What is a Compromise Agreement?
Compromise agreements in employment law are legally binding agreements between an employer and employee that outline the terms on which an employee will leave employment with the employer. They are used by an employer in circumstances where it is necessary to resolve a dispute, or to avoid a potentially contentious issue being brought to court. There are specific circumstances in which an employee would be asked to enter into such an agreement, such as following a grievance or disciplinary procedure, or to resolve a potential Tribunal claim.
Whilst employees are not legally required to accept these kinds of agreements, in practice if an employee refuses to enter an agreement, the employer may seek legal advice that the employee’s refusal is unreasonable. This is because if the employer contends this, a Tribunal may overrule a refusal. In addition, the employee will be giving up the right to take any Employment Tribunal claims and will (almost always) receive some form of financial settlement (as well as other benefits) in exchange for the acceptance of the agreement which may be more beneficial to them and more financially advantageous than paying legal fees to fight, and risk losing, a claim.
Compromise agreements have their origins in the old common law doctrine of accord and satisfaction, which provided that if the parties intended to compromise a dispute through the execution of a written agreement , that agreement would be binding even if it was unclear whether the party waiving a claim received something in return for that waiver – so long as the intentions of both parties were clear.
As an employee is giving up his or her right to bring an Employment Tribunal claim, the waiver must be specific. Therefore, for a waiver to be effective, it must be able to be proven that the employee knew the rights they were giving up and, in relation to the rights being waived, an employee must be provided with sufficient information about the claims that they are waiving. Sufficient information means that the employee must be made aware of the real scope of their claims in order to waive them properly.
To ensure that the employee knows what they are signing up to, the law places an additional requirement on compromise agreements to be signed by the employee’s legal representative before the waiver becomes legally binding. The law requires the independent legal advisor to be competent to give advice on, and explain the terms of the compromise agreement and its effect to the relevant employee. As well as giving advice on the waiver of Tribunal rights, many lawyers employed to advise on a compromise agreement also advise on the financial considerations.
Compromise agreements must also be submitted to the ‘certifying’ body (normally a lawyer) for approval as meeting the legal requirements of a compromise agreement before the deal can be signed by the employee.
Essential Components of a Compromise Agreement
The purpose of a Compromise Agreement is to bind an employee to the terms of a settlement and to prevent them from pursuing previously agreed claims in an Employment Tribunal or court. The essential elements of a compromise agreement are as follows:
- The document must be in writing. For example a Settlement Agreement, although it is usual for it to be called a Compromise Agreement by employees. Sometimes an employee may refer to a Settlement Agreement as a waiver document.
- The document must relate to proceedings before an Employment Tribunal or court and therefore should state the Employment Tribunal or court from which the claims will be presented. The claims must be presented within the normal respective time limits, either within the period mentioned in the Agreement or the fields, time limit for any further claims.
- The employee must have legal advice on the terms and effect of the agreement. This is a fundamental jurisdictional requirement of the legislation. Employees commonly ask if they are able to claim back the costs of obtaining the advice. It is common practice for the employer to contribute to the employees’ legal costs by payment of a specific sum.
- The terms of the agreement must be in respect of "particular claims". This means that the employee must understand the claims they are giving up.
- The types of claims that are commonly the subject of Compromise Agreements are unfair dismissal, breaches of contract, grievance and resignation conditions by an employee. Other claims that are less common are breach of fiduciary duties, breach of directors’ rights and loss of salary.
It is important that appropriate claims are contracted out of the Compromise Agreement by the employee, their advisors and the employer.
The Advantages of Implementing Compromise Agreements
In most cases, a compromise agreement will be advantageous to both the employer and the employee.
Advantages for employers:
Employers will normally save money in legal fees that might otherwise be spent in litigation. The agreement will stop the employee from making a Claim to an Employment Tribunal, enabling the company to put behind them the "burden" of the dispute. The dispute may have been affecting the individuals involved or the wider team working in that department. Employers will want to move on quickly. The business will avoid the publicity of any Claim being brought. It is, for example, in the interests of an employer to avoid having its staff spread potentially damaging gossip if sexual harassment or discrimination have been claimed.
Advantages for employees:
The employee does not have to worry about the Tribunal process or give up their rights to make a claim. The compensation package that is offered in exchange for signing the compromise agreement will be greater than the prospects of winning a claim and getting an award very much less that that amount. Also, it may be that the employee has enjoyed their time at the company or that they have some continuing friendships with colleagues. They will not want to listen to their friends if they were fired unfairly or discriminated against. Equally, the employee does not want their name being broadcast around with allegations that they have been discriminated against or sexually harassed.
Legal Criteria for Compromise Agreements
An issue that often causes confusion for both employers and employees is the legal requirements for compromise agreements to be enforceable. To recap the importance of compromise agreements, case law stipulates that where an employee’s claim is brought against their employer, the employee must be careful not to sign a settlement agreement before they have been to a tribunal as this will automatically extinguish their legal rights to bring a claim (as well as preventing them from pursuing a claim in the future). Where the employee does go to tribunal, the claim will only be recognised if it has been made "in accordance with the statutory procedure for the resolution of individual disputes in force at the time when the tribunal claim is presented".
