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Frequently Asked Questions

Click on the links below to view answers to these common questions.

Why have I been offered a Compromise Agreement?

A Compromise Agreement may be offered by your employer for a variety of reasons. There may be an underlying dispute, you may have raised a grievance, be medically unfit to continue working or may not want to return to work at the end of Maternity leave. Most commonly, a Compromise Agreement, which is sometimes referred to as a redundancy agreement, is offered as part of redundancy arrangements. One of the unusual aspects of Compromise Agreements is that the underlying reasons for a Compromise Agreement being offered often do not materially impact on the financial package offered. The main reasons employers offer such Agreements are:

· Certainty and finality

· The employer is in a largely no win situation if there is any prospect of an Employment Tribunal claim. This is because there is a general “no costs” rule for Tribunal claims. Consequently, even if the employer wins at tribunal it will not get costs from the employee. Legal costs are expensive, so an employer often prefers to offer an inducement to the employee to avoid this risk.

The main reasons employees commonly sign compromise agreements are:

- The employee generally receives an enhanced ex gratia or compensatory amount in addition to being paid contractual notice money

- The odds are generally in favour of the Employer under English law for Employment Tribunal claims. Pursuing a dispute in the Employment Tribunal is risky, takes many months and is expensive if a lawyer is used

- Employment law, like English law generally, is predominantly loss rather than compensation based. Even if an employee has a strong claim to have been unfairly dismissed, over and above contractual entitlements, the employee will generally have to be unable to secure employment for 3-4 months to make rejecting compromise agreement worthwhile

- The employee will generally not be required to work his or her notice period, and will be paid all sums, including contractual notice and ex gratia amount upfront

-The employee will generally be free to seek another job immediately

For all the reasons given above, Compromise Agreements are now commonly offered by Employers even if there is little prospect of a dispute, and are commonly accepted by Employees.

What are the main points in a Compromise Agreement?

The essence of a Compromise Agreement is that:

- The employee contractually agrees to terminate the employment relationship and not to bring any claims (subject to 2 exceptions – see below) against the employer, whether arising under the contract, English or European law

- In return, the employer generally pays up the employee’s notice period, the employee is not required to work the notice period and the employee receives a further ex gratia or compensatory payment as an inducement to sign the Agreement and waive any available claims
The employee cannot be asked to and in fact cannot agree to, waive (contract out) in the Compromise Agreement of a possible claim for personal injury claim which neither the employer or employee are aware of. An example of this is asbestosis, which often takes many years to develop. The other main area is pensions. The employee cannot contract out of any pension rights.

Is there a standard or typical financial offer for a Compromise agreement?

This is a very commonly asked question. Whilst each case depends to a degree on the underlying circumstances, in terms of relationship between the parties, length of service, possible underlying claims and other factors, there is something of a “going rate” for the ex gratia offer made by an employer.

In our experience, a typical compromise agreement will offer:

- the equivalent of somewhere between 2-4 months salary, paid gross, as an ex gratia inducement to the employee, and

- the employee’s contractual notice period (generally paid net of tax – please see below) and

- any other contractual entitlements such as untaken holiday pay.

There are technical and tactical reasons why an Employer may not be prepared to offer, ex gratia, more than around the equivalent of an extra 4 months' salary. Please ask us if you would like a more detailed explanation.

Why will the Employer pay your fees?

There is a short and simple answer to this. Yes, in almost all cases, our fees are paid by the employer and not by you. As part of the legislation in which the Government created Compromise Agreements, in order for a Compromise Agreement to be legally valid and binding, amongst other requirements, the employee must have been independently advised by a qualified and insured legal advisor (generally referred to as the “Independent Advisor”). Due to this requirