Compromise agreements… How to avoid pitfalls in

Hurrah. You have at last reached an agreement with your employee who accepts a termination payment and goes forth in peace.

OK, so the money is a bit more than you would have liked, but you have got authority to go to that level of money (the chief executive really wants to see the back of this employee). All you need to do now is knock out the bog-standard compromise agreement. Job done, or so you might think.

Be aware that you could end up providing generous terms without effective protection, potentially putting you in a difficult position. Don't assume that the standard compromise agreement drafted by your lawyers will necessarily be right for your particular circumstances.

A high-profile case of a compromise agreement apparently not being thought through for the particular situation is that involving Crystal Palace FC and its ex-manager Iain Dowie (Crystal Palace FC Limited v Dowie).

The club waived a £1m compensation clause on the basis that Dowie had led it to believe that he would be moving to a northern club, when, in fact, he joined local rivals Charlton.

Playing dirty

The compromise agreement was a two-page document based on one that had previously been used for one of the club's players. It did not cover the representations relied on, leading to (no doubt expensive) High Court litigation.

The High Court found at a preliminary stage that the club was deceived by Dowie but declined the club's application to rescind the compromise agreement.

A more common example of this kind of situation is where the employer relies on a representation from the employee that they have no alternative employment lined up, so that the employer pays out a large sum in the belief that the employee will be spending a long period looking for work. In the event the employee walks into a lucrative new job the following day, having pocketed a nice little windfall.

This kind of situation can be anticipated in the compromise agreement, unless the employer is happy to pay out the money in the knowledge that the employee may receive a windfall of this kind.

It is also galling for employers to find that a departing employee has pocketed a large termination payment and then immediately joined a major competitor, in apparent breach of post-termination restrictions.

It is usually sensible to reiterate and reinforce such restrictions in the compromise agreement and to ensure as far as possible that they are enforceable. The original restrictions may be too wide to be enforceable or later events (such as an alleged constructive dismissal) may have weakened them.

Total coverage

Naturally, you want total coverage against all possible claims. However, the compromise agreement regime is not designed to provide anybody with a security blanket.

It aims instead to allow specifically identified complaints to be settled. In Hinton v University of East London, the university entered into a "full and final settlement" of all claims with Dr Hinton under a compromise agreement.

The agreement expressly referred to a number of specific claims, but not whistleblowing claims under the public interest disclosure legislation. Hinton later brought a whistleblowing claim and the Court of Appeal found that the claim was not precluded by the compromise agreement.

The Court of Appeal suggested that compromise agreements should not list every form of potential employment claim known to the law, but be tailored for the particular circumstances. Hinton raised the possibility of a whistleblowing claim before the agreement was entered into and so it should have been possible to cover the point easily.

Some claims cannot effectively be excluded by compromise agreements - for example claims for breach of the obligations to inform and consult employee representatives in relation to proposed redundancies under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992.

The same applies to attempts to compromise information and consultation claims under the Transfer of Undertakings (Protection of Employees) Regulations 2006.

However, where such claims are potentially in play, it should be possible to gain some protection by allocating specific sums towards the potential protective awards that could be granted as a result of such claims, and by including an acknowledgement from the employee that any right to such an award has been fully satisfied.

The essential message is clear: there should be no such thing as a bog-standard compromise agreement.

Rob McCreath is a partner at Archon Solicitors

Top reasons why compromise agreements fail

• Do not cover specific complaints
• Do not include points that have been specifically relied on in negotiations
• Do not deal with post termination restrictions
• Do not deal adequately with the employee's position as a director and/or shareholder and/or holder of share options
• Fail to recognise claims that cannot be waived
• Do not deal with serious misconduct discovered after the agreement
• Do not cover claims against other employees
• Fail to take into account the effect of TUPE transfers