CMS Expert Guide to employment termination law and legislation

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1. Dismissal of employees

1.1 Reasons for dismissal

A claim for unfair dismissal can be made if the reason for dismissal was not one of a number of ‘fair reasons’ (e.g. conduct, capability, "some other substantial reason", statutory ban or redundancy).

Most employees need a particular length of service to bring a claim for unfair dismissal. At present this is two years’ service. However, all employees can bring a claim for unfair dismissal if the reason for dismissal is deemed to make the dismissal automatically unfair (e.g. for whistleblowing or for family reasons such as dismissals for reasons connected to pregnancy, parental leave, or requests for flexible working).

Even if the dismissal is deemed to be for a fair reason, to avoid a successful claim for unfair dismissal the employer must still follow a fair procedure and act reasonably in dismissing the employee.

If the reason for the dismissal involves discrimination against the employee (because of a protected characteristic such as sex, race, age or disability), employees may make a discrimination claim irrespective of their length of service.

Employees with two years of service have the right to request a written statement of reasons for dismissal. Employers must provide the statement within 14 days of the request.

Irrespective of length of service, employees dismissed during pregnancy or statutory maternity or adoption leave are automatically entitled to a written statement of reasons for dismissal without having to request it.

Notice may be given without providing any reason (‘Kündigungsfreiheit’).

Both employer and employee may end the employment relationship without providing reason or cause.

However, a dismissal must not be abusive (wrongful or unlawful dismissal). Subject to certain exceptions, such a notice is unlawful where issued:

  • due to an inherent personal quality of the other party (skin colour, nationality, sexuality); or
  • because the other party exercises a constitutional right; or
  • solely in order to prevent claims under the employment relationship from accruing to the other party; or
  • because the other party asserts claims under the employment relationship in good faith; or
  • because the other party is performing military service or a non-voluntary legal obligation; or
  • because the employee is or is not a member of an employees’ organisation or because he carries out trade union activities in a lawful manner; or
  • while the employee is an elected employee representative on the works council and the employer cannot cite just cause to terminate his employment; or
  • in the context of mass redundancies ordered by the employer if the consultation process is not observed.

In any of the above circumstances, the notice remains valid,  but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months' salary.

The employer may not terminate the employment relationship during the following periods, and notice given during these periods is void:

  • while the other party is performing Swiss compulsory military service, and during the four weeks preceding and following the service if the service lasts for more than 11 days; or
  • while the employee, through no fault of his own, is (partially) prevented from working due to illness or accident, for up to 30 days in the first year of service, 90 days between the second and fifth years of service, or 180 days thereafter; or
  • during the pregnancy of an employee, and for 16 weeks following the birth.

1.2 Form

Employees may be dismissed orally or in writing. In misconduct and capability dismissals the ACAS Code of Practice states that the employee should be invited to attend a meeting to explain their version of events. A letter should then be sent to confirm the reason for the dismissal and the date of dismissal in writing to avoid any dispute over the effective date of termination. A right of appeal should be offered. Failure by the employer to follow the Code of Practice does not give an employee a remedy for breach. However in the event that an unfair dismissal claim is successful and there has been non-compliance with the Code the tribunal has the power to increase the award of compensation by up to 25%.

There is no specific requirement. Notice of termination may be communicated verbally or by other means. For evidentiary purposes, it is strongly recommended that notice be issued in writing.

1.3 Notice period

There is a statutory minimum notice period of between one and 12 weeks, dependent on length of service.

The contract of employment can provide for a longer notice period. Failure by the employer to comply with the contractual notice period can result in a claim for ‘wrongful dismissal’.

The statutory notice periods include: one month in the first year of service; two months between the second and ninth year of service; and three months thereafter.

The notice period may vary depending on the written individual or collective employment contract. however, the notice period may be reduced to less than one month only by collective employment contract and only for the first year of service. The notice period must be the same for both parties.

The parties may agree on a probationary period of up to three months with a notice period of seven days.

1.4 Involvement of works council

No general legal requirement for involvement, but staff forums may be involved in the case of collective redundancies (see below).

Except for mass dismissals, there is no statutory requirement to involve a works council.

1.5 Involvement of a union

No involvement normally other than in the case of collective redundancies (see below) or if the employee exercises their right to be accompanied by an appropriate trade union representative to a disciplinary meeting.

No involvement.

1.6 Approval of state authorities necessary

Not necessary.

Not necessary.

