, in Dubai. However, UK employees with more than two years’ service benefit from unfair dismissal rights which limits an employer’s ability to terminate their employment without triggering a claim. In our experience, where an employer looks to dismiss a senior executive, they will seek to do so via a settlement agreement under which the employee will receive an ex-gratia payment in return for waiving his/her rights to bring any claim.
• Non-competes: it is very common for UK employers to insist that senior executives enter into a non-compete, preventing him/her from working for a competitor for a period (normally between 6 – 12 months) after their employment has terminated. Unlike in much of continental Europe, there is no requirement on employers to ‘pay’ employees during such restricted period. Where possible, senior executives should seek to limit the effect of the non-compete (including limiting the duration and its geographical scope) or, if in a particularly strong bargaining position, insist on a contractual payment being paid in the event the restriction is enforced.

This is a practice that developed historically for high-earning UK resident but non-UK domiciled employees working partly in the UK and partly abroad. They would enter into dual employment contracts:

• one with an overseas employer covering non-UK employment duties; and
• another with a UK employer (within the same group) covering UK employment duties.

Overseas earnings under the non-UK employment contract would be outside the scope of UK taxation unless remitted to the UK because the employee would be taxed under the more favourable ‘remittance basis’.

Following growing scepticism and concerns about this tax advantage and possible artificiality of dual contracts arrangements, rule changes were introduced from 6 April 2014 which restricted the availability of the remittance basis. Ever since, overseas’ earnings under a non-UK employment contract are subject to UK income tax as they arise if certain conditions are present, including (a) the UK employer and foreign employer being the same or associated and (b) the UK and foreign employments are related.

Such restrictions do not, however, remove the availability of ‘Overseas Workday Relief’ to protect overseas’ earnings from UK taxation for the first three years of UK tax residence. Dual contracts have therefore become less popular over the years, but they can still be appropriate in the right circumstances.

Senior executives are usually these days offered incentives in the form of Performance Share Plans rather than options. Under an LTIP/Performance Share Plan an executive is awarded free shares which vest after, say, a three year period, subject to performance conditions and service conditions having been met. Since participants do not have to pay for the shares, they benefit from the “whole value” of the shares.

In contrast, if an employee is granted a “market value” share option then, in order to exercise that option, the executive normally has to pay an amount equal to the market value of the shares when they were granted.

One of the advantages of free shares provided under a Performance Share Plan is that they are likely to retain some value whereas options can be out of the money if the market value of the shares falls after the grant of the option.

In both cases the executive will be subject to income tax when the shares vest, either on the total value of the shares at that point in relation to free shares or on the difference between the exercise price that the executive has to pay (where the grant was of a market value option) and the value at that time.

EMI options are subject to a much more favourable tax treatment but they are specifically targeted at higher risk trading companies. The gross assets of the relevant company must not exceed £30 million and the company must have fewer than the equivalent of 250 full time employees at the time of grant. Where these and other strict conditions can be satisfied, so that EMI options can be granted, there is no income tax liability on exercise of the option if the exercise price is at least equal to the market value of the shares at grant. On the sale of the shares acquired, following exercise of the option, capital gains tax (rather than income tax where the rates are currently higher) would be payable on any gain over the market value at grant.

In deciding the type of share incentives that can be provided to the executive, the employer company will need to take into account regulatory requirements which will apply if, for example, the company’s shares are traded on AIM or are listed on The London Stock Exchange.

It is possible that your employer might look to end your current UK working arrangements, whether temporarily (e.g., seconding you to another country) or for good (e.g., terminating your employment). Here are the key points for you to consider in either scenario.

Secondments

Overseas secondments are common within international organisations, especially for senior level staff. Generally speaking, you (as a secondee) would remain employed by your current employer, albeit seconded to work for a group company in another country (the “host employer”); you should be asked to sign a secondment agreement, detailing the relevant terms.

