Exit Strategy: Settlement Agreements, Releases & Avoiding Post‑Employment Claims

The end of an employment relationship is often where legal risk quietly peaks. While terminations, resignations, and redundancies may appear routine, poorly managed exits can expose organisations to costly post-employment claims ranging from wrongful dismissal and discrimination to victimisation allegations.

The best exit strategies are those which pose the least possible risks on the employer. It is felt that there are two prevailing solutions in which termination of employment, being the most onerous stage of the employment relationship, whereby, by balancing the interests of both the employee and the employer, risks are mitigated. One would undoubtedly be exposed to a variety of risks in the absence of recourse to such solutions. Strangely enough, the latter solutions would need to be considered at two opposite ends of the contract, before the engagement and later on, when there is a possibility of termination.

Essentially, even before engaging a new employee, the employer should map out how to protect his interests during employment and upon the termination, however and whenever this takes place. This is the purpose of post-termination clauses in the contract which would be presented to the employee for consideration and eventual signature. The employee would therefore be put in a position to know the obligations with which he would be bound where the employment ends.

Besides the contractual arrangement itself before the start of the engagement, loopholes are closed further by reaching a settlement agreement at the very last stage of the employment relationship.

Indeed, post-termination clauses in an employment contract and settlement agreements may be viewed as complementary tools that can operate in tandem to manage risk at the end of an employment relationship. While post-termination restraints are agreed at the outset and seek to protect the employer's legitimate business interests after departure, a settlement agreement provides a tailored, contemporaneous framework to regulate the specific circumstances of exit, often reinforcing, clarifying, or even extending those existing obligations. In practice, a well-drafted settlement agreement can reaffirm the enforceability of contractual restraints, adjust their scope where appropriate, and introduce additional protections or consideration, thereby ensuring a smoother and more certain transition for both parties.

The Employment Contract

The first port of call when exiting from employment is referring to the employment contract. The reason behind this is due to the fact that the employment relationship between the employer and the employee, should be one of trust and confidence. Therefore, such contracts often cater for conditions which regulate the activity of the employee post termination of employment in order for that trust and confidence acquired not to be betrayed.

In this regard, every employment contract should include post-termination clause in order to protect the interests of the employer. While such clauses have been the subject of debate for many years with respect to their strength and validity, these clauses are not necessarily considered to restrain commerce or freedom of the parties to contract an agreement. The debate stems from the fact that Maltese law does not cater for these types of clauses, however they are not prohibited by the Maltese legal system as long as certain rules established by case law are followed.

Post-Termination Clauses

Employment contracts often envisage conditions which regulate the activity of the employee after termination of employment, so that the aforementioned value is not undermined or betrayed.

While post-termination clauses have been the subject of continued debate, with respect to their strength and validity, these clauses are not necessarily considered to restrain commerce or the freedom of the parties to contract agreement. In fact, a balance must be struck between on the one hand, the right of the employee to earn his living, and knowledge and skills obtained in his former employment which will undoubtedly enable him to continue to do so, and on the other hand, the protection of the interests of the employer. Essentially, there are four legitimate interests in respect of which the employer is entitled to limited protection.

These are:

• Trade secrets and confidential information;
• Employer protection when it comes to existing customers and connections;
• Working for competitors; and
• The enticing of existing employees.

As a general principle of civil law, all contracts have the force of law between the parties concerned. In Mark Bugeja et vs Marvin Zammit (COM) (15 January 2020), the Court held that contractual terms must be respected since they reflect the will of the parties at the moment of signing of the contract. Thus, when an express pact in a contract is violated, this constitutes a contractual default which carries compensation through payment of damages or penalties stipulated (Attilio Vassallo Cesareo et vs Anthony Cilia Pisani (CA) (3 March 2007). That said, it does not mean that these clauses are absolute and supreme and cannot be challenged somehow. Indeed, judgments provide that in certain circumstances, post-employment restraints can be considered unenforceable since they are done in restraint of trade (Delvetro Limited vs Kishore Kumar Neduru (FH) (26 September 2024).

