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Compromise Agreements - October 2008
In the current economic climate, an increasing number of employers are using compromise agreements either to record an agreed termination of employment or as a pre-requisite to receipt of an enhanced redundancy package. In this month's Working Times we explore what is meant by a compromise agreement and consider the terms which will be typically included.
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What is a compromise agreement?
A compromise agreement (sometimes referred to as a severance agreement) is an agreement between an employer and employee which settles claims arising from the employee's employment and/or its termination. In simple terms, the employee agrees to give up most, if not all, of his/her employment-related legal rights and any outstanding claims against the employer in return for an agreed termination payment and/or benefits.
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What matters does a typical compromise agreement cover?
The date that the employment terminated or will terminate Arrangements for the return of any company property
Details of the various claims the agreement is intended to compromise
The sum of money to be paid to the employee and details of when it must be paid
Who will be liable for any tax due on the termination payment
What level of contribution to the employee's legal fees (if any) will be met by the employer
What happens if the employee does in fact bring an employment-related claim against the employer
What staff, clients, customers and if appropriate the press, will be told about the employee's departure (if anything)
Whether the employee must observe any restrictions upon his/her activities after the employment has terminated and if so, for how long those restrictions will last
Whether certain matters must be kept confidential
What reference (if any) the employer will give to future prospective employers.
In addition, employees who are also directors will typically be required to resign their directorship and if an employee holds shares in the company or a group company he or she may also be required to transfer these back to the company.
A compromise agreement can be an opportunity for employers to protect their business against competition from the departing employee by including post termination restrictions on competitive activities where there are no restrictions already in the contract of employment.
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Can anybody draft a compromise agreement?
Strictly speaking, the answer is yes. However, extreme care must be taken when drafting a compromise agreement to ensure that the employer is gaining the maximum amount of protection in excchange for the termination payment and that the agreement complies with the necessary legal requirements. It is all to easy for an inexperienced draftsman to fail to properly exclude relevant claims, either by failing to include them inthe first place or by describing them incorrectly. |
Requirement for independent legal advice?
If a compromise agreement intends to settle claims which arise from legislation e.g. unfair dismissal, discrimination) it must comply with certain legal formalities if it is to be legally binding upon the parties. In particular, the employee must obtain independent legal advice from a lawyer or other appropriately qualified adviser upon the terms of the compromise agreement and the implications for the employee of signing it.
Commonly, compromise agreements will require the adviser to confirm that the employee has received the necessary advice by signing a certificate which is attached to the agreement.
Most Employers will make a contribution (commonly in the region of £250 plus VAT) towards the cost of the employee obtaining independent legal advice.
Without prejudice discussions
An employer will often raise the question of a compromise agreement with an employee on an 'off the record' basis in the course of a performance management, grievance or absence management procedure, with the compromise agreement being offered as an alternative to continuing with the procedure in question.
Provided there is a genuine dispute between the employer and employee and the "off the record" discussions are a genuine attempt to settle that dispute, they will be treated as "without prejudice" and neither the employer nor employee can refer to them in future legal proceedings.
If there is no such dispute however then such discussions will not be "without prejudice" or "off the record" and can be referred to in evidence in a subsequent tribunal hearing.
Just occasionally, an employee may treat the offer of a compromise agreement as a fundamental breach of contract and claim that he has been constructively dismissed.
The offer of a compromise agreement may also prejudice the fairness of any subsequent dismissal in circumstances where the offer has been rejected.
In either case, if the offer of the compromise agreement was not "without prejudice" then this may be problematical for the employer. Employers should always take legal advice before a compromise agreement is offered in order to minimise these risks.
Binding nature of compromise agreements
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Provided all of the necessary legal formalities are complied with, once it has been signed, a compromise agreement will be binding against both employer and employee. This means that if, for example, the employer failed to pay the termination payment on time the employee could take enforcement action for the debt. Likewise, if the employee were to breach a term of the agreement, for example by bringing a claim which had been settled, the employer would be able to recover some or all of the termination payment. |
Next steps?
If you plan to use a compromise agreement as part of a redundancy exercise or other termination, you should take legal advice as soon as possible. It is best to do so before settlement terms are verbally offered to the employee so that the offer can be made in a way which minimises the risk to the employer and the agreement can be drafted in a way which is most advantageous for the employer.
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If you would like any more information about this, or related employment matters, please do not hesitate to contact Adrian Berkeley, Principal or Craig Oldale, Employment Department Head. |
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