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Employers Beware Of Hasty Compromise Agreements

Marsha Thompson

Marsha Thompson

In the current climate, employers should exercise caution when considering issuing a Compromise Agreement to terminate the employment of a poorly performing employee. A Compromise Agreement is a legally binding settlement (sometimes referred to as a termination settlement or a termination agreement), usually offered by the employer shortly before or after the termination of the employee’s contract.

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 used against the company.

In the case of King -v- Royal Bank of Canada Europe Ltd, the Employment Appeal Tribunal (EAT) criticised the practice of offering Compromise Agreements to employees without there being an existing dispute. This practice is becoming increasingly common and employers need to beware that by doing this they could leave themselves open to a claim for unfair dismissal.

In the case of King, Ms King was called into a meeting at short notice without being told the purpose of the meeting. She was then informed that her role was redundant and placed on garden leave. There was no consultation in relation to redundancy. She did not receive any written confirmation that she was at risk of redundancy nor was she given the right of appeal. During the meeting, the employer also raised issues with her performance despite stating that she was being dismissed for redundancy. At no point had she been placed on a Performance Review. She was then given a Compromise Agreement in which she would have to agree not to sue her employer.

Ms King declined the Compromise Agreement and brought claims for unfair dismissal and discrimination. Although in this case Ms King lost her case in the Employment Tribunal and the EAT, important points were raised in relation to when it is appropriate to offer a Compromise Agreement.

The EAT criticised the actions of the company in dealing with the dismissal in this way as all organisations should ensure that a fair process is followed before dismissing any employee.

In order for an employer to have a ‘without prejudice’ discussion with an employee about a Compromise Agreement, there needs to be a genuine dispute between the parties. If an employer approaches an employee without there being such a dispute, this could be a serious breach of his contract for which he could resign and claim constructive dismissal.

The judge’s comments in the King case also states that a Compromise Agreement should only be offered as one of a number of options and not presented to the employee as a ‘done deal’. In this case, the employee should have been given the choice between taking the formal performance management route OR the Compromise Agreement route.

It is important that when considering terminating an employee’s employment due to poor performance that an employer commences a formal performance management process.

If you are faced with a poorly performing employee and are thinking of issuing a Compromise Agreement, you should :

  • Invite the employee to a meeting to discuss the concerns you have with his performance and – a) set targets for improvement and b) agree a timescale e.g. three months in which to improve
  • Follow the company’s capability procedure and the ACAS Code of Practice
  • Consider issuing a verbal warning in accordance with the company’s disciplinary procedure
  • Think carefully about any emails ‘or other written correspondence’ sent to the employee. Never send any aggressive emails
  • Keep records of any emails, letters, conversations or meetings – ‘formal or informal’ – with the employee relating to their performance
  • Not sideline, bully or shun the employee to leave. If they can demonstrate that they resigned for a serious breach, they may bring a claim for constructive dismissal

If you are considering terminating an employee’s employment, you should always seek advice before taking any action.

You can contact us to discuss any Compromise Agreement issues you might have on 01273 609911.

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T: 01273 609 991

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