1.7 Collective redundancies

If 20 or more employees are proposed to be made redundant at one "establishment" within a period of 90 days or less, consultation with employee representatives (who may be trade union representatives) must begin at least 30 days (or 45 days if 100 or more employees are to be made redundant) before the first dismissal takes effect.

Additionally, employers are obliged to notify the Secretary of State (for Business Innovation and Skills) where they are proposing to dismiss as redundant 20 or more employees within a 90-day period.

The Secretary of State must receive notification at least 30 days (or 45 days if 100 or more employees are to be made redundant) before the first dismissal takes effect.

A copy of the notification must also be provided for the employee representatives.

The statutory provisions regarding mass dismissals apply where the employer – within a time period of 30 days – gives notice for reasons unrelated to any particular employee and affecting:

  1. at least ten employees at a business normally employing between 21 and 99 employees; or
  2. at least 10% of the employees at a business normally employing between 100 and 300 employees; or
  3. at least 30 employees at a business normally employing more than 300 employees.

The provisions governing mass redundancies do not apply in the event that business operations have ceased by court order or mass redundancies have occurred due to bankruptcy or a composition agreement with assignment of assets.

Prior to giving notice, the employer must consult the employee’s representative body or the employees, and at the same time notify the cantonal labour office in writing of the planned mass dismissal. these bodies have consultation rights only. Neither the employees nor the cantonal office are able to block a mass dismissal.

The employer is obliged to enter into social-plan negotiations if it (i) usually employs at least 250 employees and (ii) intends to terminate at least 30 employees within 30 days for reasons that are unrelated to an individual employee. Notices given over a longer period but based on the same operational decision must be added together.

The employer negotiates:

  • with the employee associations that are party to the collective employment contract if a party to this collective employment contract;
  • with the organisation representing the employees; or
  • directly with the employees if they have no representive organisation.

An arbitral tribunal will establish a social plan by way of an arbitral award if such negotiations fail.

1.8 Summary dismissals

Summary dismissal (dismissal without notice) is only lawful where the employee has committed a breach of contract that is sufficiently serious to entitle the employer to treat the employment contract as terminated with immediate effect. A typical example is where the employee has committed gross misconduct.

Both the employer and employee may terminate the employment relationship with immediate effect at any time for cause.

The requirements for termination for cause are high. There must be a severe breach of contract and – except for very serious cases (e.g. theft) – a clear warning must be given, which is then ignored by the other party. The notice must be issued within two to three days of the party becoming aware of the serious breach allowing termination for cause.

1.9 Consequences if requirements are not met

The employee may have various claims, such as an unfair dismissal claim where the primary remedy is financial compensation. However, there is also scope for the claimant to request reinstatement or re-engagement, and in very limited circumstances (e.g whistleblowing) the claimant can request interim relief, and if the tribunal grants this, then an employer must continue paying the claimant's wages until the date of the substantive hearing. Most employment-related claims in the UK are made in employment tribunals.

In case of ordinary dismissals:

  • in case of unfair dismissal, the notice remains valid, but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months' salary.
  • The employer must not terminate the employment relationship during certain protected periods, as mentioned above under ‘Reasons for dismissal’. any notice given during these periods is void. If any of these circumstances apply after notice has been given, the notice remains valid but is extended accordingly.

Where a termination is made with immediate effect for cause but the requirements are not met (e.g. no serious breach, no or insufficient warning, late notice), the employee is entitled to the salary for the period until his contract expires or would have been ordinarily terminated. In addition, the court may require the employer to pay an indemnity of up to six months' salary.

In a case of mass dismissal, a notice of termination given without or before completion of the consultation process is deemed abusive. The notice of termination remains valid, but the employer is obliged to pay an indemnity to the employee of a sum fixed by the court not exceeding two months' salary.

1.10 Severance pay

The employment contract may provide for the employer to make a payment in lieu of notice, for example, equal to the salary that the employee would have earned during the notice period. If this is not provided for in the contract, the parties can agree for such a payment to be made, for example, as ‘damages’ for breach of contract.

If an employee with two years’ continuous service has been made redundant, they will be entitled to a statutory redundancy payment. The amount is calculated according to a statutory formula based on the employee’s age, length of service and weekly pay (capped at GBP 538 as at April 2020), up to a maximum of GBP 16,140 (as at April 2020). The employment contract may provide for an enhanced redundancy payment.

