Compromise agreement

When you want to prevent an employee from issuing proceedings in relation to the infringement of their statutory employment rights on termination of their employment, consider going down the compromise agreement route. This is an alternative to going through time-consuming dismissal procedures. In addition, it can also be used to settle serious employee disputes, such as allegations of constructive dismissal or unlawful discrimination.

Negotiated terminations

Sometimes, it will become necessary to dismiss an employee in circumstances where you want to prevent them from issuing employment tribunal or other court proceedings against you in relation to infringement of their statutory (or contractual) employment rights. This may happen in relation to senior employees when you do not propose to go through formal dismissal procedures because you want them out as soon as possible. In such circumstances, you should hold a “without prejudice” meeting to discuss the termination package in return for their signing a Compromise Agreement. This is essentially a formal, legally binding agreement made between an employer and employee (or ex-employee) in which the employee agrees not to pursue particular claims they believe they have in relation to their employment or its termination, in return for a financial settlement from the employer.

Legal formalities

In order for a compromise agreement to be legally binding, a number of important statutory conditions must be fulfilled as follows: - the agreement must be in writing - it must relate to the “particular proceedings” - the employee must have received independent legal advice from a relevant adviser as to the terms and effect of the agreement and, in particular, its effect on their ability to pursue their rights before an employment tribunal - there must be in force, when the adviser gives the legal advice, a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising as a result of the advice - the agreement must identify the relevant advisor - the agreement must state that the conditions regulating compromise agreements under the relevant Act(s) are satisfied. The people who are eligible as “relevant advisors” are: - qualified lawyers (solicitors holding a practising certificate or barristers in practice or employed to give legal advice) - officers, officials, employees or members of an independent trade union, provided that they have been certified in writing by the union as competent and authorised to give advice - employees or volunteer workers at advice centres giving free legal advice, provided that they have been certified in writing by the advice centre as competent and authorised to give advice - fellows of the Institute of Legal Executives employed by solicitors’ practices.

Without prejudice

The “without prejudice” meeting should only take place with the employee’s consent and they should be warned in advance that you wish to have a meeting of this nature. There should also be a pre-existing dispute with the employee and the discussion must be a genuine attempt to settle the dispute. As stated above, the employee is required by law to seek independent legal advice as to the terms and effects of a compromise agreement. You should ensure that all correspondence in connection with the negotiation of the agreement is marked “without prejudice” (including the draft agreement itself) so as to avoid disclosure of it should negotiations for settlement break down prior to signature of the agreement. Marking correspondence this way will prevent the use of it in any subsequent legal proceedings. Bear in mind that if settlement negotiations do break down, you’re likely to be left with a disgruntled employee!

The employee’s particular complaints

A compromise agreement may be used to settle one or more employee complaints. In drafting it, you should make clear each of the specific complaints being settled and refer to the relevant statutory provisions because, as identified above, the compromise agreement must relate to the “particular proceedings”. Particulars of the complaints made by the employee and of the particular allegations made in them must be inserted into the compromise agreement in the form of a brief factual and legal description. A ‘blanket agreement’ simply signing away all of an employee’s employment rights, or one which lists every form of employment right known to the law, will probably not be a valid compromise agreement. It’s always better to get legal advice on drafting a compromise agreement because it is a complex legal document which has to be tailored to fit the circumstances of the particular case. Our compromise agreement is a good starting point for you but you will need to consider the clauses in detail to decide which are relevant. In addition, not all sums payable under a compromise agreement are tax-free so speak to your accountant if you’re unsure.