Employers
Questions - Compromise Agreements
Q1: I want to make
an employee redundant and someone has suggested I give him a compromise
agreement. Do I really need to?
Q2: When
is the right time to suggest to an employee that we use a compromise
agreement?
Q3: I understand
that the employee has to take the agreement to an independent solicitor.
Isn't that asking for trouble?
Q4: Is the
employer required to pay the employee's costs of obtaining legal
advice on the agreement?
Q5: Can I
simply ask an employee to sign a letter stating that he accepts
the sum in full and final settlement of all and any claims he may
have?
Q6: Last
year, an employee took our Company to the Employment Tribunal and
we settled out of court through ACAS and signed a COT3. What is
this?
Q7: Are there
specific requirements in terms of what a compromise agreement should
contain or how it should be set out?
Q8: Can I
insert a clause in the compromise agreement to protect the Company
against all possible potential claims?
Q9: Can I
make provision in the compromise agreement to prevent an employee
from soliciting customers of the business?
Q10:
I understand
that the first £30,000 paid under a compromise agreement is
tax free. Is this always the case?
Q11: I am concerned
about setting a precedent and do not want other employees finding
out how much was paid and the terms of the agreement. Is there any
way I can ensure that other employees do not find out about the
content of the agreement?
Q12: I am
concerned that if the Company pays money to an employee in return
for her signing the agreement, she may then start ‘bad mouthing’
the Company after we have paid her. Is there anything we can do
to prevent this?
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Please note, we cannot answer your specific legal queries by email.
If you require legal advice on this or any
other employment law issue, please contact Tony
Hyams-Parish or your usual contact in the employment team at
Rawlison Butler LLP.
This document is provided for information purposes
only and does not constitute legal advice. Professional legal advice
should be obtained before taking or refraining from taking any action
as a result of the contents of this document.
_____________________________________________________________________________________________________ Answers
to questions below, please click on the questions above to be directed to the
correct answer.
A1:No, you don't need to but in some circumstances it is advisable.
A compromise agreement is an agreement entered into by an employer and an employee which prevents him/her from bringing an employment claim (e.g. unfair dismissal, breach of contract, discrimination claims, etc) against the employer in the future.
Most compromise agreements are entered into in circumstances where the employer proposes to give the employee a lump sum severance payment which s/he is not entitled to under contract or statute and where the employer considers it is at risk of a claim from the employee. In effect, the lump sum payment is given as compensation for the employee losing his/her job, without any admission of liability, in return for protection against legal proceedings brought by the employee.
A compromise agreement may be a useful and cost effective solution giving an employer the comfort of knowing that it is unlikely to be presented with a tribunal application in the future.
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A2:Generally, you should only discuss the use of a compromise agreement in ‘without prejudice’ discussions. This means that normally the discussions will not be admissible in legal proceedings.
The context in which you discuss the use of a compromise agreement and how you phrase such an offer is crucial. Handled badly, such ‘without prejudice’ conversations could lead to a successful claim for unfair dismissal, e.g. if you use words which make it clear to the employee that s/he has already been dismissed. The wrong approach to these discussions can at the very least put you in a weak position when negotiating a settlement because the employee will know that s/he has a good/strong case to take to the Employment Tribunal if necessary. If you are in any way unclear about the best approach, you should seek specific legal advice before entering into these types of discussion.
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A3:The employee must take the agreement to an independent solicitor who will advise the employee as to the terms and effect of the agreement. The legal advisor will also sign a certificate confirming that the employee has been independently advised.
Offering a compromise agreement can be perceived to be a double edged sword because you may be sending the employee into the welcoming arms of a solicitor. It is a question of weighing up the pros and cons of offering the agreement in the first place. However, whenever a lump sum payment is made, which is in excess of the employee's legal entitlement, you should always consider entering into a compromise agreement. Do speak to us on this issue if you are unsure.
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A4:It is normal practice for the employer to contribute towards the employee's legal fees, but there is no obligation to do so. It is up to you how much you contribute, although it is usually in the region of £250.
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A5:Not if you want to be fully protected against all potential employment claims. A simple letter may only protect you in relation to contractual claims, which means that an employee will still be free to bring statutory claims (i.e. unfair dismissal, discrimination, etc) against you even after signing the letter and accepting any payment.
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A6:A COT3 records the terms of a settlement reached between an employer and employee, usually where Employment Tribunal proceedings have already begun, using the services of ACAS. Once proceedings are issued at the Employment Tribunal an ACAS conciliator is usually assigned to the case to try and help negotiate a settlement between the parties.
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A7:Yes. In order for the agreement to be legally binding and enforceable the agreement must be in writing and relate to the particular complaint or complaints or proceedings listed in the agreement. In addition, the employee must receive independent legal advice, the legal adviser must be insured against claims of negligent advice and the agreement must clearly identify the legal adviser. The agreement must also state that the conditions regulating compromise agreements have been fulfilled.
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A8:No, the agreement will be invalid if it includes a ‘blanket clause’ covering all potential claims. It must relate to a specific complaint or complaints which the employee has in respect of his/her employment or the termination of it. You should speak to us on this to ensure that the correct claims are referred to in the agreement. Failure to effectively exclude all relevant claims will of course leave you open to the risk of the employee trying to pursue those claims which have not been effectively compromised.
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A9: Yes you can. How you do so will depend on whether you are simply repeating restrictions already in the employee's contract of employment (in which case you need to consider whether you need to refer to them at all) or whether you are introducing new restrictions (i.e. not previously contained in the contract).
If you want to introduce new covenants, there will need to be a separate payment made to the employee in return for agreeing to be bound by the new restrictions. This payment is taxable. If you are repeating existing restrictions, no separate payment is required, but you must make sure the restrictions are the same. Any new clauses will need to be carefully drafted.
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A10:Some payments under a compromise agreement benefit from a £30,000 tax free exemption. To determine which payments this applies to, a distinction must be drawn between contractual payments and non-contractual payments.
As a general rule, if the employee is contractually entitled to the payment then it will be taxable and it will not benefit from the £30,000 exemption. In these circumstances the payment can be made before the P45 is issued and tax and national insurance is deducted in the normal way. Where the payment is non-contractual and is genuinely an ex-gratia payment representing ‘compensation for loss of office’ the employee will generally benefit from the £30,000 tax exemption. The payment should be made after the P45 has been issued and the employment has been terminated.
If a payment is made under the compromise agreement and includes contractual and non-contractual elements, it is necessary to clearly distinguish between the two because the entire sum could be taxed if it includes contractual elements.
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A11: It is possible for you to have a clause in the compromise agreement which provides that the employee cannot disclose the contents of the compromise agreement to anybody except for specified individuals. These individuals are normally the employee's legal advisors, tax authority, and his/her spouse.
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A12:You can include a clause in the compromise agreement which prevents the employee from making any derogatory statements about the Company. If the employee then makes derogatory statements about the Company it may be possible to obtain an injunction against the employee if damage has been incurred by the Company as a result.
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