Compromise (Settlement) Agreements

Q. One of my senior employees is causing all kinds of issues and rather than go through a disciplinary process I want to offer her a compromise agreement to protect the company against all claims. How should I go about this, and what issues should I watch out for?

Compromise agreements offer an alternative and often more expedient way of resolving workplace disputes compared with drawn out processes and / or painful tribunal appearances.

The CIPD reported in a survey of UK employers in 2011 that more than half of companies have used compromise agreements in the past two years as a means of resolving workplace disputes. The average compensation package varies depending on the circumstances, the length of service and seniority of the employee. The government is expected to encourage the further use of compromise agreements including proposals to change the name to ‘settlement agreements’ in an effort to promote a more positive and balanced image of respective powers of both the employee and the employer in making an agreement.

NOTE: As the changes BIS is making in GB have implications for some UK-wide legislation which also has application to Northern Ireland, the Department for Employment and Learning here is minded to facilitate the same change in Northern Ireland, and sought feedback in April from key stakeholders on whether there are any drawbacks to this course of action. We are not aware of any opposition to the change in NI and anticipate compromise agreements to be renamed settlement agreements throughout the UK.

What are compromise agreements and where’s the advantage in using them?

A compromise agreement is a legally binding, written agreement either during or following the termination of the employment, and which brings the employment to an end. It is recognised by statute and is the only way (other than through an LRA facilitated settlement) one can validly "contract out" of their employment law rights. It usually provides for a severance payment, in return for which the employee agrees not to pursue any claim or grievance they may have in an employment tribunal. The employee must take advice from an independent, qualified advisor on the agreement for it to be valid and the employer will normally pay for the cost of this or pay an agreed fixed sum towards the cost. Other conditions must also apply for the compromise agreement to be valid.

Employers have for many years now increasingly used compromise agreements as a mechanism for preventing possible future complaints to a tribunal. The CIPD survey found that major reasons for using the compromise agreement (other than to settle an existing claim) are:

• to remove an employee on the grounds of poor performance or misconduct (39%)
• to avoid legal challenge in redundancy situations (26%)
• to make it easier to remove senior staff without embarrassment (24.3%)

Even where an employer has followed a fair process, many will still prefer the employee to sign a compromise agreement to ensure that the process is concluded with the assurance that there will be no future tribunal claims allowing the business to move forward.

The Labour Relations Agency can often assist in the implementation of Non ET1 agreements, which are increasingly used following redundancy settlements as a way of reaching a mutually agreeable conclusion. These have the same effect as a compromise agreement - the employee loses the right to pursue claims in return for some additional consideration.

Very few processes are absolutely watertight and so reaching a professionally managed settlement can often be reassuring for both the employee and the employer. The CIPD survey demonstrated that the average time for management in dealing with a compromise agreement is far less than would be the case if the matter went to an employment tribunal. Compromise therefore presents a valid commercial option – especially in the present financial climate.

The compromise process also provides the opportunity for an employee to be fully informed of their rights and the implications, ensuring they are making an informed decision and concluding the process so they too can move forward.

Risks of using compromise agreements

In certain circumstances, progressing a compromise agreement should be approached with care. Informing an employee that you want him / her ‘to go’ without prior process will almost certainly constitute an unfair (constructive) dismissal. Experience also shows that it is notoriously difficult to facilitate a constructive ‘exit conversation’ when one is actually required. If you misjudge the moment or the employee’s inclination to listen to the options available, you may have just dismissed him/her unfairly and without the security of an agreed settlement. You will effectively be defenceless in the employment tribunal. This risk exists regardless of how the subject of the employee's departure is broached. Prefacing the conversation with "off the record" or "without prejudice" makes no difference.

If the suggested agreement follows the employee making a protected disclosure or discrimination complaint, then the dismissal may also be unlawful victimisation, with no cap on the compensation which could follow.

Top tips for using compromise agreements

Whatever the legal exposure from offering a compromise agreement, sometimes the risks are worth taking for commercial reasons in order to facilitate a more expedient exit process when it has become clear the employment of an individual is no longer tenable for the organisation.

What should the offer contain to maximise the chances of a deal with the employee?

• A reasonable figure by way of compensation. There is no point in seeking to short-cut the formal process but then short-changing the employee. It is good practice to err on the generous side. This also gives you a stronger negotiating position if the employee is wavering about acceptance.
• Include whatever concessions you are able to make, for example allowing the employee to phrase his or her departure as by way of his resignation or mutual consent, plus a reference to support this. Be careful though; you should never agree to falsely claim the departure was due to redundancy given the potential for false representation with the revenue and future employers.
• To avoid unnecessary delay, a set timescale within which the offer must be accepted should be set, failing which you will revert to the original plan. This may be either the start of formal disciplinary proceedings you were hoping to avoid, or a simple dismissal without the financial or ‘reputation sensitive’ concessions.
• A comprehensive waiver of claims in a proper compromise agreement (this should be specific and relevant in each case and not a standard list of statutes), including your making the usual small contribution to the employee's legal costs.