Most HR Directors and managers breathe a sigh of relief when a Compromise Agreement is finally signed off by an ex-employee. Often these agreements will come at the end of a lengthy period of negotiation and employers are relieved that, finally, they can draw a line in the sand and be safe in the knowledge that the employee has waived his or her rights to bring any future claims against the employer except for any rights which are specifically excluded from the waiver (often personal injury or accrued pension rights). Equally, employees will expect the payments under the agreement to be honoured otherwise a claim for breach of the agreement’s terms will usually be pursued to recover the sums which are owed. However, as one recent case demonstrates, in some circumstances the terms of a Compromise Agreement may not be enforced by the Courts.
In Gibb v Maidstone and Tunbridge Wells NHS Trust, G was employed as the Trust’s CEO with a basic annual salary of £150,000 and an entitlement to 6 months’ notice. Following outbreaks of the “super bug” C.difficile at hospitals managed by her, there were a significant number of deaths and widespread public anger and anxiety. G left the Trust under a Compromise Agreement which agreed to pay her around £250,000 including around £75,000 pay in lieu of notice and a compensation payment of £175,000. The compensation payment due under the Agreement was never paid to her (although she did receive her payment in lieu of notice). The £175,000 compensation payment which had been agreed was challenged by G’s successor as being ultra vires, i.e. beyond the powers of the NHS Trust to award. G issued proceedings against the Trust to recover the £175,000.
The High Court found that the £175,000 which had been agreed under the Compromise Agreement was irrationally generous and was therefore outside of the Trust’s powers to award. It held that G was not therefore entitled to recover the £175,000. The Trust had failed to ensure that it did not reward for failure, and the £175,000 was over and above any contractual or statutory entitlement which G may have had. The Court also held that she was not entitled to any other lesser payment (such as compensation for unfair dismissal). Whilst G could have claimed for unfair dismissal, she had not done so. G therefore failed to recover the £175,000 which had been an agreed payment under the Compromise Agreement. G was out of time to bring a claim for unfair dismissal, but if she had still been within time, she could have issued proceedings against the Trust.
The NHS Trust was a public body so is clearly of relevance to those involved in the public sector. The Trust had failed to follow specific guidance for NHS bodies in assessing compensation and had acted outside its authority. The argument that payments are “ultra vires” cannot usually be used against private employers. However, the case could potentially have implications in the private sector, and it is a useful reminder to all employers of the potential consequences of agreeing to compensation payments which are over and above an employee’s contractual and statutory entitlements. Following the recent financial crisis, many employers have been introducing new provisions into contracts of employment, and attaching conditions to bonuses, to make it clear that they will not reward for failure. There have been a number of cases recently which have attracted a lot of negative publicity where senior executives have left with “fat cat” payments despite poor performance or financial results.
Quite apart from the adverse publicity which could result from a departing director or senior executive being seen to have been rewarded for failure where a generous package is agreed under a compromise agreement, under company law there are specific restrictions placed on a company’s ability to make severance payments to directors which are over and above their contractual and statutory entitlements. Shareholder’s approval is needed where a company makes a payment to a director for loss of office, unless the payment is made “in good faith” in discharge of an existing legal obligation, by way of damages for breach of such an obligation, by way of settlement or compromise of any claim arising in connection with the termination of a person’s office or employment, or by way of pension in respect of past services. This means that in negotiating compromise agreements for directors companies need to pay attention to what that director’s actual statutory and contractual entitlement is, as well asfactors such as the need for mitigation and accelerated receipt. This should usually ensure that the payment has been made in “good faith”. Where any payment which has been made to a director is considered to be in excess of this, the directors will hold the payment on trust for the company and the directors responsible for making the payment are liable to the company for the amount paid. Additionally, shareholders could challenge the decisions taken by the directors if they are in breach of their duties.
It is always sensible in negotiations to have reference to the employee’s performance, as well as any statutory or contractual entitlements which he or she may have, when negotiating Compromise Agreements. To fail to do this could lead to adverse publicity, internal or external (confidentiality provisions are not always adhered to). For public bodies it could also result in an argument that the payment is “ultra vires”, whilst for private sector employers making payments to directors, it could result in an argument that the payment breaches company law.
Rebecca Davidson is a Senior Associate in the employment department and can be contacted for more information on this article at firstname.lastname@example.org.