Factsheet: Compromise Agreement Advice for Employers
This factsheet explains how to decide whether to terminate your employee’s contract of employment using a Compromise Agreement, how much it might cost you to settle in this way and common Compromise Agreements pitfalls.
What is a Compromise Agreement?
A Compromise Agreement is a legally binding agreement between you and your employee. It is usual for you to provide a severance payment in return for your employee’s agreement not to pursue any claims in a Tribunal or a Court.
The benefit of using a Compromise Agreement is that the circumstances leading to your employee’s contract being terminated and/or the terms and payment offered will remain confidential.
You will also have peace of mind that the employee will not be able to bring any claims against you in a Tribunal or Court unless you have misrepresented the reasons for termination. An example of this is if you have advised an employee that their job is redundant when this is not really the case.
Why do my employee and I need separate solicitors?
A Compromise Agreement is a lengthy document which provides protection in relation to a number of scenarios. These range from preventing the employee from making disparaging remarks to reaffirming their post-termination covenants.
Each potential dismissal will have its own set of difficult issues. It is your solicitor’s duty to draft a Compromise Agreement that takes into consideration the individual circumstances in relation to each termination. This ensures a smooth parting of the ways while reducing the risk of an ongoing dispute or litigation.
The employee can only waive their rights to bring an employment claim which is recognised in law if they have their own solicitor or a certified trade union or adviser to sign off the Compromise Agreement.
There are situations where it would be dangerous to offer a Compromise Agreement. For example, if you offer one prematurely, before there is any dispute between you and your employee, then you risk all off-the-record discussions and ‘without prejudice’ correspondence concerning the Compromise Agreement being raised in a formal grievance against the company. You also risk this ‘without prejudice’ documentation being presented to a Tribunal or Court. This is the case particularly if your employee alleges that the offering of a Compromise Agreement is a discriminatory act, eg the bullying of a woman employee by saying “take this or else”. There is case law enabling an Employment Tribunal to examine all without prejudice issues if the employee decided not to go ahead with the Compromise Agreement.
Why and when should you use Compromise Agreements?
You may wish to offer a Compromise Agreement in a situation where you have mutually agreed severance terms with your employee. The Compromise Agreement and the amounts involved will provide a clean break with no opportunity for your employee to take you to Court or a Tribunal for more money.
In addition, there are a wide range of scenarios in which Compromise Agreements might be offered. These include situations where you might not want to follow a potentially long, drawn-out process, such as a full performance/capability review or a full redundancy process, before being able to terminate.
Also, where there are ongoing issues such as alleged acts of discrimination or where your employee has raised a grievance which you have not felt able to uphold, you may feel that trust and confidence has completely broken down. It may be in everyone’s interest for there to be a termination on mutually agreeable terms. It is advisable that you take legal advice before offering a Compromise Agreement. This may be offered either face to face or using a Compromise Agreement letter in these types of situations to ensure that this does not expose your company to an increased risk of litigation.
Does the employee have to accept termination in this way and on the terms offered?
The employee may turn down a Compromise Agreement on the basis that this is not the way they wish to deal with the termination of their contract. They may also turn it down if the Compromise Agreement amounts on offer are insufficient.
The safest way to proceed with a Compromise Agreement is where the employee has made their own decision that this would be the best outcome. If the Compromise Agreement is your suggestion then you must be careful to ensure that the employee is given a range of options. These include placing them on a performance review or going through the redundancy procedures.
Avoid situations where the employee may seek to argue that they were given no choice but to sign the Compromise Agreement as their dismissal was a foregone conclusion. As previously mentioned, ‘without prejudice’ correspondence (such as a Compromise Agreement letter) and any relevant off-the-record conversations could be used to illustrate that a later dismissal is unfair or that this treatment is part of a series of acts of discrimination.
Where a performance review, disciplinary hearing or redundancy procedure has not already started or been completed, you need to make clear that the process will commence or continue while negotiations are taking place regarding the Compromise Agreement. Make clear they will only stop when an agreement has been reached and it has been signed by both parties.
Compromise Agreement – how much are the usual payments?
Compensation for loss of office
The Compromise Agreement will state the full breakdown of payment amounts due to the employee and also whether any sums will be paid free of tax. A payment of up to £30,000 compensation can be paid without tax being deducted if it is an ex-gratia payment (compensatory rather than contractual payment). See also Tax on Compromise Agreements Factsheet.
The Compromise Agreement will deal with your employee’s notice payment if it is not going to be worked. If you have not provided them with a contract or their contract does not contain a provision that refers to you being able to make a payment in lieu of notice (PILON), then you could pay their notice as a gross amount. There is no additional cost to you as this money would otherwise have been paid to HM Revenue and Customs.
