The Main Issues
The main reason for an employer to offer a compromise agreement is a "full and final settlement" of any potential claims. By signing such an agreement the employee is waiving their rights to bring any potential claims in an employment tribunal, in return for which they expect a financial package.
It is important for employers to manage the procedure and present a carefully drafted compromise agreement and it is important for employees that you ensure the compromise agreement provides you with the best package. This section of London Compromise Agreements sets out some of the key terms common to many compromise agreements:
Salary and Benefits
In any compromise agreement there should be a clause stating that the employee will paid their salary and all contractual benefits up to and including the termination date. If the employee has any accrued holiday pay this may be mentioned here. Where an employee has taken in excess of their holiday entitlement, then this will be deducted from the final pay cheque.
If the employee is being paid in lieu of working during the notice period, this will also be stated and the payment will be included in the final pay cheque. Holiday and other benefits continue to accrue for the period of notice and should be accounted for in the compromise agreement.
Some of these payments will be subject to PAYE deductions for income tax and employee national insurance contributions, depending on whether they are contractual or not.
The Termination Payment or "The Money"
This is the all important clause which deals with how much and when the termination payment will be made. The termination payment is the money paid to an employee in exchange for the employee compromising any potential claim they may be entitled to bring at an employment tribunal.
The amount offered varies but it will typically depend on the employee's length of service, seniority, any potential claim the employee may have and the generosity of the employer.
Any employee with over 2 years' service is entitled to statutory redundancy pay. The termination payment made will include this amount. Unfortunately, statutory redundancy is not as much as people may think it is. Employees are only entitled to 1 weeks pay for every full year worked between the age of 22 and 41. In 2009, this is capped at £350.00 per week.
It is also important that the compromise agreement reflects the fact that the employee will be waving his or her right to bring certain claims, once they sign it. Consequently, it must be compared to the value of any potential claim brought at the employment tribunal. The independent legal adviser the employee instructs should evaluate and advise you in relation to any potential claim and as to whether the amount offered is adequate.
The payment is typically made within 14 days or on the date of the payroll following the termination date and is dependant on the employer having received the compromise agreement signed by the employee and the independent legal adviser.
There will often be a statement that the payment of the termination payment is compensation for loss of employment and is made without admission of liability. This is merely the employer protecting themselves and is a very standard statement that is included in any agreement or settlement.
It is also important to remember that the first £30,000 of any termination payment is tax free. Bear in mind, however, that this is subject to certain rules.
Tax Indemnity
If any of the payment in the compromise agreement is tax free it will be the first £30,000. Any payments over this amount will be subject to tax and the employer will normally deduct this prior to making the payment.
Employers incorporate this clause to indemnify them from any tax or employee national insurance contributions which may arise after the employment relationship has come to an end. The effect of the clause is that the employee is liable for any income tax or employee national insurance contributions which arise after the termination date, including tax on the termination payment if the employer has not deducted this.
The idea of a tax indemnity sounds more daunting than it actually is. To save any unexpected surprises it is recommended that you confirm with your employer whether they will be making the tax deductions from the termination payment or whether it will fall to you.
The Employee's Obligations
On termination of employment, employers may seek to include clauses in the compromise agreement to prevent the employee doing certain things. These are commonly called restrictive covenants. Restrictive covenants may bind an employee after the termination date either indefinitely or until the time limit stated in the compromise agreement has expired. It may also be the case that the employer may have imposed similar obligations in the contract of employment, and, if so, these will continue along side those stated in the compromise agreement. Often the employer will re-state the obligations contained in the contract of employment in the compromise agreement for clarity.
The most common obligations are:
Confidentiality: not to disclose to any third parties the terms and circumstances surrounding the conclusion of the compromise agreement. The employer will normally acknowledge that the employee can discuss the compromise agreement with their legal adviser and close family. This obligation will also include keeping confidential the information of any clients of the employer.
Derogatory statements: not to directly or indirectly make or publish any negative or seemingly neutral statement which could potentially damage the reputation of the employer. In basic terms, the employer is preventing the employee who is leaving from saying or writing anything bad about them.
If the contract of employment contains very few obligations then the employer may insert obligations into the compromise agreement preventing the employee from poaching business and/or clients from them or from establishing a competitor company within a certain distance or time frame.
Any breach of these will result in the employee have to repay the termination payment to the employer.
The Agreement
All compromise agreements contain a clause which prevents the employee from exercising their right to bring or continue with any claims against the employer. These are in relation to claims before an Employment Tribunal or court which arise out of the employment or its termination. Employers typically expand this clause to include claims against any associated companies, employees, present or former officers and workers in addition to themselves.
The statutes under which a potential claim may be brought should be clearly listed. Upon signing the compromise agreement the employee will be waving your right to any such claim under the statutes mentioned. Statutes typically cited are:
- The Sex Discrimination Act
- Race Relations Act
- Disability Discrimination Act
- Age Discrimination Act
- Trade Union and Labour Relations Consolidation Act
- Employment Rights Act (which includes the Wages Act)
Breach of contract claims, wrongful dismissal and claims for bonuses are also normally included in compromise agreements. The employer may have also included any personal injury claims.
Due to the complex issues that this clause touches upon, statue requires that an employee must seek independent legal advice in relation to the compromise agreement.
Return of Property
This term is relatively self- explanatory and requires the employee to return all property in their possession which belongs to the employer, for example; keys, laptops, blackberry, as well as any correspondence, files and documents. Where the employee has have come to an agreement with the employer that they will retain any property it is important that this is provided for in the compromise agreement.
Legal costs
It is usual for the employer to state in the compromise agreement how much they are prepared to contribute toward the legal fees of the independent legal adviser you instruct. This is typically between £200 - £500.00 plus VAT. This amount is only payable upon the employee and advisor signing the compromise agreement and the legal adviser will invoice the employer directly.
At Stone Joseph we will always endeavour to work within the budget provided for in the compromise agreement, so that usually your legal costs will be covered by the employer. This may not always be possible if detailed negotiations are required to obtain the appropriate compromise agreement for you. If this is the case then we will always inform you of the projected costs and keep you updated regularly throughout the process. It is imperative with every compromise agreement that you seek independent legal advice. This is required by statute but also will ensure that your compromise agreement is suited to you individual circumstances. Your employer may suggest a solicitor to use but, as mentioned, the advice must be independent. To ensure you receive independent advice, tailor-made to your circumstances give Andre Pungerl or Ruth Neil at Stone Joseph a call (on 020 7854 9098). You have nothing to lose and everything to gain by phoning us.
Conclusion
All of the above are common terms in a compromise agreement, however, an experienced employment solicitor will be able to offer you detailed, individual advice. So why not pick up the phone today and give Andre Pungerl or Ruth Neil at Stone Joseph a call (on 020 7854 9098) and allow them to guide you smoothly through the compromise agreement process and ensure you end up with the most suitable package for you.