Why Have a Compromise Agreement?

COMPROMISE AGREEMENTS

A compromise agreement is evidence that will be accepted by a court about an employee's agreement not to pursue a legal claim against the employer in return for some kind of benefit.

A compromise agreement can be useful for an employer in order to avoid the publicity, costs or uncertain outcome of a tribunal or court case.

The agreement, known as COT3 (Central Office of Tribunals - form 3), is a contract that legally settles a dispute without recourse to a court of law.

It usually means that an employee will leave his or her job. The benefit, or compensation, is usually a sum of money and, perhaps, an agreement about other issues.

For the law to recognize a COT3, it must be in writing, related to particular legal proceedings and should state that it adheres to the relevant law.

Another requirement is that the employee should have received independent advice from a relevant and insured legal adviser. It is good practice to name the adviser in the agreement.

A court will also recognize an agreement if the Advisory, Conciliation and Arbitration Services (ACAS) has been involved.

A compromise agreement does not stop an employee from taking legal action against the employer for an unrelated dispute. However, an employer can try to stop any such action by including a general waiver. The waiver should state that the agreement is a full and final settlement of any claims the employee might have against the company arising out of the employment or its termination. An employer would need to specify in the agreement particular claims in order to make sure that the waiver applies.

The agreement should also make clear the terms of the settlement package that ends the workers employment. It should cover how much is paid and how, what happens to pensions and issues such as references.

There is a special onus on public authorities to be careful about payments they make. In 2009, a High Court, in the case Gibb v Maidstone and Tunbridge Wells NHS Trust, judged that a settlement payment of around £250,000 was irrationally generous. The court said that a public body should act in the public interest and not perversely. Yet, this decision meant that the employee could not lodge a legal claim because it had been out of time.

Employers have been known to attempt to back track on promises they have made to pay. Dresdner Kleinwort Ltd., a German bank with operations in London, tried this in 2009. Senior managers admitted that they had agreed compromise agreements that included £12.6m in bonuses. But they went on to say that they needed that money back because of a current financial disaster they were experiencing. The High Court judged that employees did not have to pay back money they were awarded in a contract.

Taxation can apply to a compromise agreement's financial package. It is therefore good practice to break down the different parts of a payment and specify what part is for what reason. If a payment is over £30,000, then the part above that amount will be taxed at the marginal rate. Furthermore, any salary that is owed will be subject to the normal income tax rate. So, it may be in the interest of the employers to state in the agreement that any taxes will be dealt with by the employee.

There is no one size fits all compromise agreement that can be pulled off the shelf. It is good practice to ensure that an agreement fits the relevant facts of the case.

Taking professional advice is the best way to ensure that circumstances are fair to all parties concerned and to ensure your rights are being respected.

Paul Sharma is the Managing Partner at Sharma Solicitors.

Sharma Solicitors is a specialist Employment Law firm which deals with issues of redundancy and all aspects of employment law.

For further information and a free confidential initial consultation please call on 0845 430 0145
Visit: http://www.sharmaemploymentlawsolicitors.co.uk/