Weekly dilemma: Compromise agreements

One of my employees isn’t working out, and rather than go through a disciplinary process I want to offer him a compromise agreement to protect myself against all claims. How should I go about this, and what issues should I watch out for?

A common response from employees taken through the mill of an extended performance management process is something along the lines of: “If you want me to go, you should just say so, and then we could have a grown-up discussion about terms”.

Tempting indeed, but there are two obvious problems with this proposition. First, telling the employee that you want him out without prior process will almost certainly constitute an unfair dismissal. Second, while the promise of an adult chat is all well and good in retrospect, experience shows that it is much harder to procure when actually required. If you misjudge your man or your moment, therefore, you have just dismissed him irretrievably unfairly and without the security of a done deal on his severance terms. You are effectively defenceless in the employment tribunal.

Top tips for compromise agreements

Whatever the legal exposure from offering a compromise agreement, sometimes the risks are worth taking just for the relief of getting a failing employee out of the business. What should the offer contain to maximise the chances of a deal with the employee?

  • A reasonable figure by way of compensation. There is no point in seeking to short-cut the formal process but then nickel-and-diming on the severance offer, so err on the generous side. This also gives you something you can threaten to withhold if the employee is wobbling about acceptance.
  • Whatever cosmetic concessions you are able to make, for example allowing the employee to phrase his or her departure as by way of his resignation or mutual consent, plus a reference to support this. However, note the following bullet point.</

  • Be careful before agreeing to phrase a performance termination as by way of redundancy. That would entail your making representations to successor employers, the state benefits people or the employee’s insurers which are untrue and to their detriment, and that could land you in some very hot water.
  • A set timescale within which the offer must be accepted, failing which you will revert to plan B. This may be either the start of formal disciplinary proceedings you were hoping to avoid, or a simple dismissal without the financial or cosmetic concessions, leaving the employee with the cost, time and stress burden of litigation.
  • A comprehensive waiver of claims in a proper compromise agreement, including your making the usual small contribution to the employee’s legal costs.

Moreover, if the suggested expediting of the employee’s career options follows his making a protected disclosure or discrimination complaint, then the dismissal may also be unlawful victimisation, with no cap on the compensation which could follow.

One prerequisite of cutting corners in the manner you suggest is that you have (and can prove) what would have been or become a legitimate reason for dismissal if the performance management process had been done properly. You can then hope to fall back on this to displace discrimination/victimisation allegations and limit your compensation exposure by reliance on the employee’s contributory fault and the Polkey principles.

This risk exists regardless of how the subject of the employee’s departure is broached. Even a circuitous approach along the lines of “you don’t have to go, but you will face a formal disciplinary process if you do not” still gives the employee the clear picture that you want him to leave and so sails dangerously close to constructive dismissal territory. Prefacing the conversation with “off the record” or “without prejudice” makes no difference to this – would you feel any the less distressed if your boss were to wander up and suggest that you should think about leaving really quite soon, but “without prejudice”?

Be aware that a question mark exists over whether or not a compromise agreement can validly waive a claim under the Equality Act 2010. An apparent drafting glitch in section 147 of the Act has attracted considerable debate and equally learned QCs have opined equally categorically in exactly opposite directions on the point. The pragmatic approach must be to assume that an employment tribunal would go out of its way to discourage a claim brought in the face of clear compromise agreement wording, whether by halting the claim when first lodged or using its just and equitable discretion to award no compensation anyway.

Lastly, remember that if you do approach a severance in this way, you are putting a coach and four through the ACAS code of practice on disciplinary and grievance procedures. As a result, you will unquestionably be the villain in an employment tribunal’s eyes, almost regardless of how hopeless and deserving of dismissal is your employee. The plaintive defence that “I thought we could just have a grown-up discussion about it” will sadly not take you very far at all.

David Whincup, head of employment, Squire Sanders Hammonds, London

XpertHR FAQs on compromise agreements and settling claims

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