In order for the employee to settle their claim without having to go to the tribunal first, the claim will have to be settled in accordance with the statutory procedure required. So what is the statutory procedure and how can it be adhered to?
The statutory procedure mandates that the employee must receive independent legal advice on the terms and effect of the proposed compromise agreement. The independent legal advice must be provided by a qualified solicitor or a trade union official or official of a recognised independent charitable organisation (known as an "independent adviser"). The independent adviser must explain to the employee "that the work done in respect of [the] advice is likely to prevent the employee from bringing proceedings before an employment tribunal or an employment appeal tribunal". In addition, the independent adviser must have a current contract of insurance or professional indemnity arrangement that provides for at least 10 million euros for liabilities that may arise in respect of any advice given to the employee.
It is essential that the statutory provisions are adhered to as the courts have interpreted the legislation to mean that they have no power to make an agreement unenforceable under the statutory term "in accordance with the statutory procedure".
How to Draft a Compromise Agreement
Before entering into the terms of the agreement (through negotiation or otherwise), it pays to consider a few essential pointers before adopting too much of what is being suggested.
Steps to be completed to formulate a compromise agreement
Perhaps not entirely dissimilar to the frequently employed depiction of the five steps in formulating a compromise agreement, these are;
1. The preliminary framework – initial assessment of the issue and likely outcome
2 . Initial negotiations – establishing the basis for a potential settlement
- Drafting the agreement
- Legal advice on the agreement
- Execution of the agreement
It is often helpful to take a logical approach, agreeing the priorities from the outset and working through them methodically towards the conclusion at 5 above. This may seem simplistic, but of course applies to more complex issues that may require more detailed discussions, explanations and counter-proposals.
Problematic Scenarios and Mistakes to Avoid
When entering into a compromise agreement, like any other contract for that matter, it is essential to ensure that all parties clearly understand the terms of the agreement and that it complies with the relevant legal requirements. Failing to do so may render the agreement unenforceable against the party who has not been in receipt of independent legal advice, i.e. the employee.
This section deals with the common pitfalls and mistakes, how to deal with them and secure compliance.
Whether independent legal advice was taken A basic requirement for compliance with Section 203(3) ERA91 is that the employee has been provided with independent legal advice. However, a number of recent Employment Appeal Tribunal (EAT) decisions have shown that the court will look beyond this technicality. For example, the question of whether independent legal advice was given has been answered by examining whether at the time the agreement was entered into:
Having regard to the above, should it come to pass that an employee’s lawyer has failed to present their case properly, the agreement can still be considered valid if the employee states that: 1. They are satisfied that their claim has been settled to their advantage; 2. They are aware that there may be other claims to which they are waiving their rights; and 3. The agreement is used for a different purpose than that originally intended.
The Employer’s failure to provide adequate information The employer must provide sufficient information to the employee’s lawyer to be able to advise the employee as to the terms of the agreement, possible alternative claims and the terms of settlement. However, if that information is given after the independent legal advice has been provided, it shall not invalidate the compromise agreement. Typically, the information will be provided in what is known as a ‘bargaining position letter’, setting out what the employer’s position is.
Sufficient time for consideration of the agreement The time period between provision of independent legal advice and signing of a compromise agreement is of an important factor in determining whether the agreement was signed willingly, knowingly and freely. Therefore the amount of time to consider the agreement should be reasonable. However, short time limits will not render a compromise agreement automatically invalid.
It is not uncommon for an employee to be subject to time pressures when completing a compromise agreement. The Agreements (Terms of Employment Information) Act 1993 provides a statutory exemption where an employee waives their right to reasonable time to consider the terms of a compromise agreement. The employer is therefore free to dispense with this requirement when entering into a compromise agreement. However, it is advisable that where an employee has waived their right to reasonable time, the employer should inform the employee of the risks of doing so.
When Compromise Agreements are Unsuitable
A compromise agreement may not always be the appropriate way to deal with a dispute and there may be for example:
- Separate restrictive covenants which are being ignored – where there is a clear breach of, say, a non-compete covenant, it may be better to issue proceedings against the former employee for an injunction to prevent them from working for a competitor than to enter into an agreement. The reason for this is that where the employee is contemplating legal action for breach of contract they may well demand the right to work out their notice period, whereas if the employer sues them then there will be an injunction restraining them from working for a competitor during the notice period.
- An employee who has been accused of gross misconduct (or misrepresentation of qualifications etc) – often the fundamental breach which leads to dispute is wilful misconduct that makes the employee’s position untenable – e . g. Gross misconduct leading to dismissal. In certain circumstances it may be possible for an employer to simply dismiss the employee and have done with it. However, if this course of action is not suitable (or if the employee is senior and the employer fears their reaction) then an alternative course might be to dismiss (with or without notice) and to explain the reason in the COT3.
- Employees who have committed fraud or theft, or have been accused or suspected of doing so – It may not be a good idea to refer to the fraud in a COT3 because to do so would give rise to a reasoned explanation of why the fraud was committed. This of itself may be or appear to be unreasonable behaviour on the part of the employer. The COT3 can be used successfully to cover up details of the allegations, although the text should be carefully drafted.