Coming to a Compromise

Compromise agreements are legally binding documents stipulating the terms on which you and your employee agree that their employment will be ended. The deal usually involves payment of a sum of money, in return for which the employee agrees not to pursue specified tribunal claims against you.

This may seem a strange arrangement because as an employer, you are not usually allowed to enforce an agreement that stops an employee from bringing a tribunal claim. However, the law says this restriction does not "apply to any agreement to refrain from instituting or continuing... any proceedings".

What are the statutory requirements?  

For a compromise agreement to be valid, however, it must satisfy certain statutory requirements:  

• it must be in writing
• it must relate to the “particular proceedings”
• the employee must get independent legal advice from a relevant, independent adviser before signing on the terms and effect of entering into the agreement.   The adviser must be a qualified lawyer, a Citizens Advice Bureau or Law Centre adviser or a trade union official certified by the union as competent to give advice who did not have any relationship with the employer when they gave the advice
• the relevant independent adviser must have insurance to cover the risk of a claim against them by the employee in respect of the advice
• it must identify the adviser
• it must state that the conditions regulating compromise agreements have been satisfied

What are particular proceedings?

In Hinton v University of East London, the Court of Appeal said that, to compromise a potential claim, the agreement has to specifically identify the claim either by describing it (for instance, unfair dismissal) or by referring to the relevant section of the statute. You cannot, for example, rely on an agreement that tries to settle “all outstanding claims.”

In Palihakkara v British Telecommunications plc, BT came a cropper because of a badly drafted agreement. First of all, it did not satisfy all the statutory requirements as there was no reference to the relevant sections of the race and sex discrimination legislation in order to compromise those claims.

And although the agreement said that it was in "full and final settlement of all claims past or future arising out of the termination of her employment", Ms Palihakkara argued successfully that only claims arising on termination were compromised, not claims that had arisen during her employment.

Why must employees have independent legal advice?

Section 203 of the Employment Rights Act 1996 says that employees must receive independent legal advice from someone who is professionally qualified so that the agreement is legally binding - usually a solicitor or qualified trade union advisor.

This ensures that the employee cannot later claim that they did not understand what they were signing. You, however, are usually expected to foot the bill for any legal expenses that the employee incurs.

Does your employee have to pay tax?

That depends on how the payment is made up. Employees usually have to pay tax and national insurance on any wages and holiday pay.

Generally, the first £30,000 of a payment given as compensation for loss of employment is tax free, as are redundancy payments up to £30,000 (both contractual and statutory).

Payments in lieu of notice are also tax free, provided that there is no contractual right to pay in lieu. Benefits such as continued use of a mobile phone or company car are usually tax free.

Even if the payment is being made to the employee tax free, the agreement normally makes clear that if Her Majesty’s Revenue and Customs state that tax or national insurance is payable, the employee is responsible for paying it, not you.

Can you insist on a confidentiality clause?

Confidentiality clauses are fairly standard in compromise agreements, although sometimes they only cover the terms of the agreement. So an employee can still tell people that they have come to an agreement with you about the termination of employment or tribunal claim, but cannot say what the terms of the agreement are.

Some agreements, however, stipulate that the employee does not even tell people that they have reached an agreement.

Can you insist on a "non-derogatory statements" clause?

Some agreements contain a "non-derogatory statements" clause to stop your former employee from bad-mouthing you or people who work for you.

It is possible to make the clause mutual so that neither side can make derogatory or disparaging statements about the other.

Can you stop an employee from going to the press?

That depends on the type of confidentiality clause in the agreement and whether there is a "non-derogatory statements" clause. If you are concerned about potential bad press, you should ensure that you include such a clause in the agreement.

What about references?

There is generally no legal obligation on you to provide a reference, but if you do, it should be true, accurate and fair. If not, you may be found guilty of misrepresentation.

If your employee asks you to incorporate a reference into the compromise agreement, this then becomes part of the actual agreement.

Implying Dismissal

Mr Dixon had worked for Homeserve for nearly seven years when, in April 2006, he and a colleague were spotted by their manager, Mr Pye, doing a "foreigner" (vernacular for doing a private job).

He was suspended on full pay and invited on 24 April to a disciplinary hearing to consider the allegation of "breach of contractual obligations, namely conducting private business using company property."

