Compromise Agreements Article

Why enter into a Compromise Agreement?

Compromise Agreements are frequently entered into between an Employer and an Employee as a speedy, cost and tax efficient method of settling an employment dispute, often following a Grievance being raised or Disciplinary proceedings being initiated.   

Compromise Agreements are also frequently used to make enable an Employer to make an ex gratia payment to an Employee on redundancy.

Subject to certain conditions, set out in Section 203(1) Employment Rights Act 1996 an Employer can pay compensation of up to £30,000 (including any statutory redundancy payment) to an Employee free of tax, although a Compromise Agreement will always contain a tax indemnity. In some circumstances, this payment may include monies paid in lieu of notice, where there is no payment in lieu of notice (PILON) clause in the contract of employment.

In addition to the tax advantages, and the substantial savings in both legal costs and management time, the purpose of entering into a Compromise Agreement is to set out clearly the terms of the agreement, so that each party knows where they stand.   

A Compromise Agreement will set out the payments to be made, when they are to be made, the claims settled by the Agreement as well as other terms, such as confidentiality, on-going restrictive covenants etc. and may attach a draft reference.      

One of the requirements of Section 203(1) Employment Rights Act 1996 is that the Employee receives independent legal advice on the Compromise Agreement from a suitable qualified and insured adviser, who will generally be a Solicitor.      In most cases, the Employer will pay for that legal advice and is able to reclaim the VAT element of the Solicitor’s bill.    

Pritchard Joyce & Hind’s employment team is highly experienced in both drafting Compromise Agreements for Employers, and advising Employees on the meaning and effect of the Compromise Agreement, and will be pleased to assist you with any employment law questions which you may have.

The majority of Compromise Agreements are entered into in good faith and will effectively and tax efficiently bring a dispute to an end or maximize a redundancy payment.  However…………….

What happens if the Compromise Agreement is breached?

1. By the Employee

A well drafted Compromise Agreement will provide that if the Employee breaches the terms of the agreement, and in particular, either issues or continues legal proceedings, the compensation monies paid under the Compromise  Agreement are repayable, andor can be set off against any damages awarded against the Employer.

(1)   Issuing or continuing legal proceedings after signing a Compromise Agreement

If the Employee brings Employment Tribunal proceedings in breach of the Compromise Agreement, the Employer is likely to defend those proceedings on the basis that a valid settlement was reached, and the Employee can therefore no longer make a claim.   It is only in exceptional circumstances that an Employment Tribunal will be able to entertain a claim which has been the subject of a Compromise Agreement – see Larkfield of Chepstow Limited v Milne and Another [1988] ICR 1, and it will be up to the Employee to prove that the Compromise Agreement is not valid and is therefore unenforceable.

This could be for Common Law reasons such as duress as in Henessey v Craigmyle & Company Limited [1985] ICR 879 or  that the Compromise Agreement was entered into based on a misrepresentation made by the Employer.

A Compromise Agreement could also be rendered unenforceable because the statutory requirements were not complied with, or because there was a defect in the Agreement – for instance that the claim which has been brought was not compromised by the wording of the Compromise Agreement.    

It is therefore important to ensure that the Compromise Agreement is properly drafted, and that all possible claims are included and settled by the Compromise Agreement.    In practice this usually means not only referring to common law claims but also listing all possible statutory claims - not just restricting the wording to the obvious potential claims which an employee has raised or might bring, with suitable warranties that the employee has told her legal adviser all the facts of the case so that advice can be given as to potential claims.

(2)  Breach of a term of the Compromise Agreement

A Compromise Agreement will contain a number of promises made by the Employee ranging from confidentiality and undertakings not to make detrimental remarks about the Employer to complicated restrictive covenants about future employment and possibly a warrantyassurance that the Employee has not received any offer of new employment.

What happens if the Employer finds out that an important term of the Compromise Agreement has been broken by the Employee?

