You have entered into a legally binding settlement agreement with a former employee and have paid him the agreed amount of compensation.  In return he has agreed not to pursue any claims against the business and has made certain promises to you (known as warranties).

What happens if, after the employee receives the money, s/he breaches the agreed terms?

This will depend on whether provision has been included for this in the settlement agreement. 

Some agreements include repayment provisions which provide that if the employee breaches any material terms of the agreement, their employer will be able to recover any money paid to him/her and recover it as a debt.  These can be problematic and are usually unenforceable if they amount to a penalty (rather than a genuine pre-estimate of the loss suffered by the employer). 

It is more common for the contracts to include an indemnity from the employee to the employer for any losses it suffers as a result of the employee’s breach. 

Remember – if you have not yet paid the employee the agreed amount, you will not have to do so in the event that he materially breaches its terms.

What is a material term?

A material term is one that if breached has a serious effect on the innocent party.  In the context of a settlement agreement, the following actions by an employee are likely to constitute a material breach which allows the innocent party to terminate the agreement:

  • Bringing an employment claim included in the list of claims the employee has agreed not to pursue.
  • Making adverse and/or derogatory statements that result in damage to the employer or its reputation in breach of a clause in the agreement.

Breaching a trivial or minor clause will not be sufficient.  Most settlement agreements require the employee to return all property belonging to the employer within a specified timeframe.  You would not normally be able to terminate the agreement and recover all (or some of) the money you have given the employee in circumstances where, for example, the employee has failed to return his identity pass, but you probably would be able to do so if he failed to return expensive IT equipment, or a car. 

Will the parties still be bound the terms of the settlement agreement?

This will depend on the terms of the agreement.  If the employee fails to comply with a condition precedent (which provides that payment will only be made if and when certain conditions are met), the employer is entitled to withhold or recover the compensation payment.  In these circumstances, the parties will remain bound by the terms of the agreement and the employee would not, for example, be able to bring new employment claims against their employer.

In other circumstances, where the employee has breached a material terms of the settlement agreement and has not yet received the money, the employer can either bring the contract to an end (in which case neither party would be bound by it), or if payment has been made to the employee, affirm it and sue for compensation or recovery of the sums paid.

Can you recover all of the money paid to the employee?

This will depend on whether you have an enforceable repayment clause or, if you are relying on an indemnity clause and can justify recovering all of the money you have paid out.  If the payment to the employee includes statutory payments they are entitled to anyway (such as a statutory redundancy payment), you would not normally be able to recover this element. 

Relevant factors include the length of time that has elapsed since the settlement agreement was agreed.  The longer the gap, the less likely you will be able to recover all monies paid out.

How do you recover the sums?

The terms of the agreement are legally binding and if they include provisions for the compensation to be repaid in the event the employee materially breaches it terms, the school can take action to recover the money. 

You will need to send a letter before action to the employee to explain that they have breached the terms of the agreement and provide details of the evidence that you have to support this.  Give the employee a reasonable amount of time to respond (14 days is usually sufficient).  If the employee disputes the facts, refuses to repay the money or simply ignores the letter, you will have to take action to recover it.

For debts in excess of £750.00 you can issue a Statutory Demand which ultimately could result in the employee being made bankrupt if they do not comply with the terms of the Demand.

Alternatively you can issue proceedings against the employee for breach of contract and pursue them through the court process, although this can be more time consuming and costly.

The value of your claim will determine how your proceedings are dealt with by the court, with claims less than £10,000 generally being determined through the small claims procedure which is a more simple process.