Last reviewed 20 May 2013

Individuals are appointed to senior roles either because of their particular expertise or leadership skills, or because of the scale of their financial investment, which entitles them to a leading role. As with more junior employees, their calibre and conduct may nevertheless be variable. This can cause difficulties down the line, as Nigel Baker of Lexicon Employment Law Training explains.

All employees need to pull their weight in an organisation to maximise efficiency and to minimise the prospect of loss and risk. The senior staff have a specific management role either in terms of supervising more junior staff or in guiding the development and future path of the organisation.

Those at the helm of an organisation are expected to make the biggest contribution and are invariably rewarded commensurately. Depending on the legal status of the organisation, those at the top or those who provide the initial and on-going finance, stand to lose everything in the event of insolvency due to either their mismanagement or difficult trading conditions. If the business unit is not incorporated or trading as a limited liability partnership, the personal assets of those behind the business are fully at risk. This is the drawback of operating as a sole trader or to some extent in a general trading partnership. The ability to limit the extent of business losses and liabilities is one of the key attractions in forming a limited company, although other factors also have to be balanced when making this decision.

The legal status of the senior staff will be determined by the form of business unit being operated. Corporate status has many consequences, whether the company is large or small. There are significant practical and legal differences between employees (senior or otherwise) and directors. A company director does not become an employee of his or her company simply through holding his or her office as director. However, most directors enter into service contracts with their company resulting in employee status, so there is then an overlap of roles. Note that under the Companies Act 2006, regulation exists regarding the legitimacy of directors’ service contracts, which last for longer than two years unless shareholder approval in general meeting is first obtained. Consideration should also be given as to the length of any notice provision on either side in a director’s service contract, which if lengthy, may not be in the best interests of the company.

Fiduciary duties and duty of fidelity

While both directors and employees as individuals have their masters and owe loyalties, directors have a particular tie to their companies, which are artificial legal entities in their own right. The duties imposed by law on company directors are more onerous than those arising simply from the employer-employee contractual relationship. Directors take on a human management role on behalf of their fictitious legal entities, acting as agents for their artificial principals. As the principal cannot do anything except on the initiative of its appointed director-agents, there has to be a very high standard of duty imposed on those directors and this is known as an implied fiduciary duty. This has to be distinguished from a mere duty of fidelity, as important as that is in its own right. All employees owe an implied duty of fidelity to their employer, which requires them to serve their employer loyally while in post. However, this duty is not comparable to a fiduciary duty, which is more onerous and exacting.

Those individuals who are senior employees but who are not directors of the company are in a situation where they may be viewed as directors by some. They may be carrying out important tasks at a high level, have managerial or supervisory powers and be well-rewarded for their efforts. Nevertheless, they do so without being formally appointed a director by those with the power in the company to confer this. There may be many reasons for this state of affairs but sometimes this can rebound on the directors who come to expect the same standards of behaviour and duties to be borne by those senior non-director employees. This can arise for example where a senior employee acts in a seemingly disloyal way by taking steps to set up in competition and then resigning his or her post. The directors of the company may seek to counterattack by claiming that the senior employee in question is in breach of his or her fiduciary duties to towards the company. Thisraises the important question as to whether such duties are owed by the individual in the first place, notwithstanding his or her senior position.

Case law

This important matter was before the court recently in Ranson v Customer Systems plc (2012) IDS Brief 955 EWCA and provides an interesting perspective on the significant differences between fiduciary duties and duties of fidelity and when the respective duties are likely to apply to specific individuals. In Helmet Integrated Systems Ltd v Tunnard [2006] EWCA CIV 1735 it had previously been stated that: "An employee owes an obligation of loyalty to his employer but he will not necessarily owe that exclusive obligation of loyalty, to act in his employer's interest and not in his own, which is the hallmark of any fiduciary duty owed by an employee to his employer. The distinguishing mark of the obligation of a fiduciary, in the context of employment, is not merely that the employee owes a duty of loyalty but of single-minded or exclusive loyalty."

In this case, it was also observed that “the obligation of loyalty is no more than an obligation loyally to carry out the job that the employee agreed to do”.

In Ranson, it was held that a senior sales manager did not, as an employee non-director, owe a fiduciary duty to his employer to report his own activities in preparing to set up in competition after his employment had ended. Such a duty could have been made an express term of his employment contract but this did not occur despite several internal promotions to senior positions in the company. Without such a contractual term, only a duty of fidelity arose and not a fiduciary one.

It was also held in Ranson that: “Since fiduciary obligations are not ‘one size fits all’ it is, in my judgment, dangerous to reason by analogy from cases about company directors to cases about employees' and that the starting point as to whether the employee owes fiduciary duties is the contract of employment.”

In University of Nottingham v Fishel (2000) ICR 1462 QBD, it was pointed out that: “The hallmark of a fiduciary is a single-minded duty of loyalty”. The duty of loyalty in that context has a precise meaning: “namely the duty to act in the interests of another”. On this point, the judge in Ranson subsequently observed that: “This is not a feature of an employment relationship.” In the employment context the duty of loyalty, although given the same label, “is one where each party must have regard to the interests of the other, but not that either must subjugate his interests to those of the other”. Again it is, perhaps, unfortunate that conceptually different things have been given the same label.

On the facts, the sales manager in Ranson was neither under any fiduciary duty nor under any express contractual term on post-employment competition with his employer so he was not in breach of contract.

What the cases above reveal is the important distinction between the fiduciary duties attaching to the office of director and the (lesser) implied duty of fidelity attaching to all employees. Senior employees who are not directors may have additional duties imposed on them but this will require an express term of their service contracts as employees.