Much may depend on whether or not the Employer has already paid the monies due to the Employee under the Compromise Agreement.    If the monies have not yet been paid, it is likely that the Employer will not to make the payment, and then defend any proceedings which the Employee may bring to enforce the payment terms.   If payment has already been made before the Employer finds out about the breach, then the Employer’s only recourse is to sue the Employee for the money back or for damages for the breach of contract.     Whether or not the Employer will do this will depend upon a variety of factors e.g. the seriousness of the breach and whether or not the Employee is still likely to have the money, or has assets which make the proceedings worthwhile.

2. By the Employer

By far the most serious likely breach is failure to pay the monies due under the Compromise Agreement, even where an agreement is reached after Employment Tribunal proceedings via ACAS under a COT3.    

Research shows that this continues to be a problem, either caused by the Employer’s insolvency, general unwillingness to pay or the Employee’s failure to enforce a Compromise Agreement due to ignorance of the procedure or inability to afford legal assistance (a common situation where an Employee has not found another job).  

Statistics set out in the Ministry of Justice Research into Enforcement of Employment Tribunal awards in England and Wales (May 2009) show that the prospects of recovering monies awarded by Employment Tribunals are greater if a Solicitor is involved.  The statistics show that 60% of Employment Tribunal Awards are paid in full if Solicitors are involved, whereas only 48% of awards are paid in full if an Employee acts in person.   Only 32% of awards are not part paid if Solicitors are involved, compared with 45% of awards not being paid at all if an Employee acts in person.

If the Employer does not pay the compensation agreed, the remedy depends on whether the Compromise Agreement was entered into as a result of Employment Tribunal proceedings, under a COT3 agreement with ACAS or as a stand alone agreement, independent of legal proceedings.

(1)  Breach of a COT3 Agreement

Although Section 27 Tribunals Courts and Enforcement Act 2007 provides for substantial reform in this area, by allowing direct enforcement of Employment Tribunal Judgments, most of that Act of Parliament is still not in force. Until such time as those provisions do come into force, the Employee will have to register the Employment Tribunal Order in the County Court for enforcement purposes.   This causes delay and unnecessary costs.

(2) Breach of a stand alone Compromise Agreement

Any breach, including non payment, can only be enforced by issuing either County Court or High Court proceedings for breach of contract.   This means delay, court fees and legal costs, although the Employee may be able to obtain a default or summary Judgment, rather than having to proceed to a full trial.

The recent Court of Appeal decision in Gibb v Maidstone & Tunbridge Wells NHS Trust [2010] EWCA 678  overruled the High Court who held that Ms Gibb could not enforce a compromise agreement which she had entered into with her former employer as the payment to her was “ultra vires “ (i.e. outside their powers) because it was “irrationally generous and based in part on irrelevant considerations”.    

The claim arose because after the Compromise Agreement had been signed the Department of Health instructed the NHS Trust not to make payments due under the Compromise Agreement.  Ms Gibb sued to enforce the contract.   She lost her case in the High Court, but the decision has been reversed by the Court of Appeal.   The Court of Appeal said that a public body who sought to rely on its own putative wrong to avoid an obligation had “a very steep high to climb” and that the Trust was entitled to take into account not only the obvious costs of an unfair dismissal claim but also potential management and legal costs and to be generous where a career was arbitrarily terminated which it was unlikely could be resumed.    The decision to pay Ms Gibb £175,000 plus notice monies was therefore within their powers  and could not be avoided as ultra vires.  

The court went on to indicate that (i) even if it was outside their powers, Ms Gibb could have a case based on the breach of the duty of mutual trust and confidence implied into her contract of employment (which was still in existence when the Compromise Agreement was signed) on the basis that they had lead her to believe (misrepresented) that they did have the power to enter into the Compromise Agreement and (ii) the claim which she had made for restitution would also have succeeded, as otherwise the Trust would have benefitted and unjustly enriched itself by withholding the payment whilst leaving Ms Gibb with no remedy.

If you require any advise on matters raised in this article or on employment law generally please contact Janet Long by email at j.long@pj-h.co.uk

The contents of this article are intended for general information only.  It is not a substitute for legal advice, and shall not be deemed to be or constitute legal advice.  We therefore cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. We will, however, be pleased to advise you on the specific facts of your case.