Senior executives and directors often hold complex positions that go beyond a standard employment contract. When a departure is being negotiated, it is essential to understand your legal status, your rights, and how to maximise your director severance package. This article outlines the key considerations for senior executives in the UK and explains how Toner Legal can support you through this process, for example through
our exit and compensation package.
Understanding Your Status: Are You an Employee, Director or Shareholder?
Before negotiating your severance, you need clarity on how the law sees you. It is common for senior executives to wear multiple hats, but each status carries different rights and obligations. It is not uncommon for senior executives to be employees, directors and shareholders at the same time.
Employee
It is important to determine if you are an employee. Most senior executives are employees that work under an employment contract. The employment contract is an important document, that will set out some key considerations, such as your remuneration, notice period, and potentially restrictive covenants.
When obtaining the employment contract to review, it is important to pull together all of the relevant documents, as they may have a bearing on negotiations. Some examples of other key documents are director’s service agreements, bonus schemes, share documents and long term incentive plans (LTIPs).
Statutory Director
Many senior executives have the title of Director, but are not actually statutory directors, i.e those formally registered as a director of the business at Companies House.
However, you may be listed as a director at Companies House. This is a formal appointment under the Companies Act 2006 and gives rise to fiduciary duties. However, being a statutory director does not necessarily mean you are an employee. If there is no employment contract or evidence of employee status (such as PAYE arrangements and supervision), you may not have full employment rights.
Further, your employment being ended does not automatically remove you as a statutory director (this point should be cross referenced with the company’s articles of association). The director severance package should cover these points and the process should factor in how each status can be dealt with, including whether the senior executive holds any other roles within the group (if applicable).
Shareholder
If you hold shares in the company, this adds a commercial and financial layer to any severance negotiation. You may need to consider how your shares will be treated on exit, for example, whether you are required to transfer them, and at what valuation. You may also have “restrictive stock units” (RSUs) which are vesting on a schedule, so understanding that schedule and the potential value of the vested and unvested shares can be crucial.
In many senior exits, the severance package must address all three areas: the employment contract, the directorship, and the shareholding.
How Do Negotiations Start?
Before a director severance package is achieved, negotiations must take place. Senior exits are often raised through a “protected conversation” under section 111A of the Employment Rights Act 1996. Alternatively, your employer may invite you to a without prejudice discussion. Either way, these conversations are off the record and intended to explore a mutual exit. There are strict rules on the application of these discussions, making it important to take advice early.
If your employer seeks to initiate these discussions, it is important to Stay Employed, Take Advice and Act Quickly. You are not obliged to agree to anything on the spot. Instead, these discussions are an opportunity to take stock, assess your leverage, and plan your next steps.
Can You Be Forced Out?
While senior executives enjoy strong positions, they are not immune to dismissal or disciplinary action. If your employer wants to remove you but does not have clear grounds, they may start applying pressure or offer a low-value settlement to prompt your resignation.
In these circumstances, it is important not to resign without advice. If you are being pushed out unfairly, you may have grounds for legal claims and/or be in a position to negotiate an exit and aim for a director severance package.
How to Maximise Your Severance Package
- Do not resign in haste – This may weaken your negotiating position.
- Understand your legal rights – Get clear on your employee, director, and shareholder status.
- Seek legal advice early – This is especially important as waiting too long, or trying to negotiate yourself without proper advice, can prejudice your exit terms.
- Think commercially – Many director exits can be negotiated without litigation, but only if you present a clear and professional case.
- Protect your reputation – We always aim for a clean break with your reputation intact. Protecting future earning potential is often vital.
How Toner Legal Can Help
We specialise in negotiating for exits for our clients, who include Senior Executives, Company Directors and Shareholders. Whether you have received an offer, are facing pressure to resign, or simply want to explore your options, we can:
- Review any proposed agreement or offer
- Negotiate the financial and legal terms of your exit
- Help protect your shareholding or commercial interests
- Secure tax-efficient payments and reputational protection
- Advise on claims you may have if no deal is reached
Our advice is strategic, commercial, and tailored to the boardroom.
A director severance package is not just about money, it is about protecting your position, securing your reputation, and moving on with confidence. If you are considering your options, or feel you are being pushed out, we can help.
If you are a Senior Executive or looking to discuss a Director Severance Package, then please call us on 0207 118 9218 or complete a Free Online Enquiry and we will be in touch.
Frequently Asked Questions – Director Severance Package
What Is A Director Severance Package?
A director severance package is a negotiated agreement outlining the financial and legal terms on which a director or senior executive leaves a company. It may include notice pay, bonuses, equity, pension contributions, and non-financial terms such as confidentiality and reference wording.
Do All Directors Qualify For A Severance Package?
Not automatically. Whether a severance package is offered depends on your contract, your status (employee, statutory director, shareholder), and the circumstances of your departure. However, senior executives often negotiate exit terms as part of a settlement agreement.
Am I Entitled To Statutory Redundancy As A Director?
Only if you are also an employee. If you are a statutory director but do not have an employment contract, you may not qualify for redundancy pay. However, if you are both a director and an employee, you may be entitled to statutory and contractual payments.
What If I Am A Shareholder Too?
Being a shareholder does not prevent you from negotiating a severance package, but it can complicate matters. Shareholder rights are governed separately under company law and may need to be considered as part of the overall exit strategy.
Can I Be Dismissed Without A Severance Package?
Yes, if you do not have a contractual entitlement or there is no agreement in place. However, many directors are able to negotiate severance packages to avoid litigation or reputational risk to the company.
Should I Sign A Settlement Agreement Immediately?
No. You should always take legal advice before signing. For a settlement agreement to be legally binding, you must receive independent legal advice from a qualified adviser. A lawyer will ensure the terms are fair, that your rights are properly waived, and may be able to negotiate an improved package on your behalf.
What Should I Watch Out For In A Severance Package?
Look closely at post-termination restrictions, clawback clauses, tax treatment of payments, bonus/commission treatment, share options, and any announcement wording. These details can have a lasting impact on your career and finances.
Can A Director Severance Package Be Tax-Free?
Some elements, such as ex gratia payments up to £30,000, may be tax-free if structured correctly. Others, such as notice pay or bonuses, are taxable. It is important to take tax advice when negotiating your exit.