BLOG -
Take caution with full and final settlement clauses!
Judgment of the Regional Court of Mecklenburg-Vorpommern of 20 April 2022 in Case No. 5 Sa 100/21
Employers should consider carefully whether it makes sense to use so-called full and final settlement clauses. Full and final settlement clauses are provisions in termination/winding up agreements or court settlements which swiftly and comprehensively settle all open claims arising out of an employment relationship between the parties. They are designed to provide legal certainty quickly. However, caution should be taken when drafting them.
Facts of the case
To terminate the employment relationship on 31 October 2020, the employer and employee concluded a termination agreement. This contained a full and final settlement clause “that all claims against the other party arising out of or in connection with the employment relationship and its termination, irrespective of the legal grounds, whether or not the claim has been established shall be completely settled with the fulfilment of this termination agreement.” The employee subsequently claimed continued payment of wages for June/July 2020. At first, the employer paid the employee the wages. In November 2020, the employer informed the employee in her payslip for October 2020, i.e., after the end of the employment relationship, that she had no claim for continued remuneration. The employer therefore offset the amount of overpaid wages for June/July 2020 with her salary for October 2020 and paid the employee a smaller net amount.
The judgment
The Regional Court of Mecklenburg-Vorpommern (Landesarbeitsgericht, LAG) held that it is not necessary to address the question of whether the employee had a claim for repayment. The conclusion of the termination agreement and the “constitutive negative acknowledgement of debt” extinguish all claims against the other party. This full and final settlement clause also covers any possible “claims of unjust enrichment” from overpayment of wages. In the interests of a quick settlement, the full and final settlement clause should be interpreted broadly. The clause prevented the employer from carrying out any set-off at the start of November. The employee therefore has a claim for the continued payment of wages.
In the Court’s view, the only exception to this is claims, which are regulated in detail and separately from any full and final settlement clause, such as clauses concerning employee rights to leave and compensation for leave not taken, the payment of overtime, or employer claims for the return of work materials. For the LAG, it did not help the employer’s argument that the parties agreed that the employment relationship would be settled in an orderly fashion in accordance with the provisions of the employment agreement and that the resulting net amount would be paid out. Offsetting a payment against an earlier overpayment did not fall under the adopted rule.
Consequences for practice
The LAG followed the case law of the Federal Labour Court, interpreting full and final settlement clauses broadly. For this reason, a termination agreement should be formulated carefully so that an employee does not have to unwillingly waive rights to claims such as claims for the repayment of any excess salary paid or performance-linked advance. The legal nature and effect of a full and final settlement clause should be determined through interpretation.
Practical tips
When the parties want to exclude claims from the full and final settlement clause, those claims must be expressly mentioned in the agreement. If this does not occur, the claims will be lost and cannot be enforced. This decision shows that the employer should also consider carefully which claims it might still have against the employee. Possible claims should also be considered prior to any hearing before the labour courts or the conclusion of any contractual agreement so that any full and final settlement clause is not concluded in haste.