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It’s all a matter of compromise

03 January 2011

Compromise agreements can be an expedient and versatile answer to a great many employment impasses.

They offer employers a fast way of avoiding drawn out dismissal procedures and the associated risks of litigation. Willans’ Litigation team , who have acted in thousands of compromise agreements, give away some tactical trade secrets.

A compromise agreement is best described as a tailor-made agreement to terminate employment. Usually drafted as a short contract, at the same time it has to satisfy the various conditions required by law in that type of agreement.

If it is to work, both parties need to be aware that it is like any other commercial deal. On one side, the employee receives payment or other incentives to compensate him for losing his job: on the other side, the employer gets a quick solution to a problem and protection against the potential of being sued.

Not worth the paper

Surprisingly often we see cases that are defective – the employer has copied something from a website that either does not meet the statutes or is not tailored to the situation. A piece of paper purporting to be a full and final settlement is not enough.

A good example of this concerned a company who asked a senior employee to leave. They gave the woman a cheque for £20,000 and a piece of paper they claimed was a compromise agreement, asking her to sign it. She signed it, took the money and used it to pay a lawyer to bring a case against the employer. We settled the case some months later for three times the amount the company had paid.

The golden rule is that compromise agreements need to be properly drafted. If the employee is going to give away his or her rights to a claim, the agreement can only be binding if it is in the statutory regulatory form.

Bolt-on conditions

Compromise agreements  can be used to repair or anticipate potential problems. For instance, if the departing employee never had a proper service contract, you may be able to negotiate terms, for example preventing him from disclosing confidential information or agreeing restrictive covenants to stop him from poaching customers or joining certain competitors.

There are reasonable limits on the sort of conditions that can be bolted on. In one rather extreme example, an employer wanted to include a clause requiring a senior employee to ‘live a decent and honest life and refrain from the use of alcohol and drugs for the rest of her life’! In case you are wondering, the clause was not included.

Booby traps

There are a couple of inherent risks with compromise agreements. One is that the employee must receive independent legal advice otherwise the agreement is not binding. This poses a risk that the lawyer might advise that the potential case is worth more than what is on offer in the agreement. This is where you are dependent on your own lawyer’s tactical skill in advising where to pitch the deal. If the offer is too low, it could merely inflame the dispute, whereas if it is too high you could be throwing money away. The real judgment call is made by the employee’s lawyer: the knack is to target him or her, factoring in all the variables and risk factors.

Another potential risk arises if negotiations break down part way through. Compromise agreements fall completely outside the statutory employment procedures – which is not a problem providing the deal is done. However, if talks collapse and the employee brings a claim, you might be seen to have abandoned proper procedure.

All negotiations are conducted on a ‘without prejudice’ basis, meaning the proposals cannot later be used as evidence. However in one recent case a young woman was dismissed on rather shaky grounds; a proposed compromise was never agreed and she then brought a claim alleging sex discrimination among other things. The court actually allowed her to use the proposals as evidence of the alleged discrimination. It is worth bearing the background risk in mind during negotiations.

Tactics

Whether or not a compromise agreement succeeds depends on getting the right blend of legal and technical experience, tactical skills and a grasp of the practical realities of what can and can’t be done. In our experience, the vast majority of clients are extremely pleased to be able to achieve rapid and orderly outcomes to difficult ‘people’ problems.

If you need clear and pragmatic legal advice, we’re here to help so please get in touch.

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