Under Maltese law, restraint of trade clauses are interpreted strictly and generally in favour of the employee. The Court of Appeal in Attilio Vassallo Cesareo et vs Anthony Cilia Pisani (3 March 2007) confirmed that such clauses are presumed to be contrary to public policy and therefore void unless justified by special circumstances. It is ultimately a matter of the Court to determine whether the restraint is justified. A restraint will only be enforceable if it is reasonable both in the interests of the contracting parties and in the interests of the public. It was held that:

"The onus of showing that a restraint is reasonable between the parties rests upon the person alleging that it is so, that is to say, upon the covenantee. The onus of showing that, notwithstanding that a covenant is reasonable between the parties, it is nevertheless injurious to the public interest and therefore void, rests upon the party alleging it to be so, that is to say, usually upon the covenantor. But once the agreement is before the Court it is open to scrutiny in all its surrounding circumstances as a question of law."

The Courts assess restraint of trade clauses on a case-by-case basis. As confirmed in Delvetro Limited vs Kishore Kumar Neduru (26 September 2024), the Court evaluates the particular facts surrounding the employment relationship, including the respective positions of the employer and employee, the nature and requirements of the business, the profession or skill of the employee, the employee's salary and length of service, and the scope, duration, and impact of the restriction imposed. Particular attention is given to the extent to which the clause limits the employee's ability to continue working in their profession.

In Attilio Vassallo Cesareo et vs Anthony Cilia Pisani (CA) (3 March 2007), the Court considered a clause which prohibited the employee from working in the same line of business for a number of years after termination. Although the Court acknowledged the employer's legitimate interest in protecting its commercial interests, it ultimately held that the restriction lacked sufficient safeguards for the employee. In particular, the employee received no compensation for the restriction and, in the context of a small jurisdiction such as Malta, the clause would have effectively forced the employee to leave the country to continue working in the same field. The Court therefore emphasised that compensation may be necessary for such restrictions to be considered reasonable.

However, the Courts have shown greater willingness to uphold clauses that are narrowly tailored. In Mark Bugeja et vs Geoffrey Camilleri (CA) (13 February 2014), the Court upheld a clause preventing a former senior auditor from taking employment with clients of his former firm for two years following termination. The Court considered the restriction reasonable because it was limited in scope to the firm's clients, allowed the employee to work with other entities including competitors, and was restricted to a defined two-year period. The agreed pre-liquidated damages of Lm2,000¹ were also considered proportionate given the employee's seniority and the level of trust inherent in the position. Similar clauses were upheld in Mark Bugeja et vs Mellyora Grech (CA) (27 May 2015) and Mark Bugeja et vs Marvin Zammit (COM) (15 January 2020), where the Courts recognised the employer's legitimate interest in protecting confidential information and maintaining the independence of auditors when dealing with clients.

Conversely, overly broad non-compete clauses have been rejected. In Alliance Yachting Company Limited vs Matthew Gusman (CA) (14 October 2021), the Court examined a clause prohibiting the employee from working with any company involved in a business competing with any activity of the employer for one year after termination. The Court held the clause unreasonable because it lacked a geographical limitation, extended beyond the employer's primary business activities, and failed to provide compensation for the restriction imposed on the employee's ability to work. The judgment also reaffirmed that non-compete clauses must be interpreted restrictively, particularly in light of the constitutional recognition of the right to work.

Overall, Maltese jurisprudence indicates that non-compete and restraint of trade clauses may be enforceable if they are carefully drafted and proportionate. In practice, enforceability generally requires that such clauses be limited in duration, geographical scope, and subject matter. Restrictions should focus on the employer's core business and on activities actually performed by the employee, while the competitive activity being restricted should be clearly defined. Where the clause effectively prevents the employee from working in their field, compensation is typically required for the restriction to be considered reasonable. It is also advisable that such clauses allow the employer the possibility of waiving the restriction where appropriate.

