Often disputes between departing employees and their employer result in a settlement or agreement. Some employers also wish to provide additional benefits to departing employees as a show of goodwill or to ensure the employee leaves in an amicable manner. Should these agreements, or additional benefits be subject to the employee agreeing not to commence any legal proceedings against the employer? Most employers would surely respond that this would be desirable. It is not uncommon for employers to require their employees in such circumstances to enter into a form of release.
There is widespread uncertainty as to the form any such release agreement should take and the default is to use a deed of release. We receive many queries from employers about whether it is appropriate to use a deed of release and what can be included in the deed. Understanding the importance of how a deed of release can assist and protect your business can be highly beneficial.
Why use a Deed rather than a contract?
This is a rather vexed issue. There are two significant reasons why Deeds are preferable to contracts (mere agreements) and they are as follows:
- There is no requirement for consideration, this means that a party entering into the Deed does not need to have something of value in return in order to make it enforceable; and
- The limitation period for suing on a deed in circumstances of breach is 12 years in most States (and 15 years in South Australia and Victoria), rather than 6 years for breach of a contract.
More specifically, deeds are a form of contract demonstrating that the parties intend their promises contained in the deed to be binding. It is usual for deeds to be used in circumstances where a person is giving up their legal rights. However, it is not absolutely necessary that a deed rather than an agreement is used.
Deeds are specialised and powerful legal instruments that can have significant consequences if not used appropriately. In order to be effective, a deed must be “signed, sealed and delivered”. In other words, there are specific requirements regarding the execution of deeds. These may differ from State to State, and care needs to be taken to ensure that the execution of the deed conforms to the relevant legislative requirements. In addition, once a deed is provided to the other party after it has been executed it will be taken as “delivered” and it will be enforceable. Care therefore needs to be taken to ensure that the deed is not provided to the employee until it is finalised and the employer is ready to be bound by its terms.
Another important difference between a deed and an agreement is that a deed is binding on a party when it has been signed, sealed and delivered to the other parties, even if the other parties have not yet executed the deed document: Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609 at 619. Given the more solemn nature of a deed, as compared to an agreement, in order for it to be effective, a deed must be witnessed by at least one person.
What is a deed of release?
A deed of release is a written instrument which either:
(a) passes an interest, right or property, or creates a binding obligation on some person or party; or
(b) affirms or confirms something which passes that interest, right or property.
A deed of release is commonly used where an employer and employee seek to settle a dispute mutually between them or prevent a dispute from arising. An employer who makes a payment to an employee whose employment has been terminated, which is in excess of the employee’s legal entitlement, should always ensure that any such payment is offered conditional upon the employee entering into a deed of release.
What should a Deed of Release include?
General terms
The terms and conditions in a deed of release should be carefully and clearly written. The deed should characterise the purpose of the deed, the parties involved, tax implications and, if there are proceedings on foot, how those proceedings will be disposed of.
Recitals
The recitals in a deed show the circumstances on which a release is based and the agreement reached between the parties. Legal authorities have held that recitals may assist in interpreting the operative provision if there is an ambiguity and therefore the effect of a recital can be of great significance.
Release from all claims in relation to employment
The parties should consider whether release clauses are to be unilateral or mutual, and how the scope of the release is to be defined. As a release involves the giving up of or abandonment of a right or claim, the deed should express clearly what the releasor is giving up. The High Court of Australia has emphasised that Courts should be slow to hold that certain rights or actions should be surrendered unless the parties had clearly intended for them to be surrendered (see: Grant v John Grant and Sons Pty Ltd (1954) 91 CLR 112 and RW Miller & Co P/L v Australian Oil Refining P/L [1967] HCA 50).
Undertakings
It is important to consider how the deed of release will be structured and whether the employee is required to comply with an obligation before they acquire any benefits from the deed of release. For example, an employee may be required to return all company property and discontinue proceedings prior to receiving the benefits under the deed of release.
Restraints of trade
Post-employment restraints are often included in deeds of release to protect the company’s confidential information, as well as customers, employees and suppliers from solicitation. It is important that restraints of trade clauses are drafted carefully and precisely to ensure they will be enforceable.
