Employment Law Compromise Agreements

Silverman Sherliker LLP
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What do I need to look out for?

Care must be taken when drafting these agreements to specify all of the possible claims that an employee is being asked to compromise whether under contract of statute.

It is also important that the agreement is properly worded to deal with issues relating to continuing obligations such as confidentiality as well as more mundane ones such as the return of a company car.

Whilst an Employer is not legally required to do so the usual practice is to offer to make a contribution to the employees legal costs for taking such advice.

Agreements must be expressed as being Without Prejudice and Subject to Contract to prevent employees referring to them if they decide to bring legal proceedings against the Employer.

Why should an employee sign a compromise agreement?

There is no incentive for an employee to sign such an agreement unless either claims are being settled that an employer may have against an employee or the employer is offering a sum in full and final settlement of claims which exceeds that which the employer is required to pay in accordance with minimum legal obligations. Typically an employer will use such agreements when offering an enhanced redundancy package to its’ employees part of which includes an ex-gratia payment.

Tax on termination payments and the ex-gratia payments

Considerable care must be taken since there are a number of pitfalls which need to be avoided when dealing with termination payments. Employers are able to take advantage of the statutory regime under the Income & Corporation Taxes Act of 1988 which permits termination payments up to £30,000 to be made tax free but great care needs to be taken since elements of an employees pay which are owed under their contract of employment cannot be paid free of income tax and for which National Insurance will also be due.

Examples of these are payment for an unused holiday entitlement and notice pay which is paid where the contract contains a right to be paid in lieu of notice. These latter payments can be a source of considerable concern to employers and employees alike since the Inland Revenue will scrutinise them carefully looking at both the actual wording of employment contracts as well as company handbooks.