The Utility of Settlement Agreements

Settlements Agreements play a vital role in settling issues or disputes that may arise with the employer's employees, whether such matter relates to the subsistence of the employment relationship or to its termination.

A settlement agreement is a written agreement which may be entered into between the employer and the employee to address a grievance, concern or requirement that the employee may present to the employer. An employer may also opt for a settlement agreement in order to formalise certain terms and conditions regulating the termination of an employee's relationship with the employer, as a preventative measure to avoid the institution of a dispute before the Industrial Tribunal.

The following matters are typically regulated by a settlement agreement:

• The parties mutually agree to terminate the contract of employment;

• Provision is made as to the notice period. The settlement agreement reflects what choice the employer makes in relation to the notice period. Indeed, in terms of article 36 (9) of Cap. 452, the employer has the option either to allow the employee to continue to perform work until the period of notice expires or, at any time during the currency of the period of notice, to pay the employee a sum equal to the wages that would have been payable in respect of the unexpired period of notice. In many cases, the relevant notice period is waived, and therefore there shall not be any notice period applicable. The employer would therefore stipulate that compensation in lieu of notice is paid to the employee in terms of law, normally with the next payroll run;

• There is the inclusion of an end date to the employment relationship. The Employee's employment will terminate on a specific date, at which point the employee's salary, as including balance of pro rata vacation leave and mandatory bonuses and allowances, will cease to accrue;

• The agreement typically requires employees to close pending matters which necessitate the employee's direct and substantial input;

• Although a settlement agreement is built on mutual understanding and good faith, it does not mean that it does not include obligations typical of an exit from employment. Such obligations include the obligation on the part of the employee to delete company-owned material or material gathered during the carrying out of duties from the employee's personal devices and property. There is also an obligation – usually included in the employment contract itself – to return all the employer's property and equipment back to the employer within a few number of days;

• There is a reference to the fact that contractual obligations which subsist beyond the termination of employment continue to run in force. This is essentially a reference to the post-termination obligations discussed in this article;

• In settlement agreements, the employer decides to grant the employee a settlement consideration, normally consisting of an ex-gratia payment on a gratuitous and personal basis. This one-time payment intends to compensate for the waivers and for the loss of work on general terms. The nature and the amount of financial compensation that the employer may agree to pay the employee in view of the termination of their employment relationship is expressly written down. In all cases the ex-gratia payment or the consideration in view of settlement, as the case may be, is supplemented by a clause highlighting the fact that it is being given without any admission of liability on the part of either party;

• Waivers, where a party is agreeing not to take any court action in relation to the employment relationship, are included so that the termination of employment, as follows by the agreement, does not raise contentious issues in the future; and

• The agreement is usually made in full and final settlement, and the employee would therefore not have any future claims against the employer.

Conclusion

It should be noted that the termination of an employment relationship is not entirely devoid of risk under Maltese law. Even where an employer considers that there exist valid grounds to terminate employment, such termination may nonetheless give rise to legal challenges or disputes. In particular, an employee may seek to contest the lawfulness of the termination on the basis that it was not effected for a good and sufficient cause or that the applicable procedural requirements were not duly observed in accordance with the provisions of the Employment and Industrial Relations Act. Moreover, issues may arise in relation to the settlement of outstanding wages, accrued leave, notice entitlements, or other statutory benefits due upon the cessation of employment. Any failure to comply with the obligations imposed by Maltese employment legislation may expose the employer to claims before the Industrial Tribunal or the Court of Criminal Judicature, as the case may be.

In light of the foregoing, it is generally advisable, where circumstances permit, for the parties to regulate the termination of employment by means of a mutually agreed settlement agreement. Properly drafted settlement agreements may therefore serve as an effective mechanism to reduce uncertainty and mitigate the risk of subsequent disputes or proceedings before the competent authorities.

Footnote

1 €4658.74

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.