What are the risks of failing to pay a settlement agreement payment on time?

risk employer failing pay settlement agreement time

Q: Late payments: What are the risks to an employer of failing to pay a settlement agreement payment on time?

Emma Gray, Managing Associate Solicitor at Linklaters LLP answers…

Emma Gray, Managing Associate at Linklaters LLP

Technically, any late payment is a breach of contract. However, the consequences can vary. In most situations, late payment will not render void the entire agreement or waiver of claims. The employee’s normal recourse would be a breach of contract claim in respect of the payment obligation. However, if the employee’s waiver of claims is conditional on receipt of payment, late payment could have more serious consequences for the employer. The agreement may be void and the employee may be free to pursue the claims purportedly settled. Settlement agreements are, however, not normally drafted in this way.

COT3 agreements

Settlement of employment claims can take place by means of a settlement agreement negotiate by the parties or a conciliated settlement agreement through the Advisory, Conciliation and Arbitration Service (“ACAS”), known as a “COT3” agreement. The consequences of employer breach of a COT3 are, unfortunately, a grey area. There is contradictory case law on whether the employee can choose to sue for breach of contract or terminate the agreement, reviving previous claims (Johnson v Communications Associates Ltd ET Case No.29768/76) or whether the sole remedy is enforcement of the payment obligation (Kelly v Moran Transport Ltd ET Case No.1276/87).

Other potential consequences

Late payment could have other unforeseen consequences. Settlement agreements can provide for payment of sums other than the settlement sums as consideration for other provisions. For instance, some agreements provide for separate payments for new post-termination restrictive covenants such as non-competes. Late payment of the consideration risks an employee arguing that the covenants are not enforceable. This could have serious consequences for a business dealing with a key individual, particularly since injunctions to enforce disputed covenants tend to be costly to pursue.

Reason for delay

The reason for delay will affect the analysis. This may be an administrative error or something more substantive, such as a concern that the employee is in breach of the agreement, e.g. breach of the non-disparagement obligation, or the employee having taken up a new job in breach of warranty. If there is good reason to suspect a breach, then the risks of delaying payment will have to be weighed against the risks of making payment and thereby undermining the value of those obligations.

How can a payment obligation be enforced?

Because of the time and cost involved in bringing proceedings, enforcement of payment terms is likely to be a last resort for most employees, when payment had been delayed for a prolonged period.

The normal forum for enforcement will be the civil court system rather than the Employment Tribunal. Employment Tribunals do not have jurisdiction to hear contractual disputes where the employment has not terminated, where the agreement is entered into after termination, or where the quantum of the contractual dispute exceeds £25,000. So only a narrow category of enforcement claims can be pursued in the Employment Tribunal.

Unless a COT3 agreement is reached, enforcing a settlement agreement involves bringing a fresh claim, suing on the settlement agreement itself.

COT3 agreements can be enforced in the same way as judgments (through a warrant/writ of control, attachment of earnings order, third party debt order or charging order). In addition, other than in respect of conditional agreements, they can be enforced through the ACAS and Employment Tribunal Fast Track Scheme. Upon payment of a £60 fee (which may be added to the amount claimed), a High Court Enforcement Officer (“HCEO”) can file a writ with a court on behalf of the individual and then pursue the debt.

Since 6 April 2016 an HCEO has had power to impose a financial penalty of up to £5,000 on an employer who has not paid the full sum (including any interest) due in a COT3 agreement. Enforcement proceedings in respect of COT3 agreements are also added to the Register of Judgments, Orders and Fines (www.trustonline.org.uk), which can be searched by the public and credit reference agencies, providing a further incentive to pay sums due in a timely manner.

Interest may also be payable if an enforcement claim is pursued. The interest rate awarded by courts for this does not mirror the base rate – it is currently significantly higher, at 8% per annum.

Practical tips for avoiding late payment issues

The key is to ensure that appropriate time is built into the settlement agreement for making payment and to consider carefully whether there are any factors that could lead to delay.

If payments can be processed only monthly in the payroll, or the organisation’s processes are such that payment requires a longer lead-in time than the period proposed in a draft agreement (14 days is common but this is negotiable), be sure to extend the period.

If the payment is subject to approval, e.g. by the remuneration committee, approval should ideally be sought before the agreement is signed. If this is not possible, the drafting will need to be considered carefully.

If a payment may be subject to change (e.g. due to a malus reduction or clawback), this should be made clear in the drafting.

Where compliance with additional obligations is key, consider allocating more than a nominal sum as consideration for specific obligations. This may be a more effective deterrent and, in the event of a suspected breach, this sum could be withheld (or claimed in respect of if paid) and the agreement should still be valid. Another option is to agree staged payments to encourage ongoing compliance.

If the employer does not wish to make the payment until the employee complies with his obligations (e.g. to return property and withdrawn claims), these need to be structured as conditions precedent to payment.

Conclusion

Settlement agreement litigation is rare. In situations where there is a minor delay in payment, a quick conciliatory explanation to the other side with assurance that the matter will be swiftly rectified may nip the issue in the bud. However, some settlement agreements follow protracted litigation or contentious negotiations which take place over months. The purpose of settlement agreements is to avoid litigation. This purpose will be defeated if late payment reignites the dispute and triggers litigation.

Visit our Settlement Agreements Hub for related articles

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