Commercial/Employment UPDATE

Issue No.13 May 2006

Fixed Term Employment Contracts- A Cautionary Case study!

Once Bitten Limited has developed an exciting new range of upmarket pet products. The managing director, Tom Shy, believes the company needs a dedicated and pro active marketing director to promote this new range and to reverse the decline in sales of its existing products. After some months of searching, Tom believes he has found the perfect candidate. Ivor Qualified has a PhD in marketing, is an experienced senior marketing manager at a large multi-national and comes highly recommended by a previous colleague of Tom’s.

Despite being delighted with his “find”, Tom is in no mood to take risks. He has previously had a bad experience with an underperforming senior employee who took the company to the employment tribunal and is determined not to face the same situation again. He therefore proposes to the Board that Ivor be offered a fixed term contract rather than a “permanent” contract. He believes that this will limit the company’s downside if the relationship does not work out and that the contract can always be extended if it does. Ivor agrees to a one year fixed term contract on this basis and Tom drafts a brief engagement letter. The Board is pleased with Tom’s work, not least the saving on legal fees!

Unfortunately a week before the company is due to launch its new range its main competitor, More Bite Limited, launches a very similar range of products. This has a serious impact on the company’s launch and sales of the new range of products are sluggish. With a mounting backlog of products to shift, the company has a serious cashflow problem. What is more, Ivor’s performance has not been at all impressive and the Board has lost confidence in his ability to develop and drive the ambitious marketing strategy that the Company needs.

Tom discusses the situation with Ivor on a “without prejudice” basis with a view to agreeing an amicable parting of the ways. Unfortunately, Ivor is in no mood to be conciliatory. He has left his previous job and the security it offered to join Once Bitten Limited and has a family to support. In his view the problems are down to Tom’s lack of strategic planning.

The Board considers that it would be prohibitively expensive to dismiss Ivor and pay him off for the remaining 6 months of his fixed term. It therefore decides that Ivor should stay on until the expiry of the fixed term. That way at least they will be getting something for their money.

An awkward 6 months passes at the end of which Tom writes to Ivor to confirm the termination of his employment due to the expiry of his fixed term contract. Tom breathes a sigh of relief but…

Ivor speaks to a solicitor friend of his who advises him that he has been unfairly dismissed because the company did not rely on a valid reason (such as redundancy, conduct etc.) in dismissing him. The expiry of the fixed term is not a valid reason for unfair dismissal purposes. In any event the dismissal is unfair because the company should have followed a specific procedure before dismissing. The failure to follow the procedure is likely to result in an uplift of between 10% and 50% in the compensation payable to Ivor. Following a bitter exchange of correspondence, the Board decides to cut its losses and agrees to a substantial pay out.

Prevention is better than cure: You should ensure that your employment documentation is professionally drafted and should seek legal advice before engaging any employee (or consultant or agent) on any other terms. You should also always seek legal advice when considering the dismissal of an employee.

CVS is experienced at advising and assisting with the formulation of suitable employment strategies and production of employment documentation. Where problems do arise, we are on hand to provide sensible and practical advice and, where appropriate, to assist in the negotiation of the best possible settlement. We are experienced in handling claims that do reach the Courts or employment tribunals.

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Mark Machray or Edward Bond or by telephone 020 7493 2903.