Compromise Agreement
What is a Compromise Agreement?
A Compromise Agreement is a legally binding agreement between you and your employee whereby the employer makes a severance payment in return for the employee’s agreement to contract out of any claims in the Employment Tribunal or court.
Benefits
The benefit of using a Compromise Agreement can include :-
- the circumstances leading to termination and/or the terms and payment offered will remain confidential.
- Certainty and risk reduction
- Maintaining an amicable relationship with a longstanding and loyal member of staff
- Avoiding a long drawn out dispute or period of poor performance and/or sickness absence in circumstances where the relationship of trust & confidence between employer and employee has been irreparably damaged
Separate solicitors
First and foremost, independent advice for an employee is a statutory requirement and a compromise agreement will not be legally valid unless it generally requires with statutory requirements. There are also areas where negotiation is often needed, not lease in negotiating the appropriate settlement agreement, whereby there would be a conflict of interest if one solicitor acted for both employer and employee. It is generally accepted practice for the employer to pay the employee’s legal fees for obtaining independent advice.
By consent & “without prejudice” negotiations
The employee can turn down a Compromise Agreement. Avoid situations where the employee may seek to argue that they were given no choice but to sign the Compromise Agreement as their dismissal was a foregone conclusion. Care needs to be taken that any negotaitaions are clearly without prejudice meaning that they are immune from court or Tribunal knowledge, and it is important to continue with ongoing alternative on the record activity even if a compromise agreement is being offered, such as performance review, disciplinary hearing or a redundancy procedure.
Breakdown of usual payments in a compromise agreement
The usual elements of a payment agreed in a compromise agreement are :-
- Ex gratia compensation for loss of office – generally tax free up to £30,000.00
- Notice payment – taxable
- Other contractual entitlements – holiday pay, possibly medical cover, bonus, commission -taxable
- Possible payment for restating restrictive covenants
Amount to offer
This depends on the surrounding circumstances leading to your wish to terminate, the terms in the employee’s contract and any potential claims that the employee may have.
If the employee’s solicitor advises that the money offered is insufficient then your solicitor will negotiate on your behalf to ensure that the amounts offered are not unrealistically high and reflect the litigation risk.
If fair disciplinary/ grievance procedures have been conducted before offering the Compromise Agreement the employer is in a much better position to withdraw a Compromise Agreement if the sums the employee is demanding is unrealistic.
Confidentiality
From an employer’s perspective, a confidentiality clause is an extremely important part of a Compromise Agreement. Without such a clause the employee may well gloat to colleagues about the amount received which can lead to further demands from other employees. There are other reasons why confidentiality may be important also.
References
There is generally no legal duty to provide any reference to an employee but employees commonly seek to negotiate a reference as part of a compromise agreement. If employers agree to provide a reference there is a duty of care not only to the ex-employee but also to future employers and care should be taken to avoid legal risk.
Post-termination covenants
The Compromise Agreement should reaffirm post-termination restrictive covenants. When a Compromise Agreement is offered because the employer has seriously breached the employment contract, the employee’s solicitor may advise that the restrictive covenants have “fallen away”. Reaffirming the covenants into the Compromise Agreement will ensure that the employer has protection particularly where a small additional amount of consideration (money) is provided for the employee, reaffirming their post-termination covenants.