If the employee has been unfairly dismissed, and brings a successful claim in an employment tribunal they may be able to claim a ‘basic award’ calculated according to the same formula as the statutory redundancy payment (but employees cannot usually recover both a statutory redundancy payment and a basic award), and a ‘compensatory award’ which is capped at the lower of one year’s salary and GBP 88,519(as at April 2020). If an order for reinstatement or re-engagement is made there is scope for this cap to be lifted.

Employees who argue that they were dismissed for making a protected disclosure (whistleblowing) are not restricted by the statutory cap referred to above.

Similarly, the statutory cap does not apply where the dismissal was related to a prohibited ground under the Equality Act 2010. In these scenarios the potential awards can be significant.

Employees are entitled to a severance payment if they are over 50 years old and with 20 or more years service. If there is no contractual severance payment, an amount equal to between two and eight months' salary will be awarded by the court. However, the employer’s contributions to the employee’s pension fund over the entire period of service may be deducted from the severance payment. As a result, mandatory severance payments are rare.

1.11 Non-competition clauses

Restrictive covenants will be void for unlawful restraint of trade and so are unenforceable unless they protect the legitimate business interests of the employer and go no further than is necessary to provide that protection, in terms of activity, duration and geographical area. However they are widely used in senior level contracts. It is always recommended to take advice on tailoring such a clause for each individual employee and to ensure that when employees are promoted or their role changes that the restrictions are suitably updated.

The parties to an employment agreement may agree on post-termination restrictive covenants prohibiting competitive activity by the former employee. Such covenants are subject to a number of requirements and restrictions, including the following:

  1. A post-termination restriction on competition is only valid and enforceable if it is limited to a specific activity, a reasonable geographic area, and a reasonable period of time (i.e. maximum three years, unless there are exceptional reasons for a longer period).
  2. In addition, a non-competition restriction is only enforceable in those cases where the employee has had access to the employer’s customers or to manufacturing or business secrets during the term of the employment, and the use of such knowledge could significantly damage the employer.
  3. The non-competition restriction has to be agreed upon in writing.
  4. The restriction does not apply if the employer terminates the employment relationship without the employee having given him good cause to do so, or if the employee terminates it for good cause attributable to the employer.
  5. Where an employee infringing the restriction is liable to pay a contractual penalty, the employee may exempt himself from the prohibition by paying the penalty. however, he remains liable in damages for any further damage. Only where expressly agreed upon in writing, the employer may insist that the employee continue to observe the non-competition restriction in addition to seeking the agreed contractual penalty and any further damages.

1.12 Miscellaneous

Employers may wish to avoid a potential dispute over a termination of employment by obtaining a waiver of rights from an employee in consideration for a termination payment. In the UK this agreement is referred to as a settlement agreement and there are a number of statutory formalities to include before such an agreement is enforceable in respect of statutory rights, including the requirement that the individual takes independent advice on the terms of the agreement. There are also risks attached to making an offer to an employee to enter into a settlement agreement and therefore legal advice should be taken before doing so. In addition, in 2019 the UK Government announced legislation on the use of non-disclosure agreements in discrimination cases which was expected to come into force in 2020, however given the pandemic, this has been delayed and no new time frame has been given. The UK statutory equality body, the Equality and Human Rights Commission issued guidance on this subject in October 2019 setting out good practice for employers to consider. 

Not applicable.

2. Dismissal of managing directors

In the United Kingdom (UK), the rights and obligations of a ‘director’ are the same whether they are for a ‘managing director’ or any other type of director. However, not all directors are employees. ‘Managing directors’, for example, are employees of the company, but ‘non-executive directors’ are not employees. Normal practice is for a managing director to have a service agreement supplementing their statutory and common law obligations as a director. Often a managing director's employment contract will require them to resign any directorships when their employment terminates, so that their directorship and employment terminate simultaneously. It Is therefore often simpler (and preferable) to remove a managing director by dismissing them from their employment, and then requiring them to resign their directorship. Please see the section "Employees: United Kingdom" for information on the relevant issues when taking that approach, as well as the "Miscellaneous" section below.

This table only covers removal of the director from office as a director and does not cover termination of any contract of employment or other employment issues.

In general, the managing director is an employee of the company. In certain situations, and subject to the prohibition of circumventing employment law, the managing director might be a self-employed person who has entered into a service agreement with the company.

The following comments relate to situations whereby the managing director is an employee of the company.

2.1 Reasons for dismissal

The company may remove the director for any reason, unless the articles of association of the company or any other agreement between the director and the company provide otherwise. There is however a statutory procedure that the shareholders of any UK company can use to remove a director (see below). This procedure will apply regardless of any agreement between the company and the director, or any provision of the company's articles.

