Settlement Agreements and Restrictive Covenants: What You Need to Know

In the complex world of employment law, settlement agreements and restrictive covenants are two important legal tools that can have significant consequences for both employers and employees in England. Settlement agreements are often used to resolve disputes, but they come with their own set of rules and potential pitfalls. In this article, we will explain what settlement agreements and restrictive covenants are, how they work, and why they are crucial in managing legal risks for both parties.

What is a Settlement Agreement?

A settlement agreement is a legally binding contract that is often used to resolve disputes between an employer and an employee, typically following a grievance, disciplinary issue, or redundancy situation. It usually serves to bring an end to any ongoing employment relationship and often includes an agreement on severance payments, the terms of the employee’s departure, and confidentiality clauses.

Settlement agreements are commonly used to prevent the employee from pursuing further legal action, such as an employment tribunal claim, against the employer. The agreement sets out the terms of the settlement and is signed by both parties, ensuring that there is a clear understanding of the rights and obligations following the termination of employment. Because of this, employees must have received independent legal advice in order for the agreement to be effective.

Key Features of Settlement Agreements:

1. Finality: Settlement agreements offer a clean break, preventing future disputes and claims.
2. Financial Settlement: The employer typically agrees to provide a financial package over and above what the employee would usually be entitled to in exchange for the release of legal claims.
3. Confidentiality: Often, both parties agree to keep the terms of the settlement confidential, which may prevent any further public knowledge of the situation.
4. Waiver of Claims: Employees agree to waive the right to bring legal claims, such as those under the Employment Rights Act 1996 or discrimination laws, provided that the agreement complies with statutory requirements.

What Are Restrictive Covenants?

Restrictive covenants are clauses commonly found in employment contracts that impose limitations on an employee after their employment has ended. These clauses are designed to protect the employer’s legitimate business interests, such as client relationships, trade secrets, or intellectual property.

Restrictive covenants are enforceable in England and Wales but must meet specific legal criteria to be valid. If a restrictive covenant is deemed too broad, unreasonable, or unnecessary, a court may rule it unenforceable.

There are several types of restrictive covenants that employers commonly use:

1. Non-Compete Clauses: These prevent an employee from working for a competing business for a specified period and within a particular geographic area after leaving their job.
2. Non-Solicitation Clauses: These prevent an employee from soliciting customers they worked with during their employment for a defined period after leaving the company.
3. Non-Dealing Clauses: These prevent an employee from doing business with former customers, even if they were not directly solicited by the employee, for a certain period.
4. Non-Poaching Clauses: These prevent an employee from recruiting other employees from the company after they leave.

Key Considerations for Employers:

• Restrictive covenants must be reasonable in scope, duration, and geographical extent.
• They must protect a legitimate business interest, such as trade secrets, confidential information, or client relationships.
• Overly restrictive clauses, such as those preventing an employee from working in an entire industry for a lengthy period, may be unenforceable in court.

Key Considerations for Employees:

• It is important for employees to carefully review any restrictive covenants in their employment contracts before agreeing to them.
• Employees may have an opportunity to negotiate the terms of restrictive covenants in settlement agreements, especially if they are leaving under terms that involve a severance payment or other compensation.
• If a restrictive covenant is found to be unreasonable or overly restrictive, it may not be enforceable, and the employee may have the option to challenge it in court.

Settlement Agreements and Restrictive Covenants: How They Interact

In many cases, restrictive covenants and settlement agreements intersect. For example, when an employee is leaving a company, they may be asked to sign a settlement agreement that includes an acknowledgment of restrictive covenants. In such cases, both the employer and employee need to carefully consider the terms of the agreement to avoid creating unnecessary legal risks.

For Employers: Employers should ensure that the restrictive covenants are clearly outlined and properly included in the settlement agreement to protect their interests and prevent future competition or solicitation. However, if restrictive covenants are too broad, they risk being unenforceable, which could undermine the company’s protection and result in costly legal disputes.

For Employees: Employees should be cautious when signing settlement agreements, especially when they contain restrictive covenants. They should assess whether these clauses are fair and reasonable, considering the industry, the employee’s role, and the duration of the restrictions. If the restrictive covenants seem excessive, an employee may want to negotiate their removal or alteration as part of the settlement.

Legal Advice for Settlement Agreements and Restrictive Covenants

Given the complexities involved in both settlement agreements and restrictive covenants, seeking legal advice is essential for both employers and employees. A qualified employment solicitor can guide you through the process, ensuring that you understand the terms of the agreement, the implications of restrictive covenants, and your legal rights.

For employers, consulting with a solicitor helps ensure that restrictive covenants are enforceable, properly drafted, and tailored to the company’s needs. For employees, legal advice ensures that the terms of the settlement agreement, including any restrictive covenants, are fair and that they fully understand the long-term consequences of agreeing to such terms.

Conclusion

Settlement agreements and restrictive covenants are powerful legal tools that can provide certainty and resolution in employment matters. While settlement agreements offer a clean break between employers and employees, restrictive covenants serve to protect businesses from unfair competition or loss of confidential information. However, both must be carefully considered and properly executed to ensure they are enforceable and fair.

Employers and employees alike should seek legal advice to navigate these agreements and clauses, ensuring that their rights and interests are adequately protected. Whether you are looking to settle a dispute or negotiate the terms of your departure, expert legal guidance is crucial in achieving a favourable outcome.

Field Overell have years of experience assisting employees with settlement agreements in Coventry and Warwickshire. If you wish to discuss any of the matters in this article, contact our employment solicitors Andrew McCusker and Lloyd Williams on 024 7622 9582 or amc@fieldoverell.com.

This article is provided for information only and is not intended to constitute legal advice. No reliance should be placed on this article. You should always take legal advice from a qualified lawyer before deciding whether to pursue legal action.