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Compromise Agreement – How do they help settle employment disputes?

11 May 2011

Neil Dwyer, Head of employment at Hay & Kilner Solicitors, offers advice on the best use of compromise agreements

Key Objectives: certainty and completeness

If an employer has decided to make a payment to settle an employment claim, these key objectives are essential to achieve maximum benefit which includes:

  • Drawing a legal line under the dispute so no “second bite of the cherry” claims can be made.
  • Not missing opportunities to deal with wider issues beyond the dispute.
  • Presenting a positive public picture of the resolution.

Legal Compromise

Although any agreement may compromise a claim (an exchange of letters indicated to be in full and final settlement) only a Compromise Agreement will satisfy the statutory requirements that are necessary to effectively waive certain employment rights. The statutory requirements provide necessary wording to be included in a valid Compromise Agreement. If it is not valid, and ACAS have not been involved in the settlement, then an ex employee may have a “second bite of the cherry” by bringing a further claim and it is possible that there will be other loose strings, dealing with property returns, tax and business protection provisions.

For the Compromise Agreement to be valid essentially:

The claims must be identified in writing and advice provided by a relevant independent adviser (with the employer usually paying a contribution towards his/her legal costs) as to the terms and effect of the agreement and in particular on its effect on the employee’s ability to pursue the claims before an Employment Tribunal or Court; and

The adviser must sign a certificate to this effect.

KEY POINT: do not spoil the ship for a ha’porth of tar.

No two cases are the same. Each should have a formal and well drafted Compromise Agreement entered into correctly. Employers should never use some version that has been passed down to them or borrowed from a friend. They may either invalidate the settlement or create ambiguity where certainty was sought.

There are technical pitfalls running through the use of Compromise Agreements such as:

  • Using wording to ensure that all intended claims are settled, with no loose strings. This involves consideration of whether the claims derive from statute or the contract, whether they are presently the subject of proceedings or not.
  • The identity and qualification of the adviser not conforming.

Back- up provisions if a “second bite of the cherry” claim is made.

Clear thinking and drafting can provide back-up in circumstances where there is doubt as to the validity of the Compromise Agreement and the employee later brings Tribunal proceedings or a second set of proceedings. In those circumstances, the Compromise Agreement can provide that the employee has to repay any compensation monies paid and this usually serves to deter a sensible employee.

Other benefits beyond legal certainty

In addition to settling legal claims effectively, the Compromise Agreement can also include provisions that deal with some typical wider issues so that completeness of settlement is achieved:

  • With an eye to Revenue returns, a provision can breakdown what payments are being made, dealing with payments in lieu of notice, redundancy payments (if relevant) and compensation payments, with an indication as to the agreement that has been reached between the parties concerning the appropriate tax treatment for each.
  • Once the responsibility for tax has been agreed, this can be supported by an indemnity from one party to the other in the event of them being called to pay, usually where the employee has agreed to be responsible, but the employer suffers a future PAYE deduction. It can also include how any monies owed (which may include outstanding pay and holiday pay) are paid and when.
  • A provision detailing the return of business property, such as company car, sales literature, lap tops, mobile telephones and all confidential information.
  • A Compromise Agreement should include a re-statement of any existing contractual business protection provisions (not to compete, solicit etc) or introduce fresh restrictions, with a provision for payment by the employer, separate from any compensation payment, so that the appropriate tax treatment is received.
  • It is useful to provide for resignation of the employee from any directorship or office, say if a Trustee of a pension fund should be clarified.
  • Additional areas that can be covered include: prior to a dismissal, arrangements for the employee to be on Garden Leave, setting out the terms dealing with contact, attendance at any premises and providing that any unused holiday entitlement will be taken during that period; and acceptance that Confidential Information will remain so and will not be used (copied or disclosed) and that the terms of settlement remain confidential, save where such disclosure is to the Revenue or as required by law.
  • It is also worth considering the contents of a reference and an agreed announcement to the Press or third party, backed up by agreements that either party will not make any adverse or derogatory comments about the other and their affairs.
  • If the employer is part of a Group, extend the benefits and entitlements under the Compromise Agreement to any other Group Company if so required.

Summary

Sometimes there may be good reason why an employer is happy to simply dismiss and defend itself in any Employment Tribunal. The usual position is where there is a strong case of gross misconduct and it is not thought a claim will result. However, in many other cases, disputes arise and it makes sense for employers to take a pragmatic and conciliatory view with regard to making a compensation payment that will buy off claims as early as possible, creating certainty and a clean break. To achieve those aims, it is essential that a Compromise Agreement is used and that it is well thought out and completed correctly.

For further information please contact Neil Dwyer on 0191 232 8345 or email neil.dwyer@hay-kilner.co.uk

Please note:
This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.