Join our JFM Law team as we answer your FAQs about Deeds of Release.
Transcript
What is a deed of release in employment law?
A deed of release, it’s something that’s brought up in all areas of law, but in employment law it’s typically brought up where there is a dispute between an employer and an employee, and then the employer and the employee agreed to settle the terms of that dispute. And it’s typically a payment being made to the employee by the employer in exchange for various contractual obligations in return.
It’s a contract at its heart, so it’s two parties agreeing to have an amount of money paid to one party in exchange for a release from legal claims by the other in it’s simplest form.
So, the most common and probably most important term you’ll find in the deed of release is the settlement sum. So that’s the amount of money being paid by one party to another on a no admissions basis in exchange for that other party releasing the first party from claims.
So, the other term that then flows on from that is the release. So that’s where one party, or often both parties, release each other from claims that they may have against each other. In employment law, it’s typically claims relating to the employment relationship between the employer and employee.
Other terms you’ll find all the time are confidentiality. So, the terms of that deed are often strictly confidential. The parties aren’t allowed to talk to anyone about them other than as required by law such as for the purpose of getting legal advice or accounting advice on a confidential basis.
You’ll also hear of the term non-disparagement, which is one that isn’t thrown around quite as much, but you’ll find it in most deeds of this kind. And what that means is no parties are allowed to say bad things about the other in its simplest form. So, the employer is to refrain from disparaging the employee, and the employee is to refrain from disparaging the employer. There’s often other terms surrounding that.
In relation to how any money paid under the deed will be taxed, there’s terms relating to how the employment relationship will come to an end if it hasn’t already. There’s often a letter of service referred to in the deed of settlement, which is a letter issued by an employer to an employee talking about how long they were employed, what they did while they were employed, and the date on which their employment came to an end. It’s a written reference for all purposes.
Another key element of all deeds of release is a bar to proceeding. So, while the deed and its terms are confidential, they can be raised in court for the purpose of preventing one party from commencing proceedings against another, because those the right to commence such proceedings have been waived so the deeds, as I said, they’re contractual in nature and so they can be quite broad, but those are the terms you’ll find in most of them.
What are the risks of signing a deed of release without seeking legal advice?
The risks of signing a deed of release without seeking legal advice are pretty significant. By signing a deed of release, an employee may be giving up certain legal rights and entitlements, such as their right to bring a claim for unfair dismissal, discrimination, general protections, or even personal injury claims, and without fully understanding the consequences of signing a deed of release an employee may be agreeing to terms that are not actually in their best interest, such as non-compete or non-solicitation clauses which could limit their ability to work in their chosen industry and not receiving adequate compensation or agreeing to terms and conditions that may be unfair. Unreasonable employees may also be inadvertently waiving their rights to make legal claims without intending to actually waive those specific claims.
Is a deed of release legally binding?
Yes, a date of release is legally binding. It’s a document that’s at its heart, it’s a deed. So, it’s an agreement between the parties, signed by the parties. And yes, it’s validly binding, and most deeds of release can only be revoked or changed by written agreement between the parties.. Just like many contracts, they’ll have a clause that says that the document can only be varied by written signed agreement between the parties.
However, in employment law and at law generally, there are ways in which deeds of this kind can be set aside, and often in an employment relationship, one of those reasons is where one party has been unduly influenced by the other to sign the deed. So, where an employer may have pressured an employee into signing something they otherwise wouldn’t have. Another circumstance is where one party’s been guilty of fraud and so the circumstances leading to the employee or the employer executing the deed were fraudulent circumstances, and there’s also circumstances which are less common where there’s been a mistake made between the parties or so on, but they’re a lot less commonly heard of.
What should an employee consider before signing a deed of release?
Before signing a deed of release, an employee should carefully review its terms and ideally, consult with a lawyer if necessary. Some key considerations include the amount of any severance pay or other compensation being offered in exchange in for signing the deed, as well as the relevant tax implications. The scope of the release is also important, including what claims the employee is agreeing to release the employer for, and whether there are any exceptions or carve outs that apply.
The impact of signing a date of release and any obligations such as non-compete or confidentiality agreements, that’s important as well. It’s also really important to consider whether the employee has received independent legal advice before signing the deed if you’re the employer as well.
What are the benefits of signing a deed of release?
The benefit for an employee is that they are receiving a sum of money that might be the same as or less than what they would expect to receive if they went to the Fair Work Commission, but they have not had to go through the cost and time and stress of going to the Commission. So, a lot of employees will accept less money than they may be entitled to at the Commission under a deed of release because they’re not having to pay legal fees in order to recover that money.
What should an employee look out for when signing a deed of release?
