Employers negotiating settlement agreements frequently stress the importance of a ‘quick clean break’, while employees typically prioritise financial benefits. This dynamic -– together with the natural tendency of lawyers to keep tightening the drafting – has helped push settlement agreements towards ever greater complexity.
The scope of settlement agreements came into focus through the #MeToo movement, and the Solicitors Regulation Authority (SRA) recently issued a further warning notice reminding solicitors of key regulatory principles.
Solicitors take compliance seriously: if they fail to do so they can be prosecuted. The warning notice focuses on confidentiality and expressly confirms that some clauses are not acceptable. It does not bind employers or HR directly. However, solicitors advising both employers and employees will be bound. An employee must be advised by a qualified person, if the settlement agreement is to be effective. So, there is a good chance that a regulated person will advise at least one party, and it is simplest to assume that the warning notice applies to all settlement agreements.
In practice, lawyers often disagree over what is permitted in settlement agreements. From a commercial perspective, unnecessary debate is generally best avoided. Put simply, this can slow things down, damage relationships and increase costs. Examples of clauses that can cause difficulty include:
- Confidentiality clauses: Solicitors must object to confidentiality clauses that do not include certain exceptions, such as those on reporting to the police or regulatory bodies; medical treatment; professional advice; tax compliance etc. Some of these limits are confirmed in the warning notice, others flow from broader lawyers’ professional conduct rules. While not all proposed agreements now meet these basic expectations, they are usually amended following requests without too much fuss.
- Claw-back clauses: Solicitors must also object to claw-back clauses linked to confidentiality. For example, if you disclose X you must pay back the compensation. Most employers are now modifying settlement agreements accordingly. However, disputes over the boundaries are common, such as regarding overreaching warranties (also highlighted in the warning notice); use of phrases such as ‘conditional on’; provision for delayed payments; or indemnities for professional fees in the event of employee breach.
- Unenforceable terms: Solicitors must object if they believe unenforceable terms have been included in a settlement agreement. However, sometimes it is not clear whether a particular term is enforceable. For example, disputes often arise over the enforceability of post-termination restrictive covenants as well as data protection and personal injury releases.
- The ‘kitchen sink’: Settlement agreements seem to include ever longer lists of claims settled, parties released and related assurances. Sometimes it is not even possible to identify who is released. Perhaps not a problem if the claims to be settled are listed narrowly, but when both claims and released parties are broadly drafted the agreement becomes unworkable.
Sometimes attempts will be made to settle claims that the employee’s lawyer cannot easily advise on. For example, few employment lawyers will have specialist pensions, personal injury, intellectual property, tax, regulatory or overseas legal expertise. Expanding definitions and assurances to include unnecessary or unspecified claims or parties is not only likely to lead to delay, but may sometimes overstep the mark to the extent that all or parts of the agreement are unenforceable.
- ‘Hand beyond the grave’ clauses: ‘No derogatory statements’, ‘ongoing cooperation’ and ‘right of inspection’ have over time become more acceptable and even normal. While rarely called upon in practice, this type of clause can cause unnecessary ongoing worry for employees. The explanation is typically that this is standard practice. In reality, we are still waiting for case law to clarify the boundaries.
The current context in which employers have reluctantly been obliged to deal with high volumes of dismissals, quickly, perhaps offers us all an opportunity for a reset. Most employers will need to review settlement agreements (and other contracts with confidentiality provisions) to take account of the SRA’s warning notice. This provides a fresh opportunity to focus on commercial objectives, and perhaps prune out clauses that are rarely needed, but may lead to unnecessary uncertainty, dispute, delay or cost. A risk management approach to review of settlement agreements may highlight benefits, for everyone, in trying to keep things simple.
Juliet Carp is a consultant solicitor at Keystone Law