Law in practice: compromise agreements

Compromise agreements – where an employee agrees not to make a claim against their employer in return for a financial settlement – are becoming increasingly common, especially in the financial services sector, as employers seek to protect themselves from legal action.

WarningThis page has been updated

This page was updated on 6 December 2011 to make sure all advice contained in this article was correct.

Employers should also note that the Government has recently announced that it will be making changes to the current legislation on compromise agreements. Read more here.

The agreements, introduced under the Trade Union Reform and Employment Rights Act in 1993, are predominantly used in cases of redundancy, unfair dismissal or unlawful discrimination. And as the ubiquitous credit crunch bites, there’s certain to be a major surge in demand for compromise deals from both employers and employees.

On the increase

Mark Taylor, a partner in the employment team at Jones Day, says: “We’re going to see an increase [in compromise agreements] given that a high number of organisations will be making redundancies.”

A recent survey by Employers’ Law’s sister publication, Employment Review, supports Taylor’s claims. The survey of HR practitioners in 101 organisations found that most (82%) would rather use a compromise agreement than contest an employment tribunal claim.

Similarly, most employers (78%) feared prohibitive employment tribunal costs and damage to their reputation (63%) and regarded compromise agreements as a way of resolving these issues.

Compromise deals typically follow a dispute of some sort and Guy Guinean, employment partner at Halliwells law firm, points out that the increase in mergers and acquisitions among City firms could also trigger an increase in disputes.

“Agreements will usually surround dismissal, failure to consult, protective awards and collective consultation. But they can be triggered by a takeover where similar obligations arise. Ultimately, any change to an employee’s terms and conditions can give rise to a potential dispute,” Guinean says.

Confidential concerns

Both employers and employees are often very concerned about confidentiality, especially if the case involves a company director, and compromise agreements usually include a confidentiality clause of some sort. Details of the compensation payment and a non-disparagement clause are also often included.

Taylor says the most important aspect to reaching a compromise is communicating the process effectively to the employee.

Most employees, however, do regard compromise agreements as final so there is rarely a backlash, Taylor adds.

Breaches of compromise agreements are also rare, according to Guinean, and an employee would have to show a breach in order to make a claim against an organisation. Any disparaging comments about the organisation could also count as slander in legal terms.

Liquidating circumstances

But what happens when a company goes into administration, as with the recent collapse of Lehman Brothers? Are employees still entitled to a compromise agreement of some sort?

Taylor says there is generally very little an employee can do if the company has gone into liquidation.

“If the administrator can’t find a buyer they will have to terminate people’s contracts. There is a certain amount that can be claimed by former employees – including eight weeks’ statutory wages as redundancy pay under government regulations – but ultimately there’s very little point in pursuing a claim against a company that’s insolvent,” he says.

Guinean says notice periods can also be an issue and that employees will usually lose any notice period entitlement if a company goes into administration.

But if a company hopes to remain profitable, they have to protect their assets, and compromise agreements seem to be a very effective way of doing so.

Case study

The case of Collidge v Freeport plc showed how an employer can protect itself  if a compromise agreement is breached.

Collidge was the chief executive and a director of Freeport, a leading developer and operator of retailer outlet centres in Europe. In early 2006, allegations of financial impropriety were made against him and in March 2006, the board proposed he be suspended while these allegations were investigated.

Collidge said he would rather resign, which the board agreed to, but the company told him its investigation would still go ahead.

Terms of a compromise agreement were reached, stating that Freeport would pay Collidge £445,680 subject to terms in the agreement being met.

Clause 7 stated: “you warrant as a strict condition of this agreement that… there are no circumstances of which you are aware or of which you ought to be aware which would constitute a repudiatory breach on your part of your contract of employment which would entitle the company to terminate your employment without notice”.

Before payment was made, Freeport’s investigation revealed that Collidge was in breach of Clause 7 of the agreement.

Therefore, the board would not authorise payment to him.

Collidge brought a claim in the High Court arguing that Clause 7 was not a pre-condition to the enforceability of the agreement and therefore payment should be made.

The High Court, however, held that the clause was a pre-condition to Freeport’s liability to perform its own obligations under the agreement. Therefore, Freeport was under no obligation to pay Collidge if the facts set out in the warranty provisions of Clause 7 were untrue.

Source: Kate Hodgkiss, partner, DLA Piper

A compromise agreement is valid if:

  • It’s 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.

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