Tuesday, 31 January 2012

A Compromising Situation

The Government has announced its intention to consult on the existing use of Compromise Agreements in the workplace, and to consider whether the law governing their use by employers should be simplified.  Here is a brief look at the law as it stands, and the opportunities and pitfalls a Compromise Agreement can present.

A Compromise Agreement can offer a means of bringing an employment relationship to an end without recourse to protracted disciplinary, grievance or capability proceedings, whilst protecting the employer from potential litigation.  Such agreements are often seen as a “way out” of a difficult situation for both employer and employee.

So what is a Compromise Agreement?
It is a legally-binding agreement between an employer and employee which usually provides for, or follows, the termination of employment (though it can be used in other circumstances).  In most cases the employer agrees to make a payment in exchange for the employee’s agreement to waive their rights to bring certain legal claims. The agreement must comply, however, with precise legal requirements regarding its formation.  There are also some claims which cannot be waived by a Compromise Agreement, including:
-          Personal injury claims which have not yet arisen
-          Claims in relation to accrued pension rights (except in certain, very limited, circumstances)
-          Claims for failure to inform and consult representatives on collective redundancies
-          Claims for failure to inform and consult or to pay compensation equivalent to a protective award under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
-          The right to statutory maternity, paternity or adoption pay

In addition there remains uncertainty over whether a Compromise Agreement can be used to waive future claims which have not yet arisen.  Whilst this is definitely not possible in relation to personal injury claims, various legal judgements have suggested that it might be for other types of claim.

What are the current statutory requirements for a valid Compromise Agreement? 
1.      The agreement must be in writing
2.      It must relate to a “particular complaint” or “particular proceedings”.
3.      The employee must have received legal advice from a relevant independent adviser on the terms and effect of the proposed agreement and its effect on the employee’s ability to pursue any rights before an employment tribunal
4.      The independent adviser must have a current contract of insurance or professional indemnity, covering the risk of a claim by the employee in respect of loss arising in consequence of the advice.
5.      The agreement must identify the adviser
6.      The agreement must state that the conditions regulating compromise agreements have been satisfied.

What is meant by “particular complaint” or “particular proceedings”?
It means that a “catch-all” waiver, often used in standard termination agreements, will not be enforceable.  The agreement must specify the individual claims which it is intended to settle, eg, unfair dismissal, disability discrimination.

Who qualifies as an “independent legal adviser”?
Either a
1.      Qualified lawyer
2.      Officer,  employee or member of an independent trade union who has been certified by the union as competent to give advice and as authorised to do so on its behalf
3.      Representative at an advice centre (employee or volunteer) who has been certified as competent to give advice and as authorised to do so on its behalf, provided the employee has not paid for the advice.
4.      Fellow of the Institute of Legal Executives employed by a solicitor’s practice.

What is the extent of the legal advice which must be given?
The adviser must advise the employee on the terms and effect of the Compromise Agreement, in particular its effect on their ability to bring an employment tribunal claim under the relevant legislation.  The adviser is not required to take a view on whether the settlement on offer is good, or to advise the employee on the potential merits of an employment tribunal claim, but in practice many will do so.

What are the pros and cons of using a Compromise Agreement?

The potential benefits are:
·         They offer a “clean break” for both employer and employee
·         They offer a degree of certainty to the employer in relation to potential litigation
·         They can be drafted and agreed relatively quickly

But there are potential pitfalls.....
·         If badly drafted they may not protect the employer against future litigation
·         If used inappropriately, their suggestion at the employer’s behest can leave the employer exposed to claims of constructive unfair dismissal and unlawful discrimination.  Although conversations surrounding the possibility of a compromise agreement will usually be labelled by the employer as “without prejudice,” they may turn out not to be so where they have not been used as a means of resolving a genuine existing dispute, ie, where the employee has been “ambushed”.
·         The requirement that the employee takes legal advice can open up the possibility of claims which the employee might not otherwise have considered, ie the “can of worms” scenario.

It remains to be seen what will come of the government’s intended consultation in this area.  Until then, employers would be wise to consult their legal or HR advisers before considering the use of a Compromise Agreement.

Please note that the above should not be construed as legal advice, and the writer bears no liability for any loss arising from actions taken in consequence of reading this article.



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