Ensure that any discussions which you have with the employee to discuss the terms of the compromise agreement, together with any emails or other documents associated with it are clearly stated to be “without prejudice and subject to contract”. This is to try to ensure that the settlement discussions cannot be referred to in the event of any future court or Tribunal claim being brought. Don’t assume that the parties will settle just because a compromise agreement is being discussed. Whilst the compromise agreement is being discussed there should therefore be a parallel open process if there is a grievance or disciplinary matter still outstanding.
Consider carefully what compensatory sum you are offering the employee. Ensure that the compromise agreement sets out the agreed terms very precisely to avoid a situation where you think that the commercial terms have been agreed, but the employee is expecting a further payment, such as a bonus payment, in addition.
Check the tax treatment of the payments very carefully. If the employee is being paid an ex gratia sum, this may be paid tax free up to £30,000. If the payment relates to a payment in lieu of notice clause, this will usually be taxable. There may also be tax free payments available in relation to any payment for injury to feelings or statutory redundancy payments. It may therefore be sensible to separate out the different elements of the compensatory payment and to show the different tax treatment of the different elements.
There are three aspects of confidentiality to consider. Firstly, you would normally want the employee to keep the terms of the compromise agreement itself confidential. Secondly, you may want to require the employee to keep the circumstances leading up to the termination of their employment confidential. Finally, the employee should be reminded of his obligations in relation to business confidentiality and trade secrets. The confidentiality clause in the employee’s contract should be re-stated or, if there is no such clause, a new confidentiality provision may need to be introduced.
Remember restrictive covenants! Having gone to the trouble of including restrictive covenants in the employee’s contract, don’t forget to refer to them in the compromise agreement, particularly if the employee’s contract has been breached by the employer – in such circumstances the restrictions arguably fall away. If the old covenants are unenforceable or non existent, you may want to consider introducing new restrictive covenants as part of the deal. It is usually advisable to attach some separate payment to this clause if new covenants are being introduced.
Consider whether you want the employee to agree not to make any derogatory comments about your company, and not to repeat any specific allegations which he has made about the company or any of its employees (such as an allegation of harassment). Often the employee will ask for a reciprocal obligation from the employer, but be cautious before you give this. Depending upon the size of your organisation it may be almost impossible to agree that no employee will make any derogatory comment about the ex-employee. If you offer this, ensure that the relevant employees are aware of their obligation not to make any derogatory comment about the ex-employee, and consider limiting its application to named employees only.
Try to agree a reference with the employee, bearing in mind an employer’s duty not to mislead future employers. Keep the reference as factual as possible. Also consider whether it is appropriate to agree a statement with the employee which will be communicated internally and externally as being the reasons for his departure.
Ensure that the waiver clause is tightly drafted. After the case of Hinton v. University of East London, you should now assume that it is a requirement that your compromise agreement should expressly set out the reasons for the causes of action that you are settling, to ensure that the compromise agreement will be regarded as binding by an employment tribunal. One way to achieve this would be to get the employee (or his representative) to set out all the claims which he considers he may have against the company, to ensure that these are waived.
If the employee has already commenced Employment Tribunal proceedings against you ensure that it is a condition of the compromise agreement that these proceedings are withdrawn. If proceedings have been withdrawn by the employee, there is a risk that they can still be resurrected. However, once proceedings have been dismissed by the Employment Tribunal, the employee will be unable to raise the same complaint again.
Finally, make sure that the employee has taken independent legal advice from an independent adviser, as defined in section 203 Employment Rights Act 1996. An employee will only be able to waive his statutory claims if he has received advice from an independent adviser on the terms and effect of the compromise agreement and if the other conditions of section 203 have been complied with.
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