For signing a deed of release, an employee should be aware of some of the potential pitfalls or red flags to look out for such as:
- Vague or unclear language that could be interpreted in different way;
- One sided or unfair terms that heavily favour the employer more often than not;
- Hidden or unexpected clauses or conditions that could have significant consequences;
- Confidentiality clauses which may restrict the employee’s ability to discuss the terms of the agreement with others;
- There’s pressure and coercion from employer to sign a deed of release without adequate time or legal advice – you know, usually they’ll say you have to get it done within a day or so, which isn’t usually pretty fair; and
- Also inadequate compensation or benefits in exchange for signing the deed itself.
Can a deed of release be revoked or changed once signed?
Once signed, a deed of release is pretty difficult to revoke or change. It is therefore really important for parties to seek legal advice before signing a deed of release to ensure that they fully understand the terms and implications of the document. In certain cases, either party may be able to challenge a deed of release. So, this will include situations of fraud, misrepresentation, duress, and undue influence. There is also human errors, major mistakes, errors, and then there’s if it’s illegal or unconscionable. However, some of these things have a pretty high threshold and often applications of this nature are unsuccessful, so parties should really feel quite well informed and confident before signing a deed of release.
What are restraint of trade clauses in employment contracts?
Restraints of trade clauses in employment contracts come in two forms, so there’s:
- Non-compete restraints of trade; and
- Non-solicitation restraints of trade.
A non-compete obligation is an obligation whereby you are agreeing not to compete with your employer. That’s typically within a specified area such as Adelaide or Sydney or Australia and also typically for a specified period of time such as six months, 12 months or two years.
The other type of restraint of trade is a non-solicitation restraint of trade. So that’s where you might be agreeing not to solicit your employer’s clients. It might be where you’re agreeing not to take your employer’s staff or contacts, your employer’s suppliers or people of that nature.
How are non-solicitation clauses enforced?
To enforce a non-solicitation clause, the employer must be able to demonstrate that the clause is reasonable in the terms of its duration, geographic scope, and the actual activities that are prohibited. If the clause is found to be unreasonable or overly restrictive, it may be considered unenforceable. The legal test is that a restrained obligation such as non-solicitation clause is only enforceable to the extent that it is reasonably necessary to protect the legitimate business interests of the employer. So, in other words, the employers need to be able to show that there is actually a legitimate business interest being protected and that the relevant obligations imposed on the employee are reasonably necessary to protect them for that purpose.
Can non-solicitation clauses be included in all employment contracts?
They can be included in all employment contracts and that’s why it’s important to when receiving a job offer, read through the contract that’s being given to you and properly understand the terms that you’re proposing to agree to.
What is a non-compete clause in an employment contract?
A non-compete clause is a contractual term, and its effects ultimately depend on how it is worded in the relevant agreement. So, for example, a non-compete clause could prohibit an employee from working for, or becoming involved in any way, with the business that competes with their employer for a period of time after their employment comes to an end. It could also be narrower than this sometimes and only prevent an employee from working for specific competitors or competitors within a specific distance of the employer’s business.
Restraint obligations which prevent you from working for a competitor are not usually reasonably necessary to protect the legitimate business interests of a protected party being the employer, and this is because businesses can often be sufficiently protected by non-solicitation restraints. This is because as a matter of public policy, restraints should not prevent someone from earning a living and they’d have to be financially compensated for their adherence to such a restraint if that’s the case. So, this often results in non-compete obligations being unenforceable.
How can employers enforce legitimate non-solicitation and restraint of trade clauses?
Employers can enforce legitimate non-solicitation and restraint of trade clauses by ensuring that the clauses are reasonably necessary to protect their legitimate business interests. And what this means is it requires careful drafting of the clauses to make sure that they are no wider than necessary and that they take into account the employee’s position and their level of responsibility.
What are some tips for drafting effective restraint of trade clauses in employment contracts?
There’s a couple of key things that should be considered when drafting restraint of trade clauses. The first is, and the thing that I always tell employers, to consider what your legitimate business interests are and only include obligations that are actually necessary to protect those. So, the first step is identifying your legitimate business interests. The second step, and this is where it gets important, is drafting an obligation that goes so far as to comprehensively protect you and your legitimate business interests but doesn’t go too far. So, a lot of businesses are quite adequately protected by having a non-solicitation obligation that prohibits an employee from talking to their clients. It’s often not necessary to fully restrain an employee from working in their area of expertise for a long period of time. If the restraint obligation goes too far, then it can be liable to be struck out as being unenforceable and that’s where employers expose themselves to a little bit of risk.
How can employees protect themselves from overly restrictive restraint of trade clauses?
Employees can protect themselves from overly restrictive restraint of trade clauses by seeking legal advice before signing an employment contract, negotiating the terms of the clauses where possible, and ensuring that the clauses are reasonably necessary to protect the employees legitimate business interests. If an employee is subject to an overly restrictive clause, they may actually be able to challenge it in court as well.
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The information contained in this post is current at the date of publishing – 14 June 2023.
