Working out a compromise

Russell, head of employment law at Norton Rose outlines the basics of
compromise agreements.

an employee resigns unexpectedly it is often HR that has to pick up the pieces.
For the sake of the firm and the individuals involved it is better if a
compromise is hammered out, and it is frequently HR which has to play

problem is that in many cases of sudden resignation the lines of communication
are clouded with disagreements and recriminations on both sides. There may also
be grounds for constructive dismissal lurking in the shadows and unless the HR
team treads carefully it risks making more trouble than already exists.

good news is that compromise agreements (CA) where employees who have resigned
agree to refrain from going to tribunal in return for a tax-free payment are
becoming more commonplace. Unfair dismissal, discrimination and numerous other
types of claim can also be settled by way of a CA with the aim of achieving a
clean break. Here are some of the issues that can arise:

How early before the effective termination date will the CA be agreed, bearing
in mind the severance payment will not be paid until after that date?

Inland Revenue rules allow a CA to be agreed in advance, but it cannot be
conditional on future events. There should not be a long period between the two
dates – firstly because the IR may take this to indicate that the agreed
payment is to induce the employee to stay, therefore negating its tax
effectiveness. Second, there are dangers in agreeing a payment when the
employee is still working out notice, such as the risk of subsequent gross

What do you do about future reference requests?

References can be problematic. It is often good practice to agree favourable
wording, plus a clause that there will be no communication inconsistent with
such wording. However, beware of being pushed into a favourable reference at
odds with the manner of departure – it could put you at risk of a negligence
claim if it is inaccurate and a new employer relies on it and suffers damages
as a result.

What legal aspects of the severance package have to be considered?

Most severance payments anticipate a future period of unemployment, so it is
worth considering a clause whereby the employee undertakes he has no job offer
or immediate expectation of one, including consultancy work.

Does the CA detail action to be taken against the employee if he breaches the

If the employer fails to make payment the tribunal has jurisdiction to enforce
this, but it is harder for the employer to show loss upon an employee’s breach,
such as a leak to the press. Consider a confidentiality clause as well as
getting the employee to agree to a specific cash penalty for any breach.

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