We are receiving an increasing number of enquiries about compromise agreements from individuals who have been made redundant and offered such an agreement and from employers looking to use compromise agreements as an alternative to using a redundancy consultation process.
We therefore thought it would be useful to produce a basic guide to offer those finding themselves in these circumstances.
What is a Compromise Agreement?
A compromise agreement outlines the terms and conditions agreed upon by an employer and employee when a contract of employment is going to be terminated.
Sometimes, a compromise agreement is also drawn up as part of a dispute resolution or to settle an Employment Tribunal claim.
It is a legally binding document and the only way to effectively waive an employee’s right to pursue employment claims.
Why a Compromise Agreement is Used?
A number of issues can be dealt with in a compromise agreement, including payments for redundancy, unpaid wages, bonuses, pay in lieu of notice and any holiday pay entitlement. One of the main functions of a compromise agreement is to prevent an employee from making any future claim against their employer through an Employment Tribunal. In accepting the terms of an agreement and signing to confirm this, you are permanently foregoing your right to do so.
It is therefore important that anyone entering into a compromise agreement fully understands the implications. It is actually a requirement that you receive independent legal advice from a qualified person before signing, for example a solicitor or a trade union adviser with the relevant qualifications and insurance in place.
Normally the employer will pay the expenses for this advice, either in full or in part.
If an employer ends an employee’s contract of employment, either with or without notice, this is known as a dismissal.
There are a number of circumstances that would be considered a dismissal, for example if a contract is terminated on the grounds of employee misconduct, a redundancy or if a fixed term contract ends and is not renewed.
An employer must be able to show that the reason for dismissing an employee was fair and the decision to do so was reasonable. For example, if an employee is dismissed as a result of improper conduct. A dismissal should always be made in accordance with statutory procedures, so it must also be shown that this was the case. If an employer can not show that they dismissed an employee fairly, it may be held that the dismissal was unfair.
When there is a cessation or reduction of a particular type of work within an organisation there will often be redundancies. A redundancy is the termination of an employee’s contract when there is no longer a need for the work which they carried out. For example if a business closes altogether, or one department shuts down, some employees may no longer be needed and will therefore be redundant.
What If I Sign a Compromise Agreement?
The main legal implication of signing and accepting a compromise agreement is that your right to claim against your employer via an Employment Tribunal, or through a Court, is specifically waived.
Compromise Agreement Confidentiality
Dependent upon the terms and conditions of your compromise agreement, you may or may not be permitted to tell people that you have entered into an agreement, or what it includes. It is common for a confidentiality clause to be inserted into a compromise agreement. The clause may cover only the terms of that agreement, so that you can tell people that an agreement has been made but not divulge any details. In some cases however, the employer may insist that you do not tell anyone about the agreement at all.
Possible Claims After Signing a Compromise Agreement
As a rule, there are only three types of claim that can still be made after a compromise agreement has been signed. These are:
1. Personal Injury – This type of claim is generally still allowed, excepting claims for injuries that were already existing at the time the agreement was signed and injury relating to discrimination, for example stress or depression caused by discriminatory conduct. If the termination was due to absence for stress or depression, it is unlikely that the claim would be allowed.
2. Pension Rights – A claim for accrued pension rights should still be possible.
3. Breach of Contract – If your employer breached the terms and conditions outlined in the agreement.
Tax and Compensation Payments
Tax may be payable on certain elements of the payment made to you under the terms of your compromise agreement. In most cases, tax and national insurance would be payable on any holiday pay and wages. Redundancy payments of up to £30,000 are usually tax free, whether contractual or statutory. Continued benefits (for example the extended use of a company car) are also generally tax free.Payments in lieu of notice may also be tax free, so long as the employer does not make such payments as a matter of course in redundancy cases. This is also on the understanding that they do not have a contractual right to provide pay in lieu of notice.
Can I Speak Freely About my Employer Following an Agreement?
In some cases, a compromise agreement will include a ‘non-derogatory statements’ clause. This is designed to prevent an employee from speaking ill of the employer or related individuals such as former colleagues and visa versa. It is therefore important to be mindful of what you say about an employer, especially in public. When an agreement is negotiated, it may be possible to agree that the clause be written so that neither party is able to make derogatory statements about the other.
Talking to the Press
Anyone who has signed a compromise agreement should always seek legal advice before speaking to the press about what has happened.Your right to do so would depend upon the types of clause written into the agreement about confidentiality and non-derogatory statements.
References From Your Employer
Any reference that your employer does provide should be accurate, correct and a fair representation. If it is not, they could be found guilty of misrepresentation.
There is not, however, any legal obligation for an employer to provide a reference. It may therefore be advisable to have a reference included as part of the compromise agreement. This should be dealt with in the early stages of negotiations.
What should I do if I have been given a Compromise Agreement?
It is essential that you obtain specialist legal advice from an employment law adviser. For advice from our expert employment solicitors email Zoe@mulberryssolicitors.com or call 01273 573850 or 020 78087180
Fees and Payment
We can normally recover the full fee from the employer upon completion of the compromise agreement.
We will properly consider the terms and conditions detailed in your compromise agreement. We will then provide you with our advice and contact your employer to negotiate any amendments if necessary. We do not just rubbert stamp agreements and where appropriate will negotiate to increase the amount of compensation.
Once the agreement is acceptable and all parties are happy with the wording, we will sign the compromise agreement and arrange it to be signed by you and your employer.
If you an employer we will advise you on the proposed terms of the agreement, including an appropriate amount to offer your employee by way of compensation for the termination of his or her employment and then prepare a draft agreement. We will then negotiate on your behalf with your employee’s representative to achieve mutually agreeable terms as quickly as possible.