Why Bother With Two-Stage Settlement Agreements?

In this OnPoint we report on why UK employers might wish to use so called “two stage” settlement agreements when agreeing the terms of an employee’s departure and the settlement of any resulting claims. 

It has become increasingly common for employers to use two-stage settlement agreements where there is a material gap between the employee signing up to severance terms and the eventual termination of the employee’s employment, for example after a period of garden leave or the employee dealing with handover of work for a significant period. This practice has grown up in order to deal with the possibility that, between signing of the settlement and eventual termination of employment, events might occur which could lead to the employee having further statutory, as distinct from contractual, claims against the employer and that these subsequent claims might not actually have been settled effectively by the original settlement agreement.

This approach requires the employee to sign the appropriate waiver of claims, having taken the appropriate independent legal advice, both when the individual signs the settlement agreement and then again at the point of or shortly after the date of the actual termination of the employee’s employment. Two-stage agreements take various forms – sometimes employers require the re-execution of the entire agreement; sometimes a short reaffirmation will suffice. In any event, in order to ensure that any claims arising between the signing of the original agreement and the eventual termination of employment are waived, the employer will wish the employee, on re-signing the agreement, to confirm that he or she waives his or her claims and to have again received the requisite independent legal advice. 

To require a two-stage settlement agreement might, depending on the particular circumstances, be seen as unduly cautious and bureaucratic. Where the employee is on ‘garden leave’ for much or all of the notice period, the risk of a claim arising between the formal binding agreement of severance terms and actual termination of employment – and of the employee seeking to challenge the scope of the settlement agreement – may be slight. The delay between signing and departure may be short enough for a two-stage agreement to be inappropriate or unnecessary. Nonetheless, where there is a material period of continued employment, the employer will be more assured that all statutory claims arising out of the employee’s employment and its termination have validly and effectively been compromised if the employee re-signs the agreement at the end of employment to re-affirm the statutory waiver in respect of all claims that might have risen by that time.

There is, however, a further and potentially significant, advantage in adopting the two-stage settlement agreement structure. The employee can be required to re-confirm, as at the termination of his or her employment, the warranties which he or she has given in the original agreement. A common and important warranty in a settlement agreement is that the employee has not committed a repudiatory or other breach of contract. If, as is often the case, this warranty is given at the time of signing the settlement agreement, a subsequent breach of contract on the part of the employee during the remainder of his or her employment would only leave the employer with a damages claim for loss resulting from that breach, or whatever other remedy might be appropriate, if it discovered the breach after termination of the employee’s employment and after making the termination payment. In these circumstances the employer would not automatically be entitled to reclaim the severance payment itself in full. Moreover, the value of the claim which the employer would have against the employee would depend on the nature of the employee’s breach and might not equate to the amount of the severance payment. An example might be if the remedy for the employee’s breach of contract is an order for the return of property rather than financial loss – as might be the case if the employee is discovered to have removed the company’s information during the balance of his or her employment but has not actually used that information in a way which has caused demonstrable financial loss to the employer.

However, if the employee has, as a condition of receiving the severance payment, reaffirmed the warranty that he or she has committed no breach of contract as at the date of the termination, and a breach is subsequently discovered, then the employer will be in a far better position to be able to recover the severance payment in full or take the position that it is no longer payable if it has not yet been paid.

While the careful drafting of provisions to this effect will be crucial to achieve the employer’s objectives, a two-stage settlement agreement does give the opportunity for an employer to protect itself more fully against the galling possibility of having agreed to a significant severance package only to discover that the employee has, after agreeing those severance terms, committed a breach which, if discovered before termination, could have justified summary dismissal and the employer then being unable to reclaim the severance payment in full or decline to pay it.

This Onpoint is an edited version of an article recently published by HR Bullets.