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With an increasing amount of employee legislation, writing a compromise agreement is becoming more and more popular for employers who want to save themselves the worry of a claim or a trip to Tribunal. Julia Carter, solicitor at Human and Legal Resources Limited, explains exactly what is involved. With an increasing amount of employee legislation, writing a compromise agreement is becoming more and more popular for employers who want to save themselves the worry of a claim or a trip to Tribunal. Julia Carter, solicitor at Human and Legal Resources Limited, explains exactly what is involved.
A Compromise Agreement is a way of reaching a settlement with your employee where there is concern that he or she could bring a claim against you, perhaps for unfair dismissal or discrimination. Once they have signed, that employee cannot then pursue you through a court or Tribunal for matters arising out of their employment though the agreement will not usually prevent an employee bringing a claim in respect of any work-related injury.
How much you decide to offer depends on what the parties agree. The lawyer advising the employee will consider what claims they may have in order to advise whether it is in their best interest to accept. It is therefore advisable to pitch the settlement at a realistic sum, bearing in mind they will probably try to negotiate upwards.
In addition the employee is likely to have contractual claims e.g. unpaid wages, contractual notice, loss of benefits but also, an employee who proves that s/he has been unfairly dismissed, would normally get a basic award (based on age and number of years service). Such an employee would also receive a compensatory award for financial loss following termination. So, you should consider how long it will take this employee to find another job that will pay a similar amount bearing in mind the employee’s age and experience, the industry and the financial climate at the time. Generally, three to six months net salary is a reasonable starting point.
Settlement will frequently include a number of different elements such as unpaid salary, holiday pay, notice pay, redundancy pay, compensation for loss of office and so on. It is important for tax purposes that these are separately identified. There is a common misconception that the first £30,000 of any termination payment is tax free, but this is not necessarily the case. If any of the payment is classed as “earnings” it will be taxable and this would include most payments that are received under the employee’s contract of employment e.g. unpaid salary, holidays, bonuses and notice pay. (Notice pay is only contractual if you have a clause in the employee’s contract allowing the you to elect to pay them in lieu of notice – if there is no such clause then dismissal without notice will be breach of contract and any sum paid “in lieu of notice” will actually be compensation.) Payments made purely as compensation for loss of office and redundancy pay come under the £30,000 tax-free limit.
Basically you are asking the employee to contract out of his/her right to bring proceedings arising from his/her employment and this can only be done with a Compromise Agreement which must comply with certain legal requirements. Even if you agree to pay an employee a sum of money and asks them to sign to say he or she accepts that sum “in full and final settlement of any claim that the employee may have against the Company” this is NOT binding in law and will not prevent an employee from taking the money AND bringing a claim.
A Compromise Agreement is only binding if:
- it is written.
- it relates to particular proceedings. In fact most lawyers now draft Compromise Agreements to include a list of every possible claim an employee may consider bringing and gets the employee to confirm the list includes potential claims that s/he has and that s/he has taken legal advice to this effect.
- the employee receives advice from an independent legal Adviser on the agreement, who is named in the agreement and covered by insurance. The Adviser needs to advise the employee of the effect of the agreement on his/her ability to bring a claim before an Employment Tribunal. It is usual for the employer to pay money to the legal adviser for the advice given to the employee and to ask the Adviser to sign a certificate to confirm that s/he has complied with the above.
- the agreement states that the conditions regulating compromise agreements are satisfied.
If the Compromised Agreement has complied with all of this, even if you might have been forced to shell out more than perhaps you had hoped for, you can at least relax in the knowledge a nasty claim or a trip to Tribunal is not lurking around the corner.
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