Ending with a compromise: top tips on compromise agreements

1.   First port of call will be negotiation of the commercial terms of settlement.  Obviously the relevant contractual and statutory claims will be the starting point for assessing the appropriate amount of compensation.  Adjustments should be made to take into account any potential uplift or discount for failure to comply with the statutory dispute resolution procedures, together with discounts for accelerated receipt and litigation risk.  The tax treatment of the settlement sum will also be relevant to the headline number.  If the payment can be made without deduction of taxes then it obviously is worth more in the hands of the employee. 

2.   Employers should consider offering greater or lesser “sweeteners” rather than increasing the headline settlement sum.  Often the value to the employee of some of these “bells and whistles” can be far greater than the financial cost to the employer.  One example is the continuation of insurance policies or other benefits to the next renewal date.  However, it is critical for the employer to check with the insurer before offering this otherwise it may be “self-insuring” and have to bear the cost of any claim direct from its own coffers.

3.   Think carefully about payment structuring.  Payments in instalments is an attractive option for the employer, particularly where they are concerned about compliance with the terms of the compromise agreement.  It is not unusual for some proportion of the payment to be withheld, depending on compliance with, for example, post termination restrictions or an obligation to return company property.  Alternatively if the extent to which an employee will be able to mitigate their losses is proving a stumbling block to arriving at a settlement figure, one option is to provide for payments to be made in instalments, combined with a contractual obligation for the employee to seek alternative employment.  You could then include a clause providing that should they be successful in that search, further payments to the employee will cease or be reduced accordingly.

4.   The compromise agreement should certainly square off any incentive structures such as bonus/commission payment or share option/shareholdings.  In respect of bonus payments, while employees will naturally prefer payment of a cash bonus as a lump sum as part of the compensation figure, a much more attractive option for the employer is simply to provide that the employee will be considered for bonus at the same time as other employees and on the same terms.  Bear in mind, however, that this may simply be storing up disputes for the future.  Similarly, while share incentive arrangements are normally governed by their own strict rules, it is worthwhile to record in the compromise agreement whether the employee is a good or bad leaver and the value or amount of shares/share options that they may retain post termination so that there can be no room for further dispute.

5.   Senior employees who may be directors or office holders will often seek in the compromise agreement reassurance that they shall continue to benefit from any officers’ liability insurance cover the company has, together with the continuing right to benefit from indemnities (if any) covering directors in the performance of their duties which may be contained in the employer’s Articles of Association.  Employers should make sure that any commitment is for a limited period only or, even better, only for such period as existing directors will continue to receive such benefit.  The company’s senior management are unlikely to thank you if, in the event of a dispute, their departed colleague is better protected than they are.  Again, remember that you can only offer what the insurance policy allows.

6.   The introduction or re-statement of restrictive covenants is often a stumbling block in negotiating a compromise agreement.  If the covenants contained in the service agreement are well drafted it will normally be best for the parties simply to acknowledge that these remain in force.  If new covenants are being introduced or old covenants varied then fresh consideration will be needed for these.  Bear in mind that payments offered in return for restrictive covenants are taxable in full and also subject to national insurance contributions, so best to allocate some proportion of the compensation payment specifically to the covenants.

7.   Clauses dealing with statements and secrecy are another contentious area.  Think carefully about what realistically can be achieved on either side.  Employers should steer clear of provisions that “the employer” will not make particular statements, as this leaves open the possibility of argument that a statement in the pub by the most junior member of staff is in breach of the agreement.  Obligations should therefore be limited to particular named individuals or to a particular level of seniority, such as board members.  Having said that, both sides are well advised to remember that these sorts of protections are notoriously difficult to police and even harder to enforce.  For this reason it is best to try and avoid getting bogged down with these clauses.  They are most often honoured - and ignored – in the breach.

8.   In the scramble to get the document agreed, don’t overlook the most important thing of all, which is to achieve an effective waiver of claims.  Recent cases suggest that Tribunals will carefully scrutinise the scope of waiver clauses, and the last thing you want is for deficiencies to be identified which mean the agreement does not effectively waive the very claims you wanted to waive.  It remains the case that compromise agreements commonly seek to waive all possible claims, whether or not there is any realistic prospect of such claims existing.  There is nothing wrong with this in principle.  However, it is critical to record in the agreement the particular proceedings or particular complaint which is at the heart of the dispute and which has driven the settlement.  This is particularly important if there has been no open exchange of correspondence between the parties documenting the points of dispute.  Similarly, the agreement must state that the conditions regulating the use of compromise agreements for that particular claim have been satisfied.  A recent case held that failure to include a statement to this effect rendered the waiver invalid. 

9.   If a Tribunal claim is already underway, do consider using a COT3 Form rather than a compromise agreement to settle the dispute.  These fall under different rules from compromise agreements, and it is far easier to achieve an effective waiver of all possible claims through a COT3.  COT3 agreements require the input of an ACAS Conciliation Officer and so may not be an option if the parties have negotiated a deal directly between themselves.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.