Better Business Act

The Better Business Act (“BBA”) coalition recently proposed an amendment which, if passed, would change the focus of the director’s duty set out in section 172 of the Companies Act 2006 from being a duty “to promote the success of the company” to being a duty “to advance the purpose of the company”.

This reflects the modern approach to sustainable business. What success means for business is no longer reflected solely on increasing shareholder value. The BBA coalition want to ensure that business success is measured by not only boosting the bottom line, but also by its impact on people and the environment. And while this is not yet law, it is a good idea to ensure senior contracts reflect this change in emphasis. Companies should check that their existing contracts for their most senior staff are appropriate for their level of responsibility and seniority. It is so often the case, that businesses have all employees on the same contract regardless of their seniority or expertise or that new contracts are issued on promotion to more senior roles.

Senior Vs Junior Employees: Duties

Organisations should have different employment contracts depending on an employee’s seniority within the business. Given that senior employees are responsible for implementing the strategy of the business, it is vital that their contracts of employment are fit for purpose and that the company has the adequate protections in place within the employment contract. The duties of a junior employee often simply refer to or include a job description and some include the stipulation that there may be other duties they are required to perform outside of the job description.

Senior employees (or executive directors) are given access to valuable and often highly confidential business information, such as intellectual property, commercial contracts, financial performance or commercial strategy. Additionally, there are the fiduciary duties to consider (including the duty under section 172 of the Companies Act 2006), which set out the duties or standards that directors are required to operate within: to promote the success of the company, to exercise independent judgment, to exercise reasonable care, skill and diligence, and so on.  While only duly statutory directors owe this fiduciary duty to their company, it is common that senior employees (even though not strictly directors) are held to the same or similar values. This must be reflected in their contract which should contain the specific fiduciary-style duties that apply to them in the course of their employment. The values or parameters are, to some extent, up to the employer.

Senior Vs Junior Employees: Other Key Clauses

There are several other key clauses which should be included or enhanced in a senior employment contract. First, there are restrictive covenants. While covenants for junior employees are often standardised across the workforce, covenants for senior employees should be drafted specifically with the scope of their work in mind and their access to vital business information such as key clients and confidential information. Covenants for senior staff may also have a longer duration than for junior staff. In situations where the covenants are the same in both content and duration, irrespective of seniority, employers run the risk of arguments around enforceability and the potential of a court ruling that the covenants are unenforceable since they do not differentiate between senior and junior employees within the business, and therefore, cannot have been drafted in such a way that it was no wider than necessary to protect the company’s legitimate business interests.

Second, there is garden leave. In circumstances, where an employee is due to exit the business, garden leave allows a company to require their employee to stay at home for part or all of their notice. Typically, an employee on garden leave is not required or allowed to work or contact customers, clients or staff. The purpose of garden leave is to protect the business from an employee working against the company before their employment finishes. However, an employer can only place an employee on garden leave if their contract of employment includes this option. It is therefore important that the contract provides for this option.

Third, there is the notice period. In the absence of written notice in the contract of employment, statutory notice (1 weeks’ notice for each full year of service) will prevail. Even if notice is set out in the standard contract, the length of notice will likely be inadequate for more senior staff. Notice for senior employees often starts at six months and may be extended to 9-12 months if they are a C-level employee. Tailoring the length of notice to the seniority of the employee will help to minimise the impact of any senior exit, will limit their ability to go to work for competitor and will provide the business with sufficient time to find a replacement.

Are You Ready?

The first step is to review existing contracts to establish whether they are fit for purpose for senior employees. If they require amendment, any change to an existing employee’s employment contract usually requires consent. Either way, whether or not the BBA becomes law, it is clear that the definition of business success is evolving. Ensuring that senior employment contracts are fit for a company’s specific purpose will help to harness future success.