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Five things you may not know about compromise agreements
Compromise agreements (soon to be called “settlement agreements”) are familiar to almost all HR professionals. They are a very common and useful tool in providing employers and employees with a clearly defined break in their relationship/dispute. However, there is more to them than meets the eye and, in this article, we touch upon some aspects that are less well known.
1. Claims that may not be settled by a compromise agreement
- Claims for breach of the information and consultation duties on a collective redundancy situation. This is an important point to be aware of given the potential liabilities involved (a protective award of 90 days’ actual pay per affected employee) and why lawyers are particularly concerned where there may be a breach of these provisions by their client.
- Claims for breach of certain obligations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (e.g. failure to comply with the information and consultation obligations, failure to pay a protective award and failure to provide employee liability information).
- Claims under the Agency Workers Regulations 2010 (e.g. in respect of the right to equal treatment as employees after reaching the qualifying period of service).
- Claims for breach of regulations in relation to blacklists of trade union members and activists.
ACAS can conciliate on the above claims, so they can be settled in that way. However, claims need to have been instigated in order for ACAS to be in a position to conciliate, so they cannot be waived “in advance”.
- Right to statutory maternity, paternity or adoption pay. Note that claims for enhanced benefits/payments under a company scheme may be waived. The restriction only applies to the statutory payments as this is a state benefit.
- Personal injury claims that have not yet arisen (i.e. claims for future injuries).
- Accrued pension rights. However, note that many claims in relation to occupational pension schemes would be against the trustees of the pension schemes, not the employer.
- There is uncertainty about whether future claims may be waived. Although case law suggests that they can in theory – provided the wording of the relevant waiver is “absolutely plain and unequivocal” – there have been no cases approving a specified form of wording to this effect.
- Compromise agreements cannot stop individuals making a protected disclosure under the Employment Rights Act 1996 (i.e. whistleblowing). That is, although whistleblowing claims may be settled/waived by a compromise agreement, clauses in such agreements (e.g. in relation to confidentiality and not making derogatory statements about the employer) are void in so far as they seek to restrain individuals from making protected disclosures. Compromise agreements therefore normally contain a provision confirming that nothing within them prevents an individual making a protected disclosure. Further, an employer cannot claim back the termination payments by enforcing a repayment provision in a compromise agreement (which is normally triggered in the event of a breach of the agreement) if the “breach” is the individual having made a protected disclosure in accordance with statute.
2. Statutory requirements for a compromise agreement
These are conditions that must be satisfied in order for a compromise agreement to constitute a valid waiver of claims barring individuals from bringing a claim before a Tribunal. If the conditions are not satisfied, the individuals will be able to bring a claim notwithstanding the fact that they may have signed the agreement. The statutory requirements are:
- The agreement must be in writing
- The agreement must relate to a “particular complaint”/”particular proceedings” (this is why most agreements contain a space requiring the employee’s adviser to specify what specific claims their client has against their employer).
- The individual must have received legal advice on the terms and effect of the agreement from a relevant “independent adviser”. People often assume that this must be a qualified lawyer, but that is not the case. Trade union officials and employees/volunteers in the voluntary sector (e.g. Citizens Advice Bureaux) who are authorised to and certified by the union/organisation as competent to give such advice (provided they are not paid for the advice, in the case of those in the voluntary sector) may also provide this advice, as may Fellows of the Institute of Legal Executives employed by a solicitors practice.
- The independent adviser must have a current contract of insurance/professional indemnity insurance covering the risk of a claim by the employee in respect of the advice given.
- The agreement must identify the independent adviser.
- The agreement must state that the conditions regulating compromise agreements have been satisfied (this quite a “legalistic” provision which refers to a number of specific statutory provisions).
3. Delayed “Termination Date” – have two compromise agreements
- As a general rule, where the “Termination Date” (i.e. the date employment terminates) occurs on a date after the compromise agreement is signed, a second compromise agreement should be signed on or after the Termination Date confirming the waiver of claims provisions and waiving any new claims that may have arisen between the date the first agreement was signed and the Termination Date.
- One example where this may be relevant is in relation to the departure of a senior employee with a long notice period who will be required to work his notice and complete a handover of duties but with whom severance terms are agreed during or before their notice period.
- Independent advice is required again when the second agreement is signed and the termination payments are also be triggered at that point.
4. Consideration for restrictive covenants
- The basic principle is that there must be consideration/payment for new restrictions (e.g. new post-termination restrictive covenants, new or broader confidentiality obligations and/or non-disparagement obligations). Such consideration is fully taxable and subject to National Insurance Contributions.
- It is advisable to allocate a separate payment towards such restrictions in the compromise agreement (this is usually a small amount) to avoid the risk of HMRC deeming the main severance payment under the agreement as consideration for the restrictions and, therefore, taxable in full.
- HMRC Statement of Practice 3/96 contains useful guidance and examples on this issue.
5. Continuation of insurance
- Always check with the insurer in question before agreeing to provide the employee with continued cover under any relevant insurance policies (e.g. private medical insurance) for a period after employment.
- A number of providers refuse to provide cover after employment has ended, or will only agree to do so until the policy’s next renewal date.
- If the compromise agreement provides for a continuation of cover and the promise cannot be honoured, the employer is liable to a claim for breach of contract and to provide equivalent benefits, which could be very costly.