Hong Kong Employment: Settlement Agreements

International news has recently been filled with talk about settlement agreements – in particular, a settlement agreement concerning Prince Andrew. How should a settlement agreement be prepared under the laws of Hong Kong? In this article, we will consider what should be included in a settlement agreement in the context of an employment relationship.

Introduction

A settlement agreement (or separation agreement) is a legally binding contract which sets out the terms of departure agreed between an employer and an employee usually in the context of a termination. 

There is no legal requirement to enter into a settlement agreement in the case of every termination, but it may be advantageous for both parties to agree to certain terms. For example, typically an employer will agree to make an enhanced termination payment to the employee, and, in exchange, the employee will agree to release and waive any potential claims they have against the employer.

Unlike other jurisdictions, employers and employees in Hong Kong have free rein to agree the terms of a settlement agreement. As long as there is an offer, acceptance of that offer and consideration, the settlement agreement will be binding on both parties.

How best to prepare a settlement agreement 

First and foremost, we suggest that the settlement agreement should be drafted using simple and clear language so that both parties can understand the scope, effect and limits to the operation of its terms. This means that parties should avoid using legal jargon or terms which are not clearly defined. This is because any ambiguity may cause issues regarding enforceability later down the line.

Terms in the settlement agreement should not seek to limit or restrict any of the parties' statutory rights (for e.g. an employee's right to receive certain statutory terminal payments). Further, terms should not seek to prevent an employee from fulfilling their legal or regulatory obligations. Any such terms are unlikely to be enforceable, and subject to whether the settlement agreement can be severed, may render the entire agreement void.

In addition, terms should be drafted carefully in order to ensure that no third party rights are inadvertently created where the parties do not intend for third parties to be able to enforce them. Alternatively, the agreement can include a provision to expressly exclude the Contracts (Rights of Third Parties) Ordinance and state that the agreement does not confer any rights enforceable by any third parties.

Employers are usually responsible for preparing the terms of the agreement and, depending on the circumstances of the settlement, should take legal advice during this process. 

Common terms 

A settlement agreement would usually contain a mixture of financial and non-financial terms including the following common terms: 

1. Terminal payments: This includes all payments (both statutory and contractual) due to the employee on termination including salary, commission, sick leave pay, as well as any accrued but untaken annual leave entitlement.
   
   
2. Ex-gratia payments: This is usually structured as compensatory payment for loss of employment, without recognising any legal liability. An ex-gratia payment is more generous than the employee's statutory and contractual entitlements and is intended to provide financial assistance to the employee and mitigate against the loss caused by the cessation of employment. 
   
   
3. Confidentiality: Most settlement agreements will include a confidentiality obligation which restricts the employee from disclosing the terms and/or the existence of the separation agreement. Exceptions to this may include immediate family, accountants, legal advisers, government bodies and/or the Courts if ordered to do so. 
   
   
4. Post-termination restrictions: These restrictions seek to prevent an employee from working for a competitor or from soliciting the employer's customers, clients or employees for a prescribed period of time after the cessation of their employment. However, it should be noted that these restrictions are only enforceable if they don't go further than is reasonably necessary to protect the legitimate interests of the employer. 
   
   
5. Non-derogatory obligation: For reputational purposes, it is common for employers and/or the employee to agree to an undertaking not to make any negative or disparaging comments about the other party.
   
   
6. Reference: Oftentimes, employers and employees may agree the terms of a reference to third parties. Unless agreed, employers have no legal obligation to provide a reference, but where one is provided, it must be accurate. The best way of discharging this obligation is to agree the terms of the reference. 

Take away

As every termination and its circumstance is unique, employers may be wise to seek legal advice when preparing settlement agreements. Likewise, employees should seek independent legal advice to understand the terms and effect of the settlement agreement.

Our team at RPC are widely recognized as leading employment lawyers in Hong Kong. We are of the few specialist employment law practices in Hong Kong and we act for both employers and employees on contentious and non-contentious matters.

Please do not hesitate to contact our Partner and Head of the Employment Practice in Hong Kong, Andrea Randall (andrea.randall@rpc.com.hk / +852 2216 7208) for any queries regarding the issues raised in this article or any employment law related queries you may have. 

All material contained in this article is provided for general information purposes only and should not be construed as legal, accounting, financial or tax advice, or as opinion to any person or specific case. RPC accepts no responsibility for any loss or damage arising directly or indirectly from action taken, or not taken, which may arise from reliance on information contained in this article. You are urged to seek legal advice concerning your own situation and any specific legal question that you may have.