Many employers enter into separation agreements with employees who have to leave employment. Prior to the signing of such agreements, the parties negotiate on the issues to be covered by the separation agreement. More or less “for good order”, almost all separation agreements contain a so-called “general settlement clause” stating that with fulfilment of the settlement any mutual claims between the parties are fully and finally settled. From time to time, legal disputes arise as to whether such a general clause really waived all mutual claims. A recently published judgment of the Regional Labour Court for the State of Hesse illustrates that one should not rely on a general settlement clause.

The Judgment of the Regional Labour Court

An employer entered into a separation agreement with one of its employees addressing all issues that had been discussed during the negotiations. One of the last provisions of the agreement was a general settlement clause: "The parties agree that with fulfilment of this [settlement] agreement any mutual claims out of the employment relationship are settled”. During the negotiations the parties obviously “forgot” to terminate and waive a post-contractual non-competition undertaking (“Non-Compete”) which was agreed on in the employment contract. According to Non-Compete, the employee had to refrain from competing with the employer for a two year period commencing on expiration of employment and was (in accordance with mandatory law) entitled to compensation amounting to 50% of the contractual remuneration last received.

Shortly after signing the separation agreement, the employee requested the agreed compensation from the employer. The employer responded that the general settlement clause fully waived the Non-Compete and that no compensation will be paid.

The former employee filed a successful claim for compensation with the local labour court of Marburg. By way of interpretation of the general settlement clause, the local labour court judged that the Non-Compete was not covered by the general settlement clause, as its rights and obligations arise after expiration of the employment relationship. The employer appealed to the Regional Labour Court and prevailed. The court considered the Non-Compete as part of the employment relationship and therefore ruled that the employer is not obliged to pay the compensation.

However, the Regional Labour Court considers the interpretation of the general settlement clause as an issue of general relevance and allowed the employee to appeal at the Federal Labour Court (Bundesarbeitsgericht). It remains to be seen how the Federal Labour Court will interpret the general settlement clause. There are good arguments to consider post-contractual obligations not as part of the employment relationship itself, and that the general settlement clause did not cover the Non-Compete.

Effect on employers

The judgment of the Regional Labour Court is a good example to remind employers to consider any issues that should or must be dealt with in a settlement. Any issues of financial nature like non-competes should be explicitly addressed in the separation agreement to avoid litigation with unclear chances of success.