Are you leaving on good terms?

It is always favourable to leave a job on good terms. It is a small world after all.

But what does it mean to be a “bad leaver”?

In corporate agreements, bad leaver clauses can be used, for example, when defining how an employee who is also a shareholder will be treated if they leave the company in certain circumstances.

Where an employee who is also a shareholder (the leaver) leaves a company, it is common for the other shareholders to require them to sell their shares either back to the company or the other shareholders. This is so that the leaver will not benefit from any future company growth, whether or not they may have contributed to it. Also, it makes way for a replacement employee to take up shares.

The key question then for the leaver is whether they are a “good” or “bad” leaver. A good leaver would usually be entitled to be paid the market value for their shares. A bad leaver may only be entitled to receive the amount of money they paid for the shares in the first place, which is often very little.

The definition of a bad leaver can be tailored to each business. It is up to the parties to decide. A bad leaver could be defined as an employee who has simply voluntarily resigned and/or one who has been dismissed for gross misconduct.

In the recent case of Nosworthy v Instinctif Partners Ltd [2019] the Employment Appeal Tribunal upheld an employer’s actions to enforce a bad leaver clause contained within its Articles of Association. This required a bad leaver to transfer their shares for minimal consideration and forfeit loan notes. The company’s former employee had sought to argue (amongst other things) that the enforcement of this after her voluntary resignation was unconscionable, and constituted a penalty. The Employment Appeal Tribunal found that the clause could not be deemed an unenforceable penalty clause because it did not relate to breach of contract. In this instance the bad leaver provision was triggered by the employee voluntarily resigning and so no breach had occurred. However where there are bad leaver provisions that are triggered by a breach of contract, they may be subject to the restriction on penalty clauses. This would mean that they are only enforceable if it is not out of proportion to any legitimate interest of the innocent party.

The fact that the employee had taken legal advice at the time of accepting a bad leaver provision was also considered in determining the enforceability of this.

This case highlights the importance of making sure that bad leaver clauses are enforceable, contained in the right document and that all parties are properly advised. 

Whether you are an employer looking to use a bad leaver clause in your agreements or a prospective employee considering whether to accept one, we can help you.  Please contact our Corporate and Commercial Team on 01242 574244 or e-mail Head of Department, Jon Rathbone.