How do you enforce the
terms of a settlement
agreement?
You have entered into a legally
binding settlement agreement
with a former employee and
have paid him the agreed
amount of compensation.
In return he has agreed not
to pursue any claims against
the business and has made
certain promises to you
(known as warranties).
What happens if, after the employee
receives the money, he breaches the agreed
terms?
This will depend on whether provision has been
included for this in the settlement agreement.
Some agreements include repayment
provisions. If the employee breaches any
material terms of the agreement, their
employer will be able to recover any money paid
to him/her and recover it as a debt. These can
be problematic and are usually unenforceable
if they amount to a penalty (rather than a
genuine pre-estimate of the loss suffered by the
employer).
It is more common for the contracts to include
an indemnity from the employee to the
employer for any losses it suffers as a result of
the employee’s breach.
Remember – if you have not yet paid the
employee the agreed amount, you will not
have to do so in the event that he materially
breaches its terms.
What is a material term?
A material term is one that if breached has
a serious effect on the innocent party. In
the context of a settlement agreement, the
following actions by an employee are likely to
constitute a material breach, which allows the
innocent party to terminate the agreement:
- Bringing an employment claim included in
the list of claims the employee has agreed
not to pursue.
- Making adverse and/or derogatory
statements that result in damage to the
employer or its reputation in breach of a
clause in the agreement.
Breaching a trivial or minor clause will not be
sufficient. Most settlement agreements require
the employee to return all property belonging
to the employer within a specified timeframe.
You would not normally be able to terminate
the agreement and recover all (or some of)
the money you have given the employee
in circumstances where, for example, the
employee has failed to return his identity pass,
but you probably would be able to do so if he
failed to return expensive IT equipment, or a
car.
Will the parties still be bound the terms of
the settlement agreement?
This will depend on the terms of the agreement.
If the employee fails to comply with a condition
precedent (which provides that payment will
only be made if and when certain conditions
are met), the employer is entitled to withhold
or recover the compensation payment. In these
circumstances, the parties will remain bound by
the terms of the agreement and the employee
would not, for example, be able to bring new
employment claims against their employer.
In other circumstances, where the employee
has breached a material terms of the
settlement agreement and has not yet received
the money, the employer can either bring the
contract to an end (in which case neither party
would be bound by it), or if payment has been
made to the employee, affirm it and sue for
compensation or recovery of the sums paid.
Can you recover all of the money paid to the
employee?
This will depend on whether you have an
enforceable repayment clause or, if you are
relying on an indemnity clause and can justify
recovering all of the money you have paid
out. If the payment to the employee includes
statutory payments they are entitled to anyway
(such as a statutory redundancy payment),
you would not normally be able to recover this
element.
Relevant factors include the length of time that
has elapsed since the settlement agreement
was agreed. The longer the gap, the less likely
you will be able to recover all monies paid out.
How do you recover the sums?
The terms of the agreement are legally
binding and if they include provisions for the
compensation to be repaid in the event the
employee materially breaches it terms, you can
take action to recover the money.
You will need to send a letter before action
to the employee to explain that they have
breached the terms of the agreement and
provide details of the evidence that you have
to support this. Give the employee a reasonable
amount of time to respond (14 days is usually
sufficient). If the employee disputes the facts,
refuses to repay the money or simply ignores
the letter, you will have to take action to recover
it.
For debts in excess of £750.00 you can issue a
Statutory Demand, which ultimately could result
in the employee being made bankrupt if they
do not comply with the terms of the Demand.
Alternatively, you can issue proceedings against
the employee for breach of contract and pursue
them through the court process, although this
can be more time consuming and costly.
The value of your claim will determine how
your proceedings are dealt with by the court,
with claims less than £10,000 generally being
determined through the small claims procedure
which is a more simple process.
We can help you
Irwin Mitchell is well positioned to be able to
assist you with pursuing breaches of settlement,
or indeed any, agreements in order to recover
sums which are rightfully owed to you.
For further information on settlement agreements please contact Jane Anderson (jane.anderson@irwinmitchell.com).
Spring 2016
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