Compromise Agreements

Perhaps for obvious reasons, we have seen an increase in businesses seeking to reduce payroll costs. There are a number of ways in which this can be achieved*. However, one common concern for most employers is how to ensure departing employees do not bring unfair dismissal claims. You do not want to pay a settlement sum and still have to defend a costly and time-consuming tribunal claim.

Compromise Agreements are one of the only (and by far the most common) ways of preventing employees bringing unfair dismissal claims. The question of whether an employer should use a Compromise Agreement for all departing employees is often not a straightforward one.

The reasons why you may want to enter into a Compromise Agreement include:

• To ensure an employee cannot bring an unfair dismissal claim. It can cost up to £72,900 in compensation plus the legal costs and wasted management time of defending the claim.

• To document sums paid to employees by way of settlement. This prevents costly disputes over whether employee has, for example, been paid at least the statutory redundancy pay and can help justify any tax free payments.

• To impose restrictions (or maintain existing restrictions) over what the employee can or cannot do after termination.

• To ensure employees who are also directors resign their directorship on termination of employment. This avoids the time-consuming and costly problem of forcing a director's removal from office.

However, possible downsides to employers of entering into Compromise Agreements include:

• For the agreement to be valid, the employee must be advised by an independent legal advisor. This could increase the chances of a claim being brought against the employer.

• It is unlikely that an employee will enter into a Compromise Agreement unless they are paid more than the minimum the employer is required to pay.
• Although not a legal requirement, it is standard practice for the employer to contribute to the employee's legal costs of being advised on the agreement (usually around £250 plus VAT).

In deciding whether a Compromise Agreement should be entered into, you should ask our advice on the range of factors that affect this type of arrangement. These include the number of employees being dismissed, the amount of the termination payment(s), the potential cost of any unfair dismissal claim(s), the likelihood of a claim/dispute arising and the prospects of successfully defending such a claim.

If you would like to discuss this subject further, or require more detail about the process of entering into Compromise Agreements with your employees, please contact Alistair Latham or Mark Daubney on 01482 324591 or e-mail mtd@sjplaw.co.uk.

* See details from our September 2008 Update, which is available here.

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