Mr Dixon admitted the charge and was summarily dismissed for gross misconduct on 2 May. He exercised his right of appeal, but was unsuccessful and then claimed unfair dismissal.

The DDP procedures require employers to follow two steps. Step 1 says they must send their employee a letter setting out the alleged conduct that might result in dismissal or disciplinary action. Step 2 says employers must set up a meeting, once they have informed the employee what it’s all about and the employee has had a reasonable opportunity to think about how to respond

Relying on Alexander v Brigden Enterprises Ltd, the EAT said that the employer only has to state the issues in "broad terms" in the step 1 letter. In other words, that the employee is at risk of dismissal and why. In this case, the EAT said that it was implicit in the employer’s letter of 24 April that dismissal was a possible outcome from the hearing.

The EAT then said that although the statutory procedure refers to step 1 and step 2, it is not "a requirement that the step 2 events should follow the step 1 letter. It seems to us that the matters set out in step 1 may precede or come at the same time as, or post date, the step 1 letter".

The EAT said that it was obvious from the letter that Mr Dixon would immediately know why he was being asked to a disciplinary hearing, as it specifically said that Mr Pye (who had caught him red-handed) would be presenting the case against him.

The EAT therefore dismissed the claim of unfair dismissal.

Dismissing Injustice

The law says that employers can dismiss an employee as a result of pressure from a third party. However, the Employment Appeal Tribunal (EAT) said in Greenwood v Whiteghyll Plastics Ltd that employers must consider whether doing so would result in injustice to the employee.

What happened?

Mr Greenwood was employed as a shop fitter by Whiteghyll who hired him out to work in different stores, including Morrisons. In mid-2006 the chain made a number of complaints about his work, and barred him from their stores. Whiteghyll had no alternative work for him, and after a disciplinary haring, he was dismissed. His appeal was rejected, and Mr Greenwood claimed unfair dismissal.

The tribunal found the dismissal fair "for some other substantial reason" under section 98(2) of the Employment Rights Act (ERA) 1996, saying that although Mr Greenwood did not think it fair that Morrisons should dictate to his employer, the reality was that it had the "whip hand."

It also thought his employer had acted reasonably under section 98(4) of the ERA. Given that the supermarket chain refused to have him back and there was no other work available, Whiteghyll had no alternative but to dismiss him.

Although the EAT agreed that pressure from a third party can justify dismissal, it found against the company saying that it had failed to consider the very important factor as to "whether there will or will not be injustice to the employee and the extent of that injustice." It should, therefore, have considered his length of service, whether it was satisfactory or not, and the difficulties he might face in obtaining other employment.

The EAT accepted, however, that even if the tribunal had considered the injustice to Mr Greenwood the outcome might have been the same. On the other hand, given that the tribunal did not make any finding criticising Mr Greenwood's work, it might have found the injustice he suffered was so severe that the company should have reorganised its business. For instance, Mr Greenwood could have taken the job of the person who took over his job at Morrison's.

Ultimately, however, the EAT did not know how the tribunal "would have determined this matter and it cannot be shown that after considering these matters, it would inevitably have upheld the dismissal of the claimant as being a fair one."

The appeal was therefore allowed and the case remitted to a different tribunal to consider these points.

IN BRIEF

Under a new system of civil penalties (effective from February 2008), the Government has announced that employers who negligently hire illegal workers could face a maximum fine of £10,000 for each illegal worker found at their business. If employers are found to have knowingly hired illegal workers they could incur an unlimited fine and be sent to prison.

Over the next 12 months the Border and Immigration Agency will also introduce:

• an Australian-style points based system "to make sure only workers with the skills to benefit Britain’s economy come to the UK"
• a single border force bringing together the Border and Immigration Agency, Customs and UK visas
• compulsory ID cards for foreign nationals

The Government also recently announced that, under the points based system, employers and colleges will need a licence in order to sponsor migrants. To earn and hold a licence they must agree to fulfil certain duties.

To build awareness of these new measures, the Government has launched a national press advertising campaign and has enhanced the employment verification scheme for employers.

For more details, go to: www.bia.homeoffice.gov.uk/aboutus/newsarchive/employersfacenewfines