Company property
The requirement to return company property is useful in ensuring that the employee is compelled to return all company property before receiving the benefits provided under the Deed. Clauses regarding company property can require former employees to return to the employer any copies of confidential documentation or property that they have in their possession.
Confidentiality
It is common for confidentiality provisions to be used in deeds of release to prevent both the employer and employee from disclosing what was agreed in the Deed to anyone, except their financial advisor, lawyer or where permitted by law.
Non-disparagement
Non-disparagement clauses restrict what former employees can say about their former employer, specifically restricting them from saying anything that would damage the reputation or goodwill of the employer in its industry and the community generally. For employers, the obligation of non-disparagement should be drafted in a way that only obliges the corporate party “to use its best endeavours” to ensure non-disparagement by its directors, officers and employees and ensure they will not be responsible for any unauthorised statements.
Terms regarding communication to other employees
It is not uncommon to have a provision in the deed of release setting out how the termination of the employee will be communicated to their colleagues. Generally, this can be achieved by the parties mutually agreeing on a form of communication, and how it will be transmitted, and included this in a Schedule to the deed.
Execution
It is important that the relevant parties are signatories to the deed of release and the at no time should an employee be coerced or pressured into signing the deed of release. Employees should be given the opportunity to consider the deed, ask any questions and obtain independent legal advice about the contents of the deed if they wish. In order to be effective, a deed must be witnessed by at least one party who is not a party to the deed.
What should I do if an employee breaches the terms of the Deed of Release?
The contractual doctrine of privity applies to deeds at common law. Generally, only a party to the deed may enforce the deed. In NSW a cause of action on a deed has a limitation period of 12 years (s16 Limitation Act 1969 (NSW)).
An employee may breach a deed of release in a number of ways and the available remedies to an employer will depend on the type of breach. For example:
- If a former employee breaches their restraint clauses in the deed of release, an employer can seek injunctive relief preventing the employee from continuing to breach their restraints or the employer can possibly receive compensation in the form of damages for losses resulting from the breach. The ability to enforce a restraint clause and seek any type of relief will be dependent on the wording of the clause.
- If a former employee breaches confidentiality clauses or uses confidential information, the employer may be able to obtain court orders preventing further misuse of confidential information or obtain compensation for losses as a result of the breach.
- If a former employee attempts to commence legal proceedings against the employer which is barred by the terms of the deed, the employer can plead the deed as a bar to the commencement of any such proceedings.
Relevant Decisions in this area
In Lockett v Sugar Research Australia [2015] FWC 7686 Mr Lockett made an application for an unfair dismissal claim asserting his redundancy was a sham. Mr Lockett’s employer contended that the Fair Work Commission was jurisdictionally barred from entertaining Mr Lockett’s application for reasons that the two parties had jointly entered a deed of release. Mr Lockett asserted that he did not understand the deed, and entered the deed under duress or in a confused state of mind. Senior Deputy President Richards rejected the Applicant’s assertion and held that he believed Mr Lockett entered the deed in a relatively composed state of mind. The Deputy President upheld and applied previous decisions where a deed of release, knowingly and properly executed, served as a bar to an application for a remedy in relation to an alleged unfair dismissal and dismissed the proceedings.
Further, in Nalbandian v Commonwealth of Australia (Australian Bureau of Statistics) (No 2) [2016] FCCA 1606 the applicant, a former employee of ABS, was ordered to pay costs for instituting proceedings vexatiously when he brought a claim under the Fair Work Act 2009 (Cth) when a binding deed of release was in place. The ordinary rule in this jurisdiction is that each party should pay its own costs. The applicant was also ordered to pay back the moneys paid to him under the deed for breaching the deed by commencing proceedings. It is common for a deed of release to have a provision that allows the employer to claw back monies paid under the deed if the employee commits a breach.
Even though employers may view drafting a deed costly and time consuming, the benefit of certainty surrounding the termination, and the elimination of possible future claims is invaluable. If you require advice or assistance in drafting and entering into a deed of release with an employee, please do not hesitate to contact our office for specialist advice.
This alert is not intended to constitute, and should not be treated as, legal advice.