Your solicitor will check your employee’s contract before drafting the Compromise Agreement to make sure that the sums you offer to your employee are set out in the most tax efficient way possible. As the Compromise Agreement requires your employee to provide you with a tax indemnity, the sums offered need to accord with tax law.
Bonus and commission
If your employee is due bonuses or commission then the amounts owed should be set out in the Compromise Agreement. Your solicitor should check your employee’s contract to ensure all contractual bonuses and commission are paid in full. However, if the contract refers to discretionary bonuses your solicitor will advise you if there is a legal obligation to pay additional bonuses and whether they need to be pro-rated to reflect the termination date.
Your solicitor will tell you if you have a contractual obligation to continue to pay company pension contributions, particularly during the notice period if it is to be paid in lieu. You may be able to reach an agreement with your employee in relation to a lump sum of money being paid directly into their pension as part of the overall settlement. The employee could then benefit from this being treated as a further tax-free payment, subject to the terms of the pension scheme.
Medical and life insurance
Some schemes allow the employee to remain in the company scheme for the period up to which you have paid. Other schemes require this benefit to terminate on the last day of employment. However, it is always a good idea to advise your employee to approach the insurer direct to find out whether enhanced terms will be offered if the individual stays in the scheme once their contract has terminated, if there is no break. The employee can explore this before the termination date.
Have you offered a fair amount of money?
Your solicitor will advise you as to a fair settlement sum to offer your employee in the Compromise Agreement. How much this is will depend on the surrounding circumstances leading to your wish to terminate, the terms in the employee’s contract and any potential claims that the employee may have against you.
Your solicitor will tell you if your employee would have a strong claim against you were they to take their case to a Tribunal or a Court. They will calculate how much the employee might get if they were to pursue their claim in a Tribunal compared to the Compromise Agreement amounts you are offering. This will include advising as to the statutory cap on unfair dismissals.
If the employee’s solicitor advises that the money offered is insufficient then your solicitor will advise you and negotiate on your behalf to ensure that the amounts offered are not unrealistically high.
If you have carried out all fair disciplinary/grievance procedures before offering the Compromise Agreement then you are in a much better position to withdraw the Compromise Agreement if the sums that your employee’s solicitor are demanding are unrealistic. This is why you should seek specialist employment legal advice prior to embarking on the Compromise Agreement route.
There is no duty to provide any reference to an employee except in certain sectors of activity such as the financial services sector. However, the reference provided must ‘in substance be true, accurate and fair’. You have a duty of care not only to your ex employee but also to future employers. Your solicitor can provide you with guidance on this issue particularly where there have been performance issues prior to termination.
The Compromise Agreement should reaffirm post-termination restrictive covenants in your employee’s contract to ensure that your business is protected. Your solicitor will check your employee’s contract and ensure that enforceable covenants are included in the Compromise Agreement. When a Compromise Agreement is offered because you have seriously breached a contract, your employee’s solicitor may advise that the restrictive covenants have ‘fallen away’. Reintroducing the covenants into the Compromise Agreement will ensure that you have protection, particularly where a small additional amount of consideration (money) is provided for your employee in reaffirming their post-termination covenants.
The confidentiality clause is an extremely important part of the Compromise Agreement. Usually it is the employer who is most interested in this but in certain circumstances the employee will also require that there is a mutual obligation for the employer to keep confidentiality. Where the employee has been speaking to other people then you may need to reduce the scope so that it allows them to speak to their spouse or immediate family. As an employer you will need to be careful not to promise confidentiality where you have little control over third parties or employees and where you can only use your best endeavours.
There may also be clauses preventing the employee from making derogatory comments against you. Sometimes their solicitor will require that these are changed to mutual clauses, which may be in the interests of both parties where there has been a particularly difficult termination.
Compromise Agreement – how much will it cost?
Solicitors’ fees vary. martin searle solicitors’ fees for advice on a well-drafted and mutually beneficial Compromise Agreement are usually between £500 to £1,500 (plus VAT). The amount will usually depend on the complexity of the payments in relation to tax rules and the requirements of the business. In addition, you will usually be expected to pay a contribution towards your employee’s legal fees which usually ranges from £350 plus VAT to £500 plus VAT.
When will the employee receive their money?
Once all parties have signed a Compromise Agreement, compensation is usually paid within 7 to 21 days. However, it is usual to make certain payments through the payroll on the usual payroll date such as outstanding salary and accrued holiday and bonuses or commission payments.
What service will martin searle solicitors provide?
martin searle solicitors offers an experienced employment team where all solicitors are specialists in employment law. The practice will advise you fully on all the implications of offering a Compromise Agreement and will endeavour to ensure that the sum offered represents a fair amount and is not unfairly inflated by the employee’s solicitor.