Compromise Agreement

COMPROMISE AGREEMENT SOLICITORS BIRMINGHAM

When an employee leaves an organisation prematurely there are many legal pitfalls or disputes which either employer or employee may wish to avoid.   A Compromise Agreement is a means for both parties to terminate the employment relationship by consent in a way, which whilst not ideal, has some advantages for both.

Compromise Agreements are legally binding and act to prevent employees from bringing a claim against the employer, now or in the future, for any potential claim that could arise under the employee’s Employment Agreement. The employer will provide the employee normally with a cash incentive in exchange for a promise not to commence any legal claim against the employer. The main kinds of claim that the Agreement shields the employer from are redundancy, wrongful dismissal or unfair dismissal.

Any potential claim that is not expressly mentioned could still be instigated in the Employment Courts therefore the Compromise Agreement should be drafted in as water-tight a way as possible.  Birmingham Solicitors includes a broad catch to waiver all potential claims while providing you with scope to bring specific claims against the employee. A Compromise Agreement therefore eliminates the risk of litigation which if the situation arises could prove costly. Compromise Agreements are flexible and, as an employer, you are able to offer a Compromise Agreement just before deciding to dismiss an employee.

As an employer you may want to, particularly during the current economic climate, mitigate potential financial losses by putting Compromise Agreements in place. They will have the effect of capping the amounts you may need to dish out for redundancy, the number of which have been rising at a steady level since 2008, or other similar claims.

The existing employment agreement should be used as the background to drafting a Compromise Agreement. The agreement will only be binding and enforceable if both parties have being given impartial legal advice. The solicitor that represents each party must sign a certificate confirming that advice has been provided to the employee. The advice confirms that the employee will be unable to ever pursue a claim relating to their employment contract against the employer. The employer must also agree that they will not pursue any possible claim they have against the employee. In order for an employer to be sure that they are safe from potential action against an Employment Tribunal, which is the main aim of the agreement, is achieved, the agreement should be checked by a specialist legal adviser.

An agreement which is drafted properly will reduce potential tax and national insurance incursions. If a payment of £30,000 or below is made to the employee it will be paid free of tax and NI.  Effective negotiation techniques will ensure that employers pay out less than an agreement that simply ticks all the boxes and is legally binding.  This is only possible through a lawyer with in-depth knowledge of this nuanced area of law.

A number of employers have asked whether it is possible to get around the issue of taxation of notice periods (PILON).  Our specialist solicitors have devised a way of achieving this by advising employers to make sure that any payments agreed to be made under compromise agreements should be treated as severance pay and not labelled PILON. The tax revenue team may still challenge whether the payments are severance pay or contractual rights and may still impose tax or NI contributions.

We are able to draft compromise agreements to suit any business type.  If you have been running a business for more than a few months you will be privy to knowing that problems arising between employers and employees are almost inevitable.

A Compromise Agreement provides you with the peace of mind that costly litigation between employees will never take place as a result of terminating their employment contract. This gives you the freedom to operate your business in as cost-effective a way as possible.

Compromise Agreements are expected to be compliant with Employment Legislation which expects a confidentiality clause to feature in the agreement requiring that the departing employee does not disclose details of the contents of the Agreement.

Birmingham solicitors are able to customise your Compromise Agreement to meet your business needs and ensure peace of mind in relation to spiralling legal costs and time wasted resolving avoidable employment issues in court.

FAQs about:
Compromise Agreement

Why should I pay my employee any more than he/she is contractually entitled to ?

Of course, every situation is different but if there is a possibility that an employee may bring a claim against your business in the Employment Tribunal, you will then face paying legal costs to defend yourself with little prospect of a costs order against the former employee even if you successfully defend the claim. This is obviously a very annoying position but as a pure business decision, it can make sense, in the right circumstances, to terminate by consent, which also provides certainty for you as employer against the threat of the vast majority of any further claims by that employee.

I have a disruptive employee in the workplace - is a compromise agreement worthwhile in this situation ?

Again, every situation is different but one factor certainly worth bearing in mind is staff morale. A disruptive employee can cause real damage to any business and some employees are good at "playing the game". they will be aware that short of an act of gross misconduct, it could take the employer a number of months to wait and go through the time, trouble and expense of going though various disciplinary stages such as first warning, written warning, final warning before dismissing and even then the employee may still start a Tribunal claim. A compromise agreement is certainly worth considering in these circumstances.

If I give a few employees a compromise agreement and ex-gratia payment they'll all want one ?

Many employers worry about the possibility that employees generally will believe that if colleagues have received a compromise agreement, they should get one too, notwithstanding  a very different situation. This is of course a genuine concern. It can be allayed to a degree by the fact that compromise agreements will generally include a clause requiring the employee to keep the fact of it and it's terms strictly confidential and that a breach will require repayment.

However, sometimes there are leaks and employees are now generally quite familiar with the existence of compromise agreements, which have been around for some years now. We recommend that the best approach is simply to be consistent. Don't start giving compromise agreements to all staff or even a good proportion. Be firm and consistent in your approach.

I heard that there are some other advantages to compromise agreements for employers ?

Compromise agreements can be particularly useful for employers with employees on long term sickness absence, where the absence is extended and prognosis uncertain. However, it is very important to tread very carefully in this type of situation and we would recommend taking early and ongoing advice. In addition, it is possible to include in a  compromise agreement a forward looking set of restrictive covenants, such as non-competition, non-poaching. with anyone in a senior or sales capacity, these restrictive covenants can be very important. If the employee will agree to have such clauses incorporated, you will probably have to pay an additional sum, generally £500.00 or less as legal consideration for a forward applying contractual covenent by the ex-employee.

Finally, the big advantage of a compromise agreement is that, in the right circumstances it is of real benefit in that, for a cost effective amount, you get certainty regarding an end to issues with difficult employment law problems and risks with an employee. It is currently the only way of obtaining such certainty.

Why should we pay the employee's legal costs and what will the cost be for drafting a compromise agreement ?

It is standard practice for the employer to pay the employee's legal costs, of generally around £300.00 plus VAT. This is because the legislation creating compromise agreements requires the employee to have received independent legal advice, some, but few, employers refuse to pay the employee's costs. In terms of your own costs, compromise agreements are largely standardised in order to comply with statute. In terms of a pure drafting exercise, and not including any other advice regarding the underlying reasonj for offering the agreement or negotiations or other employment law work, the cost for drafting an agreement should rarely exceed 2-3 hours work maximum, so this is cost effective.

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