We are finding that, at the moment, we are being asked to draft or advise on many more compromise agreements than usual. This month’s Q&A therefore looks at compromise agreements, re-capping on what they are, why they are necessary and some of the usual clauses.
Q: What is a compromise agreement?
A: A compromise agreement is a legally binding agreement which deals with the termination of an employee’s employment. It usually provides for a severance payment, in return for which the employee agrees not to pursue any claims against his or her ex-employer in the employment tribunal or in the courts.
Employers use compromise agreements as a mechanism for preventing possible future complaints to a tribunal. They are recognised by statute and are the only way an employer can be sure that an employee will not bring any claims against it. By entering a compromise agreement, the employee literally compromises his or her right to bring any claim, with a couple of exceptions.
Q: In what situations should a compromise agreement be used?
A: It is impossible to be prescriptive about the situations where compromise agreements should be used. Some employers will use them in all but the most voluntary, friendly departures. Others will only use them in extreme situations where there is a real threat of litigation. Sometimes employers want to pay a good leaver an ex gratia sum to thank and reward him or her for good service and, since they are paying above and beyond the terms of the contract, decide that they will pay the sum through a compromise agreement. In short, there is no hard or fast answer!
Q: When should I provide a compromise agreement?
A: Again, the timing of actually providing a compromise agreement will vary and it is impossible to be prescriptive. It is generally true to say, however, that the more litigious the situation, the earlier the compromise is agreed on, the better. It is certainly ‘neater’ to enter into the compromise agreement before (but close to) departure; if this is the case the agreement is likely to deal with the notice element of the contract of employment, returning company property and may provide for a payment in lieu of notice. However, in some cases, employers will have a stronger bargaining position if they wait until the employment comes to an end. In other situations, the bargaining position is weaker once the employment comes to an end. Seeking early advice from us will assist you to provide the compromise agreement at the best possible time.
Q: What terms does a compromise agreement have to contain?
A: A compromise agreement has to contain the information set out in section 206 Employment Rights Act 1996. This means it will only be valid where:
- It is in writing;
- It states the rights/potential claims that are being waived;
- The employee has received independent advice from a solicitor or qualified trade union representative; and
- Who has professional indemnity insurance
Compromise agreements also tend to include information managing the end of the employment relationship, including:
- Date of termination of employment;
- Payment of notice and/or bonus;
- Continuance or discontinuance of certain benefits;
- Return of company property
- Clauses concerning the maintenance of confidential information;
- Clauses concerning post termination restrictive covenants;
- Clauses preventing the employee from making derogatory comments and talking about the terms of the compromise agreement and the events surrounding his or her termination of employment;
- Clauses concerning the independent legal advice the employee must get to ensure the agreement is binding; sometimes a sum of money is paid for legal costs.
In addition to these, the compromise agreement will state the full breakdown of payments being made to the employee and the extent to which the sums will be paid free of tax. Usually, up to £30,000 of genuine (non-contractual) compensation can be paid without deduction, but employers will be wise to require a tax indemnity within the agreement.
It is really important that compromise agreements are drafted for each particular employee and are drafted by a solicitor; the point of them is to tie up the departure neatly and to minimise future litigation.
Q: What, specifically, is involved in managing sickness absence?
A: Essentially the management of sickness absence can be reduced to six key elements.
- Recording sickness absence
- Keeping in contact with the employee
- Planning and undertaking workplace adjustments
- Using professional or other advice and treatment advice
- Agreeing and reviewing a return to work plan
- Co-ordinating the return to work process.
Q: Anything else I should know?
A: If the employee brings a claim at the tribunal before you enter into a compromise agreement, you are still able to settle his or her claims and ensure that no further claims are made against you. However, in these situations a compromise agreement is not generally used. Instead a COT3 will be negotiated through ACAS, named after the original form. This has, essentially, the same effect as the compromise agreement but tends to be shorter.