Solicitors in Birmingham

BIRMINGHAM EMPLOYMENT LAW SOLICITOR COMPROMISE AGREEMENT GUIDE

Why have I been offered a Compromise Agreement?

A Compromise Agreement may be offered by your employer for a variety of reasons. There may be an underlying dispute, you may have raised a grievance, be medically unfit to continue working or may not want to return to work at the end of Maternity leave. Most commonly, a Compromise Agreement, which is sometimes referred to as a redundancy agreement, is offered as part of redundancy arrangements. One of the unusual aspects of Compromise Agreements is that the underlying reasons for a Compromise Agreement being offered often do not materially impact on the financial package offered. The main reasons employers offer such Agreements are:

• Certainty and finality
• The employer is in a largely no win situation if there is any prospect of an Employment Tribunal claim. This is because there is a general “no costs” rule for Tribunal claims. Consequently, even if the employer wins at tribunal it will not get costs from the employee. Legal costs are expensive, so an employer often prefers to offer an inducement to the employee to avoid this risk.

The main reasons employees commonly sign compromise agreements are:

• The employee generally receives an enhanced ex gratia or compensatory amount in addition to being paid contractual notice money
• The odds are generally in favour of the Employer under English law for Employment Tribunal claims. Pursuing a dispute in the Employment Tribunal is risky, takes many months and is expensive if a lawyer is used
• Employment law, like English law generally, is predominantly loss rather than compensation based. Even if an employee has a strong claim to have been unfairly dismissed, over and above contractual entitlements, the employee will generally have to be unable to secure employment for 3-4 months to make rejecting compromise agreement worthwhile
• The employee will generally not be required to work his or her notice period, and will be paid all sums, including contractual notice and ex gratia amount upfront
• -The employee will generally be free to seek another job immediately

The essence of a Compromise Agreement is that:

• The employee contractually agrees to terminate the employment relationship and not to bring any claims (subject to 2 exceptions – see below) against the employer, whether arising under the contract, English or European law
• In return, the employer generally pays up the employee’s notice period, the employee is not required to work the notice period and the employee receives a further ex gratia or compensatory payment as an inducement to sign the Agreement and waive any available claims

The employee cannot be asked to and in fact cannot agree to, waive (contract out) in the Compromise Agreement of a possible claim for personal injury claim which neither the employer or employee are aware of. An example of this is asbestosis, which often takes many years to develop. The other main area is pensions. The employee cannot contract out of any pension rights.

I think I need a compromise agreement with my employer. Is it normally the case that the employee approaches the employer for a compromise agreement?

It is not that unusual for an employee to suggest a compromise agreement but care needs to be exercised and such an approach is usually best made by a solicitor. It is also the case that if an employee suggest a compromise agreement, there is often no prospect of a successful long term employment relationship if the employee changes his or her mind. Such a suggestion usually destroys any remaining trust and confidence.

Is there a standard or typical financial offer for a Compromise agreement?

This is a very commonly asked question. Whilst each case depends to a degree on the underlying circumstances, in terms of relationship between the parties, length of service, possible underlying claims and other factors, there is something of a “going rate” for the ex gratia offer made by an employer.

In our experience, a typical compromise agreement will offer:

• the equivalent of somewhere between 2-4 months salary, paid gross, as an ex gratia inducement to the employee, and
• the employee’s contractual notice period (generally paid net of tax – please see below) and
• any other contractual entitlements such as untaken holiday pay.

There are technical and tactical reasons why an Employer may not be prepared to offer, ex gratia, more than around the equivalent of an extra 4 months’ salary. Please ask us if you would like a more detailed explanation.

My employer says I must go home for my notice period – do I have to comply?

Your contract may include what is often called a “gardening leave” clause, in which case you will have to abide by it. But if your employer has not included such a clause then technically he has no right to tell you not to come to work. In any case, if your contract does not have a gardening leave clause payment in lieu of notice may well be tax free if your gardening leave covers your notice period. If you accept that you will be leaving your employment one way or the other the complicated issues of what payments are taxable, and what you may do after the end of your employment, are best set out in a Compromise Agreement.

What is the tax position on payments made to me?

In general terms, any payment which an employer is contractually bound to make to an employer results in the employer being legally obliged to make appropriate deductions before payment to the employee. This generally means that payment for your notice period and holiday pay and potentially other entitlements may need to be taxed before payment to you.

There is an exception to this which sometimes applies to a Payment in lieu of notice (PILON). If your employment contract has a clause allowing the Employer to pay you in lieu of notice, then this payment must be taxed, as it is included in the contract. If the contract is silent as to this option, and in practice, which is typical of compromise agreements, the employer does not require the employee to work notice, this payment can be tax free, as it is not a contractual payment under law.

The ex gratia payment part of the overall financial package is not a contractual entitlement and is generally payable tax free up to a maximum of £30,000.00.

