Coming to a Compromise

By law, workers cannot agree to contract out of the rights that they have for bringing tribunal claims in the event of a dispute with their employer.

This rule does not apply, however, if they want to resolve matters by signing a compromise agreement as long as it satisfies certain statutory requirements.

In this article, a solicitor from Thompsons Employment Rights Unit in Cardiff, sets out the legalities of compromise agreements and offers some general background information.

What are they?

Compromise agreements are legally binding contracts between an employee and their employer. They are nearly always used when the employee’s contract is about to come to an end.

They can, however, also be used in other circumstances such as resolving a dispute (for instance, a negotiated equal pay claim) and the parties want to record the terms of the agreement to allow the employment relationship to continue.

In general, though, they are most commonly used for redundancies, terminations by mutual agreement, dismissals or to settle an employment tribunal claim prior to a hearing.

They are also known as severance agreements, redundancy agreements or termination agreements.

Why do employees sign them?

Compromise agreements provide certainty for both sides in that the terms of the agreement are written down in black and white.

Generally, compromise agreements are used by employers to ensure that employees who sign them cannot take any claims against them in the future, or to ensure that any existing claims are settled. And in return for giving up their rights, the employee gets a compensation payment.

Why must employees have independent legal advice?

However, it is not enough just for the terms to be written down. It is also very important for employees to understand what they are signing, as most agreements are drafted by employers’ solicitors and often contain complicated “legalese” which needs to be deciphered.

In any event, Section 203 of the Employment Rights Act 1996 says that employees must receive independent legal advice from someone who is professionally qualified so that the agreement is legally binding – usually a solicitor or qualified trade union advisor.

This ensures that the employee cannot later claim that they did not understand what they were signing.

In most cases, employers pay or contribute to any legal expenses that the employee incurs in receiving the legal advice.

What are the legal implications?

Before the employee signs the agreement accepting the terms, it is crucial that they understand the implications of what they are doing. In other words, that they are specifically excluding their right to make a claim against the employer in a court or employment tribunal.

Can employees still make claims?

Having said that, employees can sometimes still bring a few very limited claims in the following circumstances, even if they have signed a compromise agreement:

• if the employer breaches the agreement, for instance they do not pay the money agreed 
• claims in respect of personal injury, unless the agreement excludes personal injury claims for something that the employee knew about when it was signed (for instance, where the termination is for sickness absence or a personal injury claim for stress or depression)
• accrued pension rights. 
The Court of Appeal said in Hinton -v -University of East London (LELR 102) that, to compromise a potential claim, the agreement has to specifically identify the claim, either by describing it or by referring to the relevant section of the statute.

Some agreements set out fairly exhaustive lists of potential claims, while others only list the ones that the employer thinks are potentially relevant.

Do employees pay tax?

That depends on how the payment is made up.

Employees usually have to pay tax and national insurance on any wages and holiday pay.

Generally, the first £30,000 of a payment given as compensation for loss of employment is tax free, as are redundancy payments up to £30,000 (both contractual and statutory).

Payments in lieu of notice are also tax free, provided that the employer does not have a contractual right to pay in lieu and, in redundancy situations, provided that the employer does not usually make a payment in lieu of notice as a matter of course.

Benefits such as continued use of a mobile phone or company car are usually tax free. Even if the payment is being made to the employee tax free, the agreement normally makes clear that, if Her Majesty’s Revenue and Customs state that tax or national insurance is payable, the employee is responsible for paying it, not the employer.

Can the employee talk about it?

Confidentiality clauses are fairly standard in compromise agreements, although sometimes they only cover the terms of the agreement. So an employee can still tell people that they have come to an agreement with their employer about the termination of employment or tribunal claim, but cannot say what the terms of the agreement are 
Sometimes, however, employers insist that the employee does not even tell people that they have reached an agreement.

And after the agreement is signed?

Sometimes agreements contain a “non-derogatory statements” clause to stop the employee from bad-mouthing the employer or people who work for them.

Employees should therefore be careful what they say about the employer, particularly in public if there is a chance that someone may report back.

It is possible to make the clause mutual so that neither side can make derogatory or disparaging statements about the other.

Can employees go to the press?

That depends on the type of confidentiality clause in the agreement and whether there is a “non-derogatory statements” clause. Employees should take advice from their trade union and/or legal advisor before going to the press.

What about references?

There is generally no legal obligation on an employer to provide a reference, but if they do, it should be true, accurate and fair. If not, the employer may be guilty of misrepresentation.

It is possible to incorporate a reference into the compromise agreement, in which case the reference becomes part of the agreement. This should be done early on in negotiations.

To read more about Compromise Agreements, visit our "Your Employment Rights" section.