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Auntie looks at the problems involved in waiving claims against an employee
One of our senior employees is leaving the company under a bit of a cloud. We have agreed to enter into a compromise agreement with him. Now he is asking the Company to waive claims against him and to provide an indemnity for him if he is sued by a client in the future. Should I agree to this? It isn’t in our standard compromise agreement and I have not been asked to do this before.
Waiving claims against an employee
Generally employers are reluctant to agree to requests like this because:
- they have not fully investigated whether they have any claims against the departing employee (whereas the employee knows what claims he has resulting from the termination of his employment);
- they are unlikely to know whether clients have claims against the departing employee;
- waiving claims against a senior employee might not be in the best interests of the company or its shareholders; and
- they do not want to create a precedent which others seek to follow.
It is not standard market practice for employers to waive claims against employees in a compromise agreement. Whether or not you decide to agree to the employee’s request will depend on the circumstances and the bargaining positions of the parties.
Where there is no obvious reason for the request (for example, it is a normal redundancy or another situation where there is no known wrongdoing by the employee), then it would seem reasonable to refuse the request. Perhaps you can get to the bottom of it by asking the employee what he is particularly worried about as this might influence your decision.
You say that the employee has left under a bit of a cloud. If, for example, you have dismissed the employee on the grounds of misconduct it is understandable that the employee would want a waiver of claims in respect of the alleged misconduct but you may be unwilling to waive any other claims against him.
There are various types of waiver, and we summarise below the types most commonly sought by employees during exit negotiations with their employers.
What kinds of waiver are there?
- Full Waiver: It is rare that an employer would be willing to waive all claims against an employee. The risks of doing so may be that you, as the employer, are not aware of the full extent of an employee’s misconduct. If you were to find out later that the employee has, for example, falsely claimed expenses, stolen intellectual property rights, etc. then this would prevent the company making claims in respect of these new instances. If an employers is agreeable to waiving all claims, it should limit the waiver to claims which have arisen in the past so that the company can sue if the departing employee damages it in the future. Also, employers should consider excluding breach of any restrictive covenants from the scope of the waiver.
- Specific waiver: We would normally advise clients who do want to give an employee a waiver to make it as specific as possible. For example, if the employee is being dismissed because of misconduct (e.g. falsifying expenses), the employer may agree not to sue the employee in respect of those particular expenses. If so, the employer should consider asking the employee to give full disclosure of their misconduct before entering into the compromise agreement. This ensures that if further information comes to light which has not been disclosed (for example, and using the same scenario, the employer later finds out that the employee falsified many more expenses than he had originally disclosed) , the waiver then falls away and the company is still able to sue.
- Confirmation that the Company is not aware of any claims: if a company is hesitant to agree to a waiver of claims against an employee, a compromise position is for the employer to warrant that it is not aware of any claims that it has against the employee at the time of entering into the compromise agreement. This provides the employee with some comfort on the point, without unnecessarily restricting the company in relation to future discoveries. However, the company ought to make some preliminary enquiries of relevant management (e.g. HR, Compliance, Finance, and the employee’s line manager) before giving the warranty.
Indemnifying Former Employees
Employees, particularly senior employees and former directors, will sometimes request an indemnity in relation to claims (and costs associated with such claims) brought by third parties in relation to matters associated with their employment, or to assist the company in relation to regulatory or other investigations.
Whilst it is fairly common for employers to agree to reimburse the employee for expenses (other than legal costs) incurred in providing such assistance, employers should exercise caution about being seen to be paying the individual for their assistance because this might damage the individual’s credibility if they are needed to provide witness evidence.
It is worth considering here whether you can deal with the concerns of the employee by agreeing to keep directors’ and officers’ insurance in place. In most cases, this should be sufficient protection, unless there is a specific concern regarding a matter which arose during the employee’s employment. Again, it is worth asking the employee why they would need this sort of indemnity if they are already covered by the directors’ and officers’ insurance.
If you do decide to agree to an indemnity, it is worth considering whether:
- you impose a cap on the amount of total cover (including damages payable by the employee);
- the employee will have access to the company’s lawyers other than in the case of a conflict of interest;
- there will be a cap on the company’s contribution to fees and / or prior written consent is required before fees can be incurred; and
- you carve out situations when the company might be suing the employee, or where criminal proceedings are brought against the employee.