Much in the news recently due to widespread use (and possibly abuse) in the Health Service, a compromise agreement is a legally binding agreement between an employer and (soon to depart) employee, seeking either to settle a dispute that has already arisen or to prevent one arising in the first place. In addition, they offer employers an opportunity to revisit the original contract of employment.
A common use of compromise agreements is to settle a claim or number of claims that an employee has made to the Employment Tribunal. If the dispute has been settled an agreement is drawn under which typically a sum of money is paid and in return the claims are withdrawn. The agreement will set out the claims being withdrawn, the amount to be paid and the date for payment.
Of additional use to the employer is the common use of a confidentiality clause. This clause will forbid the parties from disclosing the amount paid under the agreement. It is not to be confused with the recent controversy over “gagging clauses” which sought to prevent former employees from making disclosures under the Public Interest Disclosure Act.
Slightly more complex are agreements drawn up when an employee is leaving without bring a claim and may be regarded as a form of insurance by an employer.
Such a compromise agreement is essentially the waiving of nearly all employment rights on behalf of a departing employee. It is not possible to waive a potential claim that the departing employee is not yet aware of, such as information coming to light that would justify a public interest disclosure, or a medical condition developing that the employee could not reasonably have been aware of at the time employment terminated.
Again, even though departure may have been amicable, and/or a correct procedure may have been followed, compromise agreements are a form of insurance against a departing employee bringing a claim.
As they involve the waiving of legal rights, to be valid, a compromise agreement requires independent legal advice to be given to the employee. In turn, the employer agrees to pay legal costs to the solicitor chosen by the employee, typically in the region of £300 + VAT.
The agreement will confirm notice pay paid, a termination payment, accrued holidays to be paid and when and how the payments are to be made to the employee together with the date employment terminates.
It is possible to be somewhat creative to the benefit of both parties. It may be, for example, that the original contract does not allow payment in lieu of notice. In addition, notice pay could be in effect waived and the amount added to the termination payment. As the termination payment does not normally attract tax and national insurance, the amount received by the employee could be greater than would have been if it had to be made subject to those deductions but will not cost the employer any more.
Which brings us to tax…. A termination payment is not subject to income tax and national insurance for basic rate tax payers so long as this exercise is not found by HMRC to be sham or the payment to be grossly disproportionate to what the employee earned. Given these caveats a “tax indemnity” clause should be included to ensure the employee is liable for any nasty shocks.
As mentioned, a compromise agreement is also an opportunity to look at the existing contract and ensure that the employer has the right level of protection. For a defined consideration it is possible to insert post termination clauses that may not have been applicable when employment commenced but are now. These clauses could include protection against the employee competing, or soliciting staff or clients.
If you would like some further help of advice please call us now on 01709 709 000
Ian Clay
Tierney & Co
www.tierneyandco.co.uk
April 2013