Although there has been much talk of the ‘green shoots of recovery’, the problems at General Motors and the threat to the UK’s Vauxhall plants is a reminder that the recession is very much still with us. In such times, redundancies become much more common place.
The use of compromise agreements in redundancy situations is a relatively recent development but is increasingly common as employers seek to ‘soften the blow’ by offering enhanced redundancy packages, or try to speed up the process by perhaps not consulting with employees as thoroughly as they should, or merely seek to prevent employees complaining to a tribunal of unfair dismissal or anything else after they have been made redundant.
BACKGROUND
Most employment rights, including the right not to be unfairly dismissed, pay issues and the rules prohibiting unlawful discrimination, are derived from Acts of Parliament. In order to protect individuals the law prevents employers from asking employees to give up such statutory rights, even with the express agreement of the individual employee, except in very controlled circumstances.
The law on the settlement of contractual claims (for example wrongful dismissal or breach of contract) is more flexible. Contractual claims can be settled under any type of agreement provided the employee receives something (known as "consideration") in exchange for giving up their claim(s). However, so as to prevent unscrupulous employers pressurising workers into signing away their rights to the statutory claims, the law states that any agreement to settle or waive statutory claims will be void unless it is:
1. agreed through Acas under what is known as a COT3 agreement;
2. reached following arbitration under the Acas arbitration scheme with the assistance of an Acas conciliation officer; or
3. recorded in a valid compromise agreement.
For a compromise agreement to be valid it must conform to the following:
1. the agreement must be in writing;
2. the agreement must relate to a particular complaint or proceedings;
3. the individual concerned must have received advice from a relevant independent adviser (ie. a qualified lawyer, a trade union official or other certified advisers, who must be covered by a current contract of insurance or professional indemnity); and
4. the agreement must identify the adviser and must state that the statutory conditions regulating compromise agreements have been satisfied.
There is still protection for those who are induced to enter into a compromise agreement by false promises or misrepresentations (in such cases the agreement will not be binding) but, generally speaking, if all the conditions set out above are satisfied then the compromise agreement will be valid and the individual signing it will have given up their rights to bring the claims specified in the agreement, normally in exchange for the sum of money to be paid by the employer.
As the reason for entering into a compromise agreement is to settle a claim or to prevent an employee from instigating or continuing with certain proceedings, redundancy is not the only circumstance in which a compromise agreement will be used. Such agreements can be used whenever an employer seeks to terminate an employee’s employment and feels the need to protect their position, perhaps because they know they have not acted correctly, or because they are aware of factors or complaints made which lead them to believe that the employee may have grounds for, or be minded to, bring a claim, or just because the employee is being given a sum of money on termination as a goodwill gesture but the employer wants peace of mind in return.
Employees can never be forced to sign a compromise agreement but are generally enticed into doing so by the offer of money. However, an employer should never assume that an employee will sign a compromise agreement even in circumstances where the employee has requested a settlement or exit package, applied for voluntary severance or otherwise indicated a willingness to leave. As we highlighted in last month’s bulletin, terminating an employee’s employment either directly or indirectly (for example, by stopping the employee’s pay) before the employee has ‘signed on the dotted line’ of a compromise agreement can be a dangerous gamble.
For that reason, when negotiating a compromise agreement, the draft agreement and any related correspondence should be marked "without prejudice" so that if agreement on the wording of the compromise agreement or the amount offered is not reached the employee cannot refer to the attempted settlement in the courts or tribunals. All discussions about a compromise agreement should also be “without prejudice” because the act of offering a compromise agreement does indicate that an employer is trying to end the employment relationship and, as such, it could, in certain circumstances, give the employee grounds for a constructive dismissal claim if they were not expecting the offer or felt that it was an ‘accept or we’ll dismiss’ scenario.
However, it is not sufficient for one party to tell the other that the discussions are "without prejudice"; the rule will not apply if the discussions are not a genuine attempt to resolve an existing dispute between the parties. Similarly, if discriminatory comments are made during such discussions they are not protected by a “without prejudice” label. This is again to stop unscrupulous employers forcing employees into a position where they have no option but to accept whatever deal is put forward.
Employers do have some protection though. The without prejudice rule does not prevent the without prejudice communications from being produced as evidence that a legally binding settlement has been reached. All draft agreements and correspondence relating to the agreement or the settlement package also need to be marked “subject to contract” so as to prevent the parties inadvertently becoming bound before negotiations have been concluded with a signed agreement.
When a compromise agreement is completed and the terms fulfilled, the aim is for the employee to have given up, forever, the claims specified in that agreement. However, a compromise agreement which merely states that all possible claims are being compromised will be invalid. This makes it very risky to have a standard compromise agreement that is used in all cases because employers cannot simply list every form of employment right known to the law. Instead, case law suggests that each compromise agreement should be tailored to the particular circumstances and the individual who is leaving. It should include descriptions of the claim or possible claims that the agreement is primarily seeking to deal with and should only list claims that the employee has or feasibly could have against the employer.
Although to be validly waived by the employee, all relevant claims need to be set out individually, it is common for the employer to require the employee to warrant that he or she does not have any other claims against the employer than those specifically mentioned in the compromise agreement. A warranty is a legal promise so if the employee does know of something but signs the agreement without raising it in breach of this type of warranty, then the employer may be in a position to refuse to pay the settlement money or to get the money back.
Although the aim for the employer is a completely clean slate and protection from all possible claims, there are some issues which cannot be waived under a compromise agreement: for example, accrued pension rights. Personal Injury claims are also often not waived. Compromise agreements can cover personal injury claims that have already been brought by the employee (although this should always be checked with an employer’s insurer first) and can also cover potential claims for personal injury, which the employee is not aware of provided the wording is sufficiently clear.
The terms of a compromise agreement are enforceable by the Court process and, therefore, it is important that both parties understand that they are bound by any other requirements that are imposed, not just the prohibition on the employee of proceeding with any Employment Tribunal claims. Employers often give commitments to keep matters confidential or to provide references. If they do not keep to these commitments, they could face breach of contract claims from the ex-employee.
Another increasingly common claim is breach of contract arising from the employer failing to pay the amount agreed under a compromise agreement. In such circumstances, the employee can make a claim for breach of contract in the civil courts or, if the compromise agreement was signed and dated before the termination of the employees’ employment, the employee can claim for breach of contract in the employment tribunal.
Compromise agreements are legally binding documents and proposing, agreeing and signing them can have serious implications for all involved. It is, therefore, important that all parties seek advice before considering going down this route.
If you need advice regarding compromise agreements, or any other employment issue, please contact the employment team at Burnetts on 01228 552222.
