Sometimes during the negotiations for a separation agreement the employee will ask for a mutual release of claims and an indemnity from the employer as well as a confidentiality obligation. What should the employer consider before agreeing to this request?
- Know what you are giving away: It is important to know what you are giving away in terms of a release of potential claims against the employee. As an employer you do not want to provide the employee with a release of claims only to subsequently discover that these are substantial claims or ones which the employer ought to have pursued against the employee or would have meant a different approach to negotiating the separation agreement. Even if an employer agrees to provide a release of claims to the employee there should be appropriate carve-outs, for example, the term should not operate to exempt or indemnify a director against any liability to the company which would otherwise attach to them in respect of any negligence, default, breach of duty or breach of trust in relation to the company (see section 468(2) and (3) of the Companies Ordinance) unless it is a “permitted indemnity provision” (as described in section 469 of the Companies Ordinance)1.
- Incorporate appropriate representations: Even where there has been an issue leading up to the separation agreement and the employer has carried out an investigation in respect of an employee, there may still be issues (or claims against the employee) in respect of which the employer is unaware. So, where the employer is considering providing a release of claims against the employee, it should accompany that release with the appropriate express representations to be made by the employee upon which the employer relies to enter into the agreement. The employee should be representing that the employee has fully complied with the employment contract and there are no circumstances which would give rise to any claims by the employer against the employee.An employee who is reluctant to provide this representation should be asked why they cannot do so.
- Confidentiality and non-disparagement provisions: Consider the appropriate scope of confidentiality and non-disparagement obligations.
It is not uncommon for employers to require an employee who is receiving an ex-gratia payment to abide by confidentiality and (sometimes) non-disparagement obligations. This is despite the practical difficulties associated with enforcement. It may be difficult to detect and prove breach, and any enforcement action taken will likely disclose, if not highlight, the very confidential information the employer is looking to protect.
Sometimes the employee may insist on making confidentiality obligations mutual. An employer should carefully consider whether it should agree to the obligations and what their scope should be.
There may be circumstances where the employer wants to be able to respond publicly to protect its reputation, especially when it was the employee who breached the confidentiality obligation in the first place. The employer may find that it risks breaching the separation agreement which has the knock-on implication of potentially affecting its ability to rely on other clauses under the agreement, such as the release given by the employee.
If the employer wants to agree to mutual confidentiality obligations, it should make sure appropriate carve-outs are included. These may include, for example, reserving the ability to disclose information in a reactive manner to protect its interests should the need arise (e.g., rebutting false accusations made by the employee or any third party) or to disclose as required by law or to a regulator if it is in a regulated business.
- Malus and clawback: if the amount of the payout under the proposed separation agreement is substantial and there are continuing obligations the employer wants the employee to abide by, consider staggering the payment over a period of time and including appropriate "malus" and/or clawback clauses.
In essence, a malus clause allows the employer to stop making payments if certain circumstances arise (e.g., if the employee breaches a term of the separation agreement). A clawback clause, as the name suggests, is a clause providing the employer the right to clawback payments already made in the event the employee subsequently breaches a term of the separation agreement. While there will still be practical issues associated with enforcing these types of clauses, having them expressly stated in the separation agreement can have a deterrent effect as well as help demonstrate the contractual intent if action needs to be taken on enforcement.
- Arbitration clause: Consider using arbitration to resolve disputes, especially when the issues are sensitive, the amounts are substantial and/or you do not want issues aired in the public arena.
Arbitration has the advantage of having the dispute resolved in a confidential manner under the arbitral proceedings. The “dirty laundry” can then be kept away from the eyes of the public.
The above list is not exhaustive. There is no “one size fits all” solution. Each case should be considered based on its circumstances.
1 Note that the restriction on companies giving an indemnity provided under section 468 of the Companies Ordinance apply only to Hong Kong incorporated companies.