Employment Law

Employment - Compromise Agreements

Although there has been a rapid increase in the number of public sector employees, employers in the private sector continue to review their cost base and reduce the number of their employees.  There are many redundancies ahead, and not only in the financial sector.

Negotiating the terms of a redundancy involves more than merely agreeing on a sum to be paid to the employee. There are tax and administrative matters to be dealt with, as well as securing the best platform for applying for a new job.

In this context, the expression “compromise agreement” usually means an agreement made between an employer and an employee as to the terms upon which they part company. It should take account of the contractual terms under which the employee has been employed, the relevant statutory obligations, any allegations as to conduct on either side, and the relative bargaining positions of the parties.

A compromise agreement also has practical and commercial benefits for both sides, avoiding damaging publicity, the heavy legal costs of a battle in the courts or Industrial Tribunal, and the time and resources which would be tied up in fighting an employment claim.

Ambrose Appelbe have wide experience of acting for both employers and employees in such agreements. This article is written mainly for the benefit of employees.

Compromise Agreements must be final
Perhaps the most important consideration is that the agreement will be in “full and final” settlement of ALL claims and counter-claims between the employer and employee. All other claims that you have or may have against your employer will be treated as having been settled. If, for example, you were to change your mind two or three days after making the Agreement, it would be too late to undo it.

For this reason, you should not sign an agreement unless you intend to be bound by it.

Prudent employers insist that you receive formal legal advice before you enter into a Compromise Agreement. The Solicitor is obliged to sign a certificate confirming that it has been explained to you in detail and that you understand it.

Compromise Agreements must cover everything
If there is anything in the agreement that you do or do not want included, now is the time to say it. Any oral assurance which you may have been given, for example, as to holiday pay or other benefit, should be supported by a provision in the agreement.

It may be possible for your solicitor to negotiate different provisions in the agreement, but quite often the employer sets a time limit for the return of the documents. It does not matter whether this time limit is reasonable or unreasonable. If you do not comply with the time limit, the employer is not obliged to conclude the agreement with you and you would have lost your automatic right to the benefit of the agreement unless an extension can be agreed.

If your solicitor seeks to negotiate a substantially better provision than that which is offered, some employers, particularly if they believe that they have been generous in their original offer, react strongly, even to the extent of withdrawing the original offer or at least threatening to do so. You should be warned of this possibility.

It is important that any negotiations are conducted as a whole, because if it is believed that only one matter is in dispute e.g. holiday pay, and then time is devoted to resolving it, negotiations may be soured by a later attempt to renegotiate another point.

Leave it to us
Ambrose Appelbe recommend that you do not make direct contact with your employers to renegotiate any part of the package. Negotiations are usually best conducted through the solicitors. This also allows for objectivity and for negotiations to be carried out on a without prejudice basis.

You may be put under pressure by your employers to agree the terms on offer quickly. It is important that we have all documents and all correspondence and details of oral agreements relating to your notice period and redundancy rights. These will usually be contained in your offer of employment, contract of employment and in successive variations, e.g. letters or e-mails. It is a good idea to keep copies of any e-mails relating to the terms of your employment.

We have found cases where the employer has made promises which have been reneged upon and which can be picked up and negotiated into the Compromise Agreement.

Severance Payment
If you are required to leave your employment immediately, you are usually offered payment in lieu of notice (“PILON”).

The usual rule is that the first £30,000 is paid free of tax, but there has been recent case law tightening this up in favour of the Inland Revenue.

One of the determining factors is whether there is a clause in your contract of employment specifically permitting your employer to make a PILON. It may be argued that such a clause makes the PILON part of the agreed package, not compensation for breach of the contract. An agreement under which the employee remains employed but is not required to work (so-called “garden leave”) will rarely attract the tax exemption.

Great care needs to be taken over this aspect and our advice is not to leave the door open through which the Revenue can come at you at a later date many months later. The very best time to take advice on this is at the beginning of the employment, when the terms are agreed. Whether or not this has been done, it is vital to understand the tax implications of any proposed severance terms before they are set in stone.

Pension Scheme
This needs to be looked at very carefully to ensure that your rights are preserved.

Private Health Insurance and other benefits
You may like to consider trying to continue this with the employer’s Private Health Provider, rather than allowing it to lapse and having to start afresh.

Return of Property
You must consider this. At a very practical level, many people depend on (and take for granted) company-owned computers and mobile phones, quite apart from a car. Their value in the hands of the employee often far exceeds the cash value to the employer and they might be included in the severance package.

Confidentiality Statements and Future Restrictions
You should only agree these if you are happy that you can honour all these provisions. Restrictions which are too widely-drawn may give the employer more protection than he needs whilst seriously hampering the employee’s ability to find similar work elsewhere.

Reference
If you are going to obtain a reference now is the time to do so.

What if compromise is not possible?
The ending of relationships between employers and employees is a normal incident of commercial life. Employers generally have an interest in smoothing over a departure, if only for the sake of their relationships with the rest of their work-force.

Where there are disputes, these often relate to allegations of misconduct on either side or disagreements over the level of compensation which should be paid, or precise interpretation of the contract or of relevant employment statutes. Sometimes, different views may be taken as to whether the dismissal is because of redundancy, in which case your compensation may be limited to statutory amounts.

These are full subjects in their own right and not covered here. Your negotiating position in compromise discussions must, of course, depend on an assessment of the likely outcome of proceedings in court or in an Industrial Tribunal.

Summary
You do not have to sign a Compromise Agreement and if you do not, you would take your chance on making out a claim for unfair or wrongful dismissal. You need time to be advised properly and not be put under pressure. There has been much publicity recently about cases where employees launched claims against their employers which, whether justified or not, and whether won or lost, they regretted.

We give practical advice aimed at achieving a sensible compromise quickly and with as little rancour as possible – just as we do with our Mediation work in other areas. Such agreements may not, when it comes to it, depend on trading detailed points with your former employer, but we need to know all the facts and to give you an assessment of the strengths and weaknesses of your position before opening discussions – often, the best way to avoid a fight is to be ready to have one.

If the main benefit of taking good advice is to secure a good financial settlement, the subsidiary benefits are equally valuable – making sure that everything else – pension, reference etc., is brought into account in the settlement and that you do not inadvertently bar your claims to some greater rights.

It is worth adding this: many of the problems which arise on the termination of an employment contract are ones which could have been anticipated when the contract was made, not least the likely tax treatment of any payment in lieu of notice. For many people on high-paid contracts of employment, the time to take advice on termination is when the employment begins. Ambrose Appelbe have considerable experience in this area.
 

For more information please contact one of the lawyers in the employment team at Ambrose Appelbe, Felix Appelbe or Andrew Penfold on 020 7242 7000 or use the Contact Request Form.

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This web site contains general information only and does not constitute legal advice. You should take suitable advice as to your specific circumstances. Ambrose Appelbe accepts no responsibility and disclaims all liability in relation to such information.