Compromise Agreements

In this article, employment law expert Alan Lewis provides advice and useful tips concerning Compromise Agreements

What are Compromise Agreements?

Compromise Agreements are legally binding contracts that prevent employees from pursuing claims in the Employment Tribunal or Civil Courts for compensation and other remedies arising out of their employment with an employer or its termination. Typically an employer will make various payments to an employee in return for them agreeing not to pursue such claims and, again, this obligation is legally binding upon the employer.

Compromise Agreements – are there any formalities?

The short answer to this question is yes. Whilst one can enter into a legally enforceable contract preventing an employee from pursuing a claim in, for example, the County Court by a mere exchange of correspondence, there is much more “red tape” involved in entering into a legally binding contract preventing Employment Tribunal claims. In essence an employee will not be prevented from pursuing a claim in the Employment Tribunal, even if he or she accepts a sum of compensation in supposed full and final settlement of any claims that may be brought before the Employment Tribunal, unless:-

The agreement is in writing;
The employee has received independent legal advice from a relevant adviser (usually a solicitor) on the terms and effect of the proposed agreement and its effect on the employees ability to pursue any rights before an Employment Tribunal;
The independent advisor has a current contract of insurance, or professional indemnity insurance, covering the risk of a claim against them by the employee in respect of that advice;
The agreement identifies the adviser;
The agreement states that the conditions regulating Compromise Agreements have been satisfied; and
The agreement relates to a “particular complaint” or “particular proceedings”. In this respect the
Agreement must identify the particular complaints or proceedings being compromised, and it is important to note that an employee cannot agree to waive claims that he or she has not raised or have not yet arisen.

What are the typical contents of a Compromise Agreement?

The terms of Compromise Agreements tend to be quite uniform with additional terms usually being used in the case of agreements with senior employees or directors. Typically such terms include:-

A provision that the employer will make payment of salary, including accrued but untaken holidays, up to the date of termination of employment;
Payment in lieu of the employee’s notice period if the employee is not required to work his or her notice. Care has to be taken in determining whether this particular payment should be subject to tax and legal advice should always be sought in relation to this issue;
Payment of compensation for loss of employment. This payment should be distinguished from a payment in lieu of notice and can often attract tax free status provided the payment is less than Ł30,000;
There is usually provision in a Compromise Agreement that an employee shall indemnify the employer in respect of any liability for tax in respect of payments arising under the agreement;
An employer will usually require an employee to enter into a confidentiality obligation whereby the employee agrees not to disclose the terms of the agreement to other employees or third parties;
Similarly, an employer will usually require an employee to agree not to make any disparaging or derogatory statements about their employer, their managers or fellow employees;
An employer may require an employee to enter into restrictive covenants concerning the solicitation of clients, customers, suppliers or employees;
An employee will also usually be required to enter into an obligation that they will not disclose or misuse confidential information belonging to the employer;
The employee will be required to waive their right to pursue specific claims in the Employment Tribunal and the Civil Courts;
An employee may be required to provide a warranty that they do not have an existing job offer or are in discussions with an employer with a reasonable expectation of receiving such an offer;
Likewise an employee may be required to warrant that they have not committed any act of gross misconduct;
It is not unusual for a Compromise Agreement to include a clause that an employee will be provided with a reference, the terms of which are frequently agreed and indeed from which an employer usually agrees not to depart from in oral communications.

Is an employer required to contribute to the employee’s legal costs of seeking advice on a Compromise Agreement?

There is no legal obligation upon an employer to contribute to the employee’s legal costs although it is customary for the employer to make a contribution. After all, an employer will not be able to obtain protection against claims in an Employment Tribunal unless an employee seeks legal advice on the terms of a Compromise Agreement. The extent of an employer’s contribution to costs varies widely depending upon the circumstances of an individual case.

26 FEBRUARY 2009

For further information on Linder Myers expertise in dealing with the issues raised in this article please contact:

ALAN LEWIS, PARTNER
EMPLOYMENT DEPT
0161 837 6807
alan.lewis@lindermyers.co.uk