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Ask Employment Law |
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There is no
substitute for legal advice on the actual situation you find yourself in. The
information posted on this site is for general information only, is based on |
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Question: |
Compromise Agreements: What generally goes in a compromise
agreement?
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Answer: |
Compromise Agreements are prescribed by statute to bring
to an end all and any statutory claims arising out of your employment or the
termination of your employment. Those statutory claims generally have to be
listed out in order to be settled by the agreement. Statutory claims will
include for example unfair dismissal, sex discrimination etc. Employers generally use compromise agreements to settle
other claims arising as well, for example breach of contract claims and
claims in tort (for example personal injury claims). There are limited
circumstances in which a compromise agreement will not be effective to settle
all claims arising, but this will be the exception and not the norm. Once a compromise agreement is completed, assuming it is
an effective agreement, then this will bring
to an end your right to pursue any claims arising from your employment or
the termination of your employment in an Employment Tribunal or elsewhere
(including for example the High Court). It is therefore particularly
important that we: a)
Identify
any claims arising. (Even if for example the compromise agreement is being
offered to you as a result of a normal redundancy situation, the procedure adopted might give rise to a
claim, or alternatively there may be (unconnected) personality clashes, or
disputes regarding time off, pay, bonuses or other matters which also give
rise to claims); b)
Get
an idea of the merits of such claims and their potential value; and c)
Consider
whether the sums offered are reasonable in the circumstances ...before you decide whether or not to sign away your
rights. In order for a compromise agreement to be effective, you
the employee first need to obtain independent
legal advice. Generally your legal adviser will be asked to sign a
certificate at the end of the agreement to confirm: a)
That
they are a solicitor of the Supreme Court. b)
That
they a current practicing certificate. c)
That
they a relevant form of indemnity insurance in place. Please note that some Trade Union representatives and
other advisers can also provide advice on compromise agreements. Employees are of course free to instruct whoever they wish
to provide independent legal advice. The solicitors’ duty of course is to act
solely your interests and not that of
the employer. There are a number of issues which typically come up when
reviewing the compromise agreement and which include: ·
It
is important to understand that the compromise agreement will generally
comprise the ‘entire agreement’,
which is to say that everything agreed between the employee and employer should be incorporated into the
agreement. The employee may not therefore be able to enforce anything agreed
informally on the side. Therefore if there is anything that has been agreed
on the side which is not in the agreement, it should be brought to the attention
of the independent legal adviser. ·
There
should normally be a clause stating that they employee will be paid salary as normal up to and including
the date your employment ends, less deductions of tax and national insurance. ·
One
would normally expect to see a clause stating that the employee will receive
a payment in lieu of any holiday
accrued but untaken to the termination date. This will have to be taxed in
the normal way. ·
One
would expect to see a figure offered ‘ex gratia’ in addition to any payments the employer is obliged to give you
anyway. This is often referred to as the Compensation
Payment. Whatever it is, it is a good rule of thumb to calculate how many
months net pay it represents. Employment Tribunals make their awards based
largely on your loss of net earnings from the date of dismissal until the
date you find suitable alternative employment. For most people it takes at
least three to six months to secure suitable alternative employment,
sometimes much longer. ·
The
payment may not be as generous as it initially appears; for example it may
incorporate your statutory entitlement
to redundancy pay. Remember though, there is not normally any obligation on
employers to offer enhanced severance in a redundancy situation. It is
normally only if we can identify claims arising that we may be able to
negotiate a bigger settlement on the employees behalf. ·
If
the employee is entitled to commission or contractual bonuses, or if the employee has share options or
vested shares in the employer, this should also be covered in the compromise
agreement. ·
One
would ordinarily expect the employee to have either worked their notice or to
be receiving a payment in lieu of notice. If receiving a payment in lieu of
notice, it may be possible for your employer to pay this in a tax efficient
manner without deductions of tax and national insurance. This is something
the independent legal adviser will need to check. ·
Under
the Income Tax (Earnings and
Pensions) Act 2003 ('ITEPA 2003') tax
is normally only payable on payments made in respect of “the termination of a
person’s employment” insofar as they exceed £30,000. ·
However
there are some exceptions to the £30,000 rule on tax; for example if the
employee receives a payment in lieu of notice, and the employer reserves the
contractual right to make a payment in lieu of notice. Alternatively if the
employer habitually makes a payment in lieu of notice. Another example would
be if the sum is paid in consideration for the employee agreeing to enter
into certain post employment restrictions, in which case the sum would be
taxable. This is something that the legal adviser would have to look at
carefully. ·