Compromise Agreements typically include a clause known as the Indemnity Clause, which states that if the Inland Revenue challenge part or all of the payment as taxable (where the Employer has not deducted tax on part or all of the overall payment), and force the Employer to pay tax, the employer can then pursue the employee for tax then paid. In relation to this clause, whilst no lawyer can offer the employee a ”cast iron guarantee” that no such claim will be made by the Inland Revenue and then by the employer, this is very unlikely in our experience. If you remain concerned about this point, please ask us to explain further.

Why are compromise agreements used in redundancy situations?

Compromise agreements are being increasingly used by employers in redundancy situations as a mechanism for preventing any future claims arising out of the redundancy.  For employers compromise agreements are a useful tool, especially if they have not fully or fairly complied with redundancy procedures. However they can still be used even where the redundancy is fair to give the employer a clean break between you and them. Remember by signing the compromise agreement the employee agrees that there is a ‘full and final’ settlement of all claims against the employer.

Can I/should I negotiate on the terms offered in the Compromise Agreement?

There are 2 aspects to this question, being:

As the Agreements are statutory and generally quite standardised (in order to make the Compromise Agreement valid and legally binding, it must include the vast majority of content included) there are few aspects of the wording which need to be changed/negotiated and/or which the Employer will generally agree to amend and/or delete

It is not unusual to seek to negotiate on the ex gratia payment, particularly if the employee has been offered an amount at the lower end of the likely range of ex gratia amounts.

What does “without prejudice & subject to contract” mean?

The words “without prejudice” when incorporated onto any letter or document are designed to prevent a letter or document being shown to a Court or Tribunal. In other words the words are incorporated to enable a party to negotiate without fear of compromising his/her or it’s position in the event negotiations fail. Compromise agreements are consequently offered on a without prejudice & subject to contract basis until they are signed by both parties, when they become open, binding and enforceable agreements which can be produced in court or Tribunal for enforcement purposes (which is rare).

Why has the employer set a deadline for the Agreement to be signed?

This is generally a tactic by the employer to ensure that the Agreement is concluded rapidly. Whilst any deadline should not be ignored, in practice, many employers will still agree to conclude the Compromise Agreement even if there is a delay due to negotiation or stand off between the parties resulting in the deadline passing.

Can I tell anyone about the Compromise Agreement?

Nearly all Compromise Agreements include a standard confidentiality agreement. Sometimes this only covers the terms of the amount offered in the Agreement. However, in some cases it covers the existence of a Compromise Agreement which means you must not tell anyone that this is the way in which you have agreed to terminate your contract. Usually you can agree exceptions to this rule so it does not apply to immediate family, spouse and professional advisers. Where people are aware that you have a dispute or claim against your employer, it is important to look at what sort of confidentiality agreement has been offered to see if this is appropriate.

When will I receive my money?

Once all parties have signed a Compromise Agreement, compensation is usually paid within 7-21 days. However, certain payments will be made through the payroll on the usual payroll date such as outstanding salary and accrued holiday and bonuses or commission payments.

Possible Claims After Signing a Compromise Agreement

As a rule, there are only three types of claim that can still be made after a compromise agreement has been signed. These are:

1. Personal Injury – This type of claim is generally still allowed, excepting claims for injuries that were already existing at the time the agreement was signed. If the termination was due to absence for stress or depression, it is unlikely that the claim would be allowed.

2. Pension Rights – A claim for accrued pension rights should still be possible.

3. Breach of Contract – If your employer breached the terms and conditions outlined in the agreement.

How long will it take?

It is be possible to sign off the agreement on the day we meet. However if we do need to liaise with your employer, either on the wording of the agreement or the amount of money being offered, most agreements will be sorted out within five to ten days.

Is there any chance the employer will withdraw the offer entirely?

This is possible until the agreement is signed and a deadline for a compromise agreement to be concluded is often part of the offer made. Withdrawal of the offer is sometime threatened but generally does not occur unless there is real friction. However, no absolute guarantee can be offered that the agreement will not be withdrawn.

What are the possible pitfalls and/or negotiating points on compromise agreements ?

These include :-

• It may be possible for part of the payments to be paid in a more tax efficient manner. The first £30,000 can possibly be paid without deductions as long as it is not paid as part of a contractual benefit.
• The offer may look good, but when you take into account the sums the employer has to pay you anyway (including statutory redundancy payments, holiday and notice) it may be rather less generous than you initially suppose.
• The agreement may for example ask you to sign away valuable benefits such as bonus, car, medical insurance, commission or the right to exercise share options
• It’s often advisable to get a suitable reference expressly agreed and attached to a compromise agreement..
• The agreement may impose restrictions on what work you can take up after you leave. Alternatively the post termination restrictions in your employment contract may remain enforceable.