Compromise agreement may be a complex subject for employers but it is very necessary. Experts assert that the deal could be a lifeline in instances when the employer may face a dilemma over terminating an employment abruptly for inevitable and unforeseen reasons. The document could also be important in helping a business avoid any possible legal hurdle or claim that an employer may file in the future. The compromise agreement must be based on current UK legislation as well as best practice.
The first thing any employer should do when considering embarking on a significant change in business landscape is to consult a competent and highly experienced employment lawyer. A compromise agreement is a legal device backed by the employment law for providing a cleaner break between a departing employee and his employer. The main objective is to settle several or all claims that may arise out of the employment and its termination. The mutually agreed document states a severance pay by the employer. This payout is in exchange for the employee’s agreement not to pursue any possible claim before an employment tribunal or a court against the employer in the future.
Often, the compromise agreement is used when there is a redundancy situation or an employee performance issue, wherein there could be a possible risk that the employee may make any claim against his employer. Such a risk may also arise from possible exit issues like post-termination competition. The agreement may also be suitable if the employer has less time or has less option to subject the company to risks of going though any full procedure, whether performance-wise or disciplinary. Basically, the document could help avoid any other form of potential litigation in the future.
Preventing future legal proceedings
An employer needs to uphold and offer a compromise agreement if he mistakenly raised to the employee the possibility of any ‘agreed departure’ too early. Such an action may suggest the weakness of the employer’s case; it also has limited merit and may possibly undermine an employer’s case in subsequent legal proceedings in the future. A badly handled approach may also justify an employee’s claim of unfair dismissal. The employer should realize that it is not anymore safe and advisable to meet an employee ‘for a quiet word’ in private.
Is a compromise agreement used only when a senior employee is involved? Certainly, such a document would be particularly significant if a senior employee is being terminated. The priority in such a case is to facilitate reassurance for both parties. However, because junior employees could also possibly expose an employer to legal risks (like possible discrimination on gender, age, race, and disability), compromise agreements are also recommended for them. In general, a compromise agreement may be used for all employees.
However, a compromise agreement should not serve as a substitute for proper following of procedures in dealing with dismissal or disciplinary issues. The document should not be treated as a mere ‘cheque book management.’ On the other hand, a compromise agreement may also be used for resolving other employment issues, including a possible dispute between the employer and the employee.
In redundancy situations, the compromise agreement is used by employers to prevent employees from possibly appealing to an employment tribunal following the job loss. Employers need to make sure that if they are paying employees above the limits, there should be a document that would outline the agreement and prevent the employees from potentially pursuing claims against the employers in any point in the future. An employer who does not strictly comply with current employment laws on making redundancies should offer a compromise agreement to prevent any claim or case of unfair dismissal, which would be costlier in the end and much more tedious to deal with.
Thus, the compromise agreement is the only effective measure to make any employee resist complaining before the employment tribunal after a redundancy. The exit package that comes with the redundancy could be instantly turned into a final and full settlement of any possible claim the employee may have against the employer. It is possible only through a compromise agreement.
A compromise agreement would usually ensure than there would be no further action to be taken by an employee against the termination of employment. However, in rare and special cases, it may still be possible that a claim is filed against the employer. Therefore, a well-termed and executed document must cover every aspect that may be relevant when added to normal contractual issues of payment, benefits, notice periods, cars, bonuses, tax liabilities, and others. It is important that agreement be properly drafted.
Costs and clauses
Any employer should be aware that he should shoulder all costs of an employee’s hiring of an independent employment solicitor. The law requires an employee to take a third-party legal advice from an employment specialist. The cost usually ranges from about £150 to £500. However, it may be costlier than that, depending on the pricing of the solicitor’s services. The employer must not force the employee to hire a solicitor but he could provide a friendly guidance through providing lists of employment lawyers in the locality. It is always up to the employee to decide which law specialist to hire.
There are specific and necessary clauses that are usually included in a compromise agreement. These clauses are often categorized under these headings: termination of employment, definition of terms, accrued benefits and salaries, secrecy and confidentiality, expenses, retention/ return of any company property, restrictive covenants, final and full settlement, and legal fees. In some cases, these clauses are added: share options, agreed references, outplacement support, and resignation of directorship.
The employer must compensate for the loss of employment despite dealing with a loss of office. This is particularly true when any director in involved. It is a common knowledge that directors are rarely remunerated for holding an office or position in a company.
Taxation may be imposed to a compromise agreement term regarding payouts. In general, termination payments that are equal to or below £30,000 are exempt from tax. However, any amount in excess would automatically be taxable. The compromise agreement may state who is appropriately liable for tax sums paid over the amount limit.
Most employers use a standard formula when computing for redundancy payments as stated in a compromise agreement. These payouts usually take into account the employee’s salary, length of service to the employer, and age. Thus, experts advise to individualize each compromise agreement as much as possible.
Support and enforceability
An outplacement support may be included in a compromise agreement. There are clear benefits to both the employer and the employee. Larger businesses offer outplacement to employees. The employer has the right to consider including the support to any compromise agreement. Details should be discussed with the employee prior to completion of any deal. There may be recommendations from an employee’s solicitor regarding provisions on outplacement support in an agreement.
Do not be surprised that compromise agreements are usually being challenged for their enforceability. Thus, the documents may turn more technical in nature. An agreement may be used for implementing an outright dismissal of an employee or for abruptly changing terms and conditions of a contract. The former may be tied to a new employment or service contract signed at the same time.
Great and proper care should be taken when wording the compromise agreement. This is to prevent any subsequent claim that may be due to possible amendments in legislation. Thus, experts always recommend to employers proper consultation with employment law specialists, who could appropriately and more effectively deal with all the intricacies and technicalities of any compromise agreement.
The Human Resources department should always make sure that it is properly updated with any latest legislation or changes to current employment laws that may affect compromise agreements. The Personnel department should make sure the company has proper and adequate legal guidance so that there would always be protection against time-consuming and expensive litigation.
The garden leave
The employer also has the option to serve a garden leave to the employee as part of an employment contract or a compromise agreement. The term is describing any situation wherein an employee is asked or required to serve a period of notice outside the office, probably at home or in his garden, thus the phrase. During the entire period of notice, the employee would continue to receive every salary and benefit provided as a regular employee. However, the same employee is still prohibited from taking another employment from any new potential employer until the entire garden leave period has expired.
Employers should be very careful when terminating employments. They should also be cautious when drafting a compromise agreement to make sure the document would cover every aspect of the employment termination. There may be other provisions to be included like non-compete clauses and restrictive covenants. In any way, the employer must be prepared to spend a considerable amount of money. The employee must be offered with hefty and attractive exit packages for him to sign any compromise agreement offered by the employer.