Notice may be given without providing any reason (‘Kündigungsfreiheit’).

Both the employer and the managing director may end the employment relationship without providing reason or cause.

However, a dismissal must not be abusive (wrongful or unlawful dismissal). Subject to certain exceptions, such a notice is unlawful where issued in particular:

  • due to an inherent personal quality of the other party (skin colour, nationality, sexuality); or
  • because the other party exercises a constitutional right; or
  • solely in order to prevent claims under the employment relationship from accruing to the other party; or
  • because the other party asserts claims under the employment relationship in good faith; or
  • because the other party is performing military service or a non-voluntary legal obligation; or
  • in the context of mass redundancies by the employer if the consultation process is not observed.

In any of the above circumstances, the notice remains valid, but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months’ salary.

The employer may not terminate the employment relationship during the following periods, and notice given during these periods is void:

  • while the other party is performing Swiss compulsory military service, and during the four weeks preceding and following the service if the service lasts for more than 11 days; or
  • while the managing director, through no fault of his own, is (partially) prevented from working due to illness or accident, for up to 30 days in the first year of service, 90 days in the second to fifth years of service, or 180 days thereafter; or
  • during the pregnancy of a managing director, and for 16 weeks following the birth.

2.2 Form

The Companies Act 2006 gives shareholders a mandatory right to remove a director by ‘ordinary resolution’ (i.e. a simple majority of the shareholders attending and voting) at a meeting notwithstanding any other agreement between the director and the company. The resolution will be of no effect if passed in writing instead of at a meeting. At least one of the shareholders must give at least 28 clear days’ notice in writing before the meeting of an intention to move the resolution at the meeting. On receiving that notice, the company must forward the notice of the resolution to the director concerned and call a general meeting of the company to vote on the resolution. The director has the right to be heard at the meeting and to make written representations. 

The company's articles of association or shareholders' agreement may contain provisions that make it difficult in practice to remove a director or provide that they can be reinstated. The company's articles of association and shareholders' agreements should therefore be checked before considering taking this route. 

A company's articles of association may set out additional (and usually less complex or time-consuming) bases on which a director can be removed. For example, the 'Model Articles' under the Companies Act 2006 set out circumstances that trigger the automatic removal of a director, including that they are prohibited from being a director by law or a bankruptcy order is made against them. Some companies' articles of association also allow the directors to remove another director by majority vote, for example. The articles of a company should be reviewed for any such procedures if removal of a director is contemplated.

There is no specific requirement. Notice of termination may be given verbally or by other means. For evidentiary purposes, it is strongly recommended that any notice be issued in writing.

The provisions set forth by Swiss Company Law must also be taken into account for managing directors. For example, in a company limited by shares (‘Aktiengesellschaft’), the appointment and dismissal of persons entrusted with managing and representing the company is part of the non-transferable and inalienable duties of the board of directors.

2.3 Notice period

Removal as a director is immediate unless otherwise specified in the articles of association of the company.

The statutory notice periods include: one month in the first year of service; two months between the second and ninth year of service; and three months thereafter.

The notice period may vary depending on the written individual or collective employment contract. often employers and managing directors agree on longer notice periods in their employment agreements than the default rule foreseen by law. The notice period must be the same for both parties. 

The parties may agree on a probationary period of up to three months with a notice period of seven days.

2.4 Involvement of works council

No involvement.

Except for mass dismissals, there is no statutory requirement to involve a works council.

2.5 Involvement of a union

No involvement.

No involvement.

2.6 Approval of state authorities necessary

Not necessary.

Not necessary.

2.7 Collective redundancies

Not applicable.

The statutory provisions regarding mass dismissals apply where the employer – within a time period of 30 days – gives notice for reasons unrelated to an individual employee (including a managing director) and affecting (numbers include employees and managing directors):

  1. at least ten employees at a business normally employing between 21 and 99 employees; or
  2. at least 10% of the employees at a business normally employing between 100 and 300 employees; or
  3. at least 30 employees at a business normally employing more than 300 employees.

The provisions governing mass redundancies do not apply in the event business operations have ceased by court order or mass redundancies have occurred due to bankruptcy or a composition agreement with assignment of assets.

Prior to giving notice, the employer must consult the employee’s representative body or the employees, and at the same time notify the cantonal labour office in writing of the planned mass dismissal. These bodies have consultation rights only. Neither the employees nor the cantonal office can block a mass dismissal.