Even
when the legal adviser and the employer believe that the payment(s) can he
paid without deductions of tax under the £30,000 rule under ITEPA, it is
important for the employee to remember that there is always a residual risk that HM Revenue and Customs may
consider that tax has to be paid. ·
In
almost every compromise agreement, there will be a tax indemnity clause, stating that in the event that tax arises,
it will be the employee’s responsibility and not the employers. The clause
typically states that if the Revenue comes after the employer for tax, then
the employer can in turn claw that sum back from you, together with any
interest, penalties or associated costs. This is called a tax indemnity
clause. From the employees point of view, it would be better if that clause
was not in the agreement but employers seldom agree to it being removed. This
is something the independent legal adviser will need to look at carefully ·
Although
the idea of the compromise agreement is to settle all claims arising from
your employment or the termination of the employee’s employment including
specific statutory claims, breach of contract claims and claims in tort, one
would normally expect to see certain claims excluded: -
Claims
with respect to accrued pension
rights to the date of dismissal (if applicable) -
Claims
for the enforcement of the terms
of the compromise agreement (though this may be implied) -
Personal injury claims. Where this applies that would
mean that if (say) after signing the agreement the employee develops a
medical condition such as asbestosis, having been exposed to asbestos dust at
work, he or she would still be able to bring a personal injury claim with
respect to it. Sometimes employers will ask the employee to warrant (confirm)
that he or she is not aware of any
such personal injury claims arising. So if for example the employee has
tripped over a cable at work, done their back in lifting heavy boxes or
developed pains in their fingers from typing, they should let the legal
adviser know. ·
Employers
will typically contribute to the cost
of your obtaining independent legal
advice up to a specified sum. ·
If
the employee is a member of an occupational pension scheme, normally his or her pension rights would be frozen at the date the employment ends until the normal retirement
date. ·
The
employee will probably be asked to return all property belonging to the employer in his or her possession. This
will ordinarily include all documents in whatever format (including
electronic). The employee may for example want to retain the laptop used by
work for you or your mobile phone number, in which case this should be
discussed with the adviser. ·
There is likely to be a clause preventing
the employee from disclosing confidential
information to third parties. Confidential information will be defined but is
likely to cover commercially sensitive information which is not already known
to the public. ·
The
Employee will probably be asked to keep the terms of the compromise agreement
confidential and you should not (for example) discuss the terms of the
agreement with colleagues. The employee will probably be allowed to discuss
the agreement with certain parties, including the legal adviser and
potentially his or her immediate family. ·
The
agreement may prevent the employee from making critical comments about your employer. It may be worth making
this obligation reciprocal, particularly if the employee is leaving in
unhappy circumstances. ·
One
would normally expect the agreement to expressly incorporate the wording of a
reference that the employer will
provide any prospective employer that contacts them. It is increasingly
common nowadays for employers only to give brief factual references, simply
confirming job title and dates of employment, especially if the employee
is employed by financial or legal
institutions. This is because the employer could be sued by a future employer
if they say anything which is inaccurate or misleading. This can be a concern
to many people, but the more common this practice is, the less that can be
read into it by a future employer. ·
There
may be a clause stating that if the employee is in breach of the compromise
agreement, anything paid to the employee under it by your employer will have
to be repaid to them and which can
be recovered as a debt. The money offered therefore is the carrot, and the
repayment clause is the stick. Arguably such a clause may amount to an
unenforceable penalty clause. This may depend how it is drafted. However it
is important that you are fully aware of such a clause if it is in the
agreement and the employee should not in any case enter into an agreement in
the expectation of breaching it in the future. ·
Occasionally
the employee will be asked to confirm that they do not have new paid
employment lined up before accepting the payment under the agreement. ·
There
may be a clause either imposing certain restrictions on what work the
employee can do after his or her employment ends, or reminding the employee
that those restrictions are already imposed under your employment contract.
It is important to ensure that the employee shows his or her legal adviser
the employment contract if they have
one. Sometimes where such a restriction is imposed by the compromise
agreement, there will be a separate payment (say £250 less tax an NI) for
your agreeing to that restriction. The idea is to ring fence the taxable
status of the ex gratia Compensation payment. ·
Finally,
most compromise agreements are marked ‘without
prejudice’ until signed. This means that they are off the record and cannot normally be referred to in legal
proceedings unless signed off. See also our page on compromise agreement breaches Last
updated: July 2010 |
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Employment
Solicitor Reculver Solicitors Tel
0207 324 6271 Regulated
by the Solicitors Regulation Authority ©
Reculver Solicitors. 2005- |
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