Assuming a working visa for the host employer’s country can be obtained, the main points to consider, include:

• Relocation costs: Who is responsible for paying what costs? Relocation is expensive: flights (for you and perhaps family members), shipping of personal items and temporary accommodation can all come at a price. It is common for employers to fund/contribute towards these, but you should understand exactly what will and will not be covered.
• Duration: Understand and agree the duration of the secondment and relevant notice periods. This is not only relevant from a personal planning perspective (e.g., renting properties, children’s schooling arrangements, etc.), but could impact on your tax position.
• Pay: Will you continue to be paid in UK sterling or in local currency? Logistical or tax issues may arise as a result of doing either. Also, if you are relocating to a country with higher living costs, you should consider asking for an increased living costs or an out-of-pocket expenses allowance, as well as possibly, a financial ‘buffer’ to guard against any currency fluctuations (if applicable).
• Benefits: Check that your current benefits (such as health insurance) cover you whilst you are in the host employer’s country. Also, ensure that the cover under any such plans is fit for purpose, especially if you are being seconded to a country with high healthcare costs, such as the US.
• Tax: It is important to understand what impact any secondment will have on your personal tax position, especially where the secondment gives rise to a presumption of tax residency in the host employer’s country. Tax advice should be sought both before and during the secondment and you should request that the employer funds this advice.
• End of secondment: It should be clear what arrangements will apply at the end of the secondment. For example, how you will re-integrate back into the UK’s business and the details of any relocation expenses back to the UK should be explained and understood.

In addition, by virtue of working in the host employer’s country, you will likely benefit from the relevant local employment laws and, depending on the circumstances, obtaining local employment law advice might be appropriate.

Termination

Sometimes things do not work out. Your employer might seek to terminate your employment where they have formed the view that you are no longer the best person for the role (especially in circumstances where there has been a change in ownership and the new owners wish to put their preferred leadership team in place, as is often the case in a private equity takeover) or there is a general clash of senior personalities.

Depending on the circumstances and how long you have been employed in the UK, you might benefit from employment protections (such as “unfair dismissal”) which would prevent your employer from simply terminating your employment without triggering a potential claim. As such, in these scenarios, it is common for your employer to approach you to discuss matters on a “protected” or “without prejudice” basis, seeking to agree a mutual separation in return for you agreeing to waive any claims you might have.

The main points to consider in such negotiations, include:

• Settlement payment: In return for your waiving any claims, it is common for senior executives to receive a settlement payment in excess of what they are otherwise entitled to. Large employers may have formalised severance payment plans, but typically this will be a point for negotiation. The greater the deemed legal risk, the higher any settlement payment is likely to be, so taking early legal advice is key.
• Notice periods: It is common for senior executives to be subject to long notice periods and so it is unusual for an employer to make a senior executive work out their notice. As such, a discussion around whether garden leave or a payment in lieu of notice is appropriate is most likely. A payment in lieu would likely result in an accelerated receipt of funds, but remaining employed during garden leave might be more attractive for the purposes of: (i) securing a new role (i.e., at interview it is often felt that confirming you are still currently employed, as opposed to confirming that you are out of work, is preferable); and/or (ii) immigration, where your right to stay in the UK is conditional on remaining employed.
• Bonuses and long-term incentives: It is vital to understand how unpaid bonuses and any vested and unvested employee incentives are to be treated. Depending on the circumstances and the underlying contractual position, you will want to ensure that any separation confirms that you will be treated as a “good leaver” under any relevant plan and/or that you are entitled for a pro-rated award in respect of the current bonus year (if applicable).
• Communication and references: It is common for parties to agree both internal and external announcements concerning a senior executive’s exit, as well as what an employer will say to any future employer or recruitment agent.
• Post-employment restrictive covenants: Most senior executives will be subject to restrictions in their employment contracts (such as non-compete or non-solicitation of clients). Depending on the circumstances, you should seek to have these limited or waived.
• Other benefits: Consider the wider impact your termination might have on you personally. For example, if you have been using a work mobile number for personal use, query whether you ask your employer (during negotiations) to transfer that number to you personally. Also, if you are undergoing any medical treatment which is funded via any workplace insurance scheme, it would be important to understand the impact that any dismissal would have on that and/or whether you can remain on the scheme for a period after termination in order to complete any treatment.

The terms of any mutual separation will typically be detailed in a settlement agreement which needs to be signed by both parties and the senior executive’s legal advisor.