The employer is obliged to enter into social-plan negotiations if it (i) usually employs at least 250 employees (including managing directors) and (ii) intends to terminate at least 30 employees (including managing directors) within 30 days for reasons that are unrelated to an individual employee. Notices given over a longer period but based on the same operational decision must be added together.

The employer negotiates:

  • with the employee associations that are party to the collective employment contract if a party to this collective employment contract;
  • with the organisation representing the employees; or
  • directly with the employees if they have no representative organisation.

An arbitral tribunal will establish a social plan by way of an arbitral award if such negotiations fail.

2.8 Summary dismissals

No special rules apply.

Both the employer and the managing director may terminate the employment relationship with immediate effect at any time for cause.

The requirements for a termination for cause are high. There must be a severe breach of contract and – except for very serious cases (e.g. theft) – a clear warning must be given, which is then ignored by the other party. The notice must be issued within two to three days of the party becoming aware of the serious breach allowing termination for cause.

2.9 Consequences if requirements are not met

The removal of the director is void.

In case of ordinary dismissals:

  • in case of unfair dismissal, the notice remains valid, but the party abusively giving notice may be obliged by the court to pay an indemnity of up to six months salary.
  • The employer must not terminate the employment relationship during certain protected periods, as mentioned above under ‘Reasons for dismissal’. any notice given during these periods is void. If any of these circumstances apply after notice has been given, the notice remains valid but is extended accordingly.

Where a termination is made with immediate effect for cause but the requirements are not met (e.g. no serious breach, no or insufficient warning, late notice), the managing director is entitled to the salary for the period until his contract expires or could have been ordinarily terminated. In addition, the court may require the employer to pay an indemnity of up to six months salary.

In a case of mass dismissal, a notice of termination given without or before completion of the consultation process is deemed abusive. The notice of termination remains valid, but the employer is obliged to pay an indemnity to the managing director of a sum fixed by the court not exceeding two months salary.

2.10 Severance pay

The director may be entitled to a payment under the terms of any service contract (for example a payment in lieu of notice), or as an employee under statute (for example a statutory redundancy payment). Sections 215 to 222 of the Companies Act 2006 contains special rules relating to compensation given to a director for their loss of office. Such compensation requires shareholder approval, except for certain payments that are made in good faith such as payments made in discharge of a legal obligation, or to settle a claim arising from loss of office or termination of employment.

Managing directors are entitled to a severance payment if they are over 50 years old and with 20 or more years service. If there is no contractual severance payment, an amount equal to between two and eight months salary will be awarded by the court. However, the employer’s contributions to the managing director’s pension fund over the entire period of service may be deducted from the severance payment. As a result, mandatory severance payments are rare.

2.11 Non-competition clauses

Restrictive covenants may be included in any service agreement. However, they will be void for unlawful restraint of trade and therefore unenforceable unless they protect the legitimate business interests of the employer and go no further than necessary to provide that protection in terms of the activities covered, duration and geographical area.

The director may also be subject to post-termination restrictions contained in other agreements such as a shareholder agreement, or (depending on the reward structure) share plans such as LTIPs (Long Term Incentive Plans).

The parties to an employment agreement may agree on post-termination restrictive covenants prohibiting competitive activity by the former managing director. Such covenants are subject to a number of requirements and restrictions, including the following.

  1. A post-termination restriction on competition is only valid and enforceable if it is limited to a specific activity, a reasonable geographic area, and a reasonable period of time (i.e. maximum three years, unless there are exceptional reasons for a longer period).
  2. In addition, a non-competition restriction is only enforceable in those cases where the managing director has had access to the employer’s customers or to manufacturing or business secrets during the term of the employment, and the use of such knowledge could significantly damage the employer.
  3. The non-competition restriction has to be agreed upon in writing.
  4. The restriction does not apply if the employer terminates the employment relationship without the managing director having given him any good cause to do so, or if the managing director terminates it for good cause attributable to the employer.
  5. Where a managing director infringing the restriction is liable to pay a contractual penalty, the managing director may exempt himself from the prohibition by paying the penalty. however, he remains liable for any further damage. Only where expressly agreed upon in writing, the employer may insist that the managing director continue to observe the non-competition restriction in addition to seeking the agreed contractual penalty and any further damages.

2.12 Miscellaneous

Regulated and listed companies should also be mindful of any obligations they may have under their regulatory rules and/or the rules applicable to their market listing. These rules are likely to limit the terms on which such companies can reimburse a director in connection with their removal from office or employment and can also subject a company to reporting obligations.

Not applicable.