A Compromise Agreement is a legally binding Agreement between an Employer and an Employee which operates following the termination of employment. The purpose of a Compromise Agreement is to provide certainty for both parties. There are a number of different circumstances when Compromise Agreements are used including:
- Termination by mutual agreement; or
- To settle an Employment Tribunal claim.
A Compromise Agreement can be a very effective way of resolving a dispute without the Employee resorting to proceedings before the Employment Tribunal. It usually provides for a severance payment by the Employer and in return the Employee will agree not to pursue any claim that they may have against the Employer.
At Oliver and Co Solicitors we can ensure that a Compromise Agreement covers all relevant points that are important to you. It will be tailored to your own individual circumstances if you are an Employee or those of your business if you are an Employer. However, there are some features that are common to all Compromise Agreements.
Why use a Compromise Agreement and who is involved?
A Compromise Agreement provides the Employer with certainty and security. Any severance payment is made in full and final settlement of any claims that the Employee may have arising from their employment or its termination.
The most important thing to understand about a Compromise Agreement is that in signing the Agreement and accepting the settlement terms the Employee is excluding their right to make a claim against the Employer in the Employment Tribunal. The existence and terms of any Compromise Agreement often remain confidential, including details of any payment that is made.
In view of the fact that the Employee is contracting out of their employment rights and entering into formally binding obligations in the Compromise Agreement, it is a statutory requirement that the Employee takes independent legal advice for a solicitor qualified to advise in this particular field.
Although it is not a legal requirement, it is good practice to ask the Employee’s legal adviser to sign a certificate or be a party to the Agreement as a means of confirming that independent legal advice has been given to the Employee.
A Compromise Agreement is made between an Employer and Employee. However, if an employee has worked for more than one group company, it may be appropriate for all the relevant group companies to be parties to the Agreement as well.
What happens in the event of a breach?
A Compromise Agreement also normally contains a clause that an Employee will repay to the Employer all of the money received if they breach any terms of the Compromise Agreement. Once the Compromise Agreement has been signed by all parties any sums payable are usually paid either on the next company pay run and / or within say 7 or 14 days. These dates will be specified in the Compromise Agreement.
What terms can a Compromise Agreement contain?
While negotiations take place between an Employer and Employee or their representatives any draft Compromise Agreement will be marked ‘without prejudice and subject to contract.’
If a document is marked as such it cannot usually be used as evidence in Employment Tribunal proceedings or be considered a legally binding contract before the parties are ready to make such a commitment. This does, however, indicate that the negotiations are a genuine attempt to reach a settlement.
There will be a lengthy list of statutes under which an Employee will agree not to bring a claim. The reason for this is that the Agreement is intended to be in full and final settlement of all claims and the Employer needs to list all those which are potentially relevant to the Employee’s circumstances in order to be able to enforce the Agreement.
In addition the Agreement will usually contain a confidentiality clause. This clause may only cover the terms of the Agreement and the Employer’s trade secrets and business affairs, in which case an Employee can still tell people that they have come to an agreement with their Employer regarding the termination of their employment, but they cannot say what the specific terms of the agreement are. An Employee will also usually be required to refrain from making any derogatory comments against the Employer in future.
Restrictions on Employee
The Agreement can either confirm any existing post-termination restrictive covenants that an Employee is bound by under the Contract of Employment or (if there are none) impose new obligations. In the latter case it is important that an Employee gets advice in relation to any properly drawn restrictions, as they can hamper the Employee’s ability to work for a competitor or service old clients or customers. Restrictive covenants are only enforceable to the extent that they are necessary to protect the legitimate business interests of the Employer.
The Agreement may also provide that the Employee will be on ‘garden leave’ until the end of their employment. If an Employee is placed on garden leave they are not required to attend work. However, the Employee remains an employee and subject to the Employer’s authority. The purpose of garden leave is to protect the Employer’s business interests, such as commercially sensitive information.
Payments and Taxation
Employees will usually be entitled to payment in lieu of notice should they not be required to work their notice period and this is determined by the provisions in the Employment Contract.
If appropriate, Employees can also receive a termination payment by way of compensation for loss of employment which HM Revenue & Customs have a discretion to allow to be paid to the Employee tax free up to limit of £30,000. Any excess will be subject to income tax as usual.
Any ex gratia or statutory redundancy payment (subject to the £30,000 limit) would also be tax free. However, the income tax liability in respect of any payment in lieu of notice will depend on whether the payment is contractual, either expressly or impliedly. If this is the case, then it will be taxable in the normal way. If there is no contractual right, then it will be exempt from tax.
An Employee also has the right to a payment in lieu of statutory holiday entitlement that has accrued but not been taken at the date of termination. The law, however, does not generally allow an Employer to deduct money from the Employee’s final salary where the Employee has taken holiday in excess of their entitlement.
There is generally no legal obligation on an Employer to provide a reference. Any reference that is provided should be true, accurate and fair. If not, the Employer will be guilty of misrepresentation and open itself up to criticism and possibly legal action from the Employee or any prospective new Employer.
However, it is common at the very least to include a term in the Agreement that provides that the Employer will respond to any request for a reference in an agreed form which is often attached to the Agreement.
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