Compromise agreements

When do I use a compromise agreement?

If an employee has potential statutory employment claims against an employer, (eg, unfair dismissal, redundancy or unlawful discrimination), an employer should enter into a compromise agreement. A normal contractual waiver (without the statutory compromise agreement wording) is sufficient to waive contractual claims, provided that the employee receives compensation for waiving their rights.

Are there any other ways of obtaining a valid waiver of statutory employment claims?

Yes. Acas conciliation officers can settle various statutory claims using a COT3 form (although the form is not obligatory). It may also be possible to waive statutory claims through an agreement to submit to arbitration under the Acas arbitration scheme for unfair dismissal claims, subject to certain conditions.

Can all statutory claims be waived?

No. In particular, it is not possible to compromise claims for failure to inform and consult on collective redundancies. Claims for failure to inform and consult under the Transfer of Undertakings (Protection of Employment) Regulations 2006 also appear to be outside the remit of a statutory compromise agreement.

What conditions must be satisfied for a compromise agreement to be valid?

A compromise agreement will only be valid if:

  • It is in writing.

  • It relates to a particular complaint or proceedings.

  • The employee has received independent legal advice from a relevant adviser as to the terms and effect of the proposed agreement.

  • The adviser has insurance or an indemnity covering the risk of a claim by the claimant in respect of loss arising as a result of the advice.

  • It identifies the adviser.

  • It states that the conditions relating to compromise agreements under the relevant Act or regulations are satisfied.

How specific do claims need to be in a compromise agreement?

In Hinton v University of East London, the Court of Appeal held that a ‘catch-all’ reference to “all claims in all jurisdictions” did not comply with the statutory conditions necessary for a valid compromise agreement as it did not relate to particular proceedings.

A compromise agreement must identify the particular (or potential) claims either by a generic description such as “unfair dismissal” or by reference to the section of the statute giving rise to the claim. As a matter of good practice, the particular proceedings covered by the agreement should be spelled out with a brief factual and legal description, such as a short introductory paragraph.

Can complaints that have not yet been presented to an employment tribunal be waived?

In Lunt v Merseyside TEC Ltd, the Employment Appeal Tribunal (EAT) made it clear that, although a compromise agreement must relate to the ‘particular complaint’, there was no reason why several complaints which had not yet been presented to an employment tribunal could not be disposed of in one compromise agreement.

Can future claims that the employee is not aware of be waived?

Possibly. In Hilton UK Hotels v McNaughton, the EAT held that, although it is not possible to use a blanket agreement which simply signs away all of an employee’s rights, the Lunt case “…does not determine… that as a matter of general law, a party can never contractually compromise a future claim of which he has no knowledge”.

If you are going to draw up an agreement that effectively waives future claims of which an employee does not and could not have had knowledge, the terms of that agreement must be absolutely plain and unequivocal.

Is it possible to compromise personal injury/negligence claims?

Yes, provided that the wording is clear. However, in most cases, employees will seek to exclude existing personal injury claims, of which they are not aware, from the ambit of the waiver. Future personal injury claims (ie, claims which do not yet exist) may not be compromised, as this would be an unlawful exclusion under the Unfair Contract Terms Act 1977.

Is it common to exclude accrued pension rights from the waiver clause in a compromise agreement?

Under section 91 of the Pensions Act 1995, you cannot waive accrued pension rights except in limited circumstances. However, it is a good idea to agree what those rights are, and that the employer has not breached any obligation in relation to the rights.

By Penny Caven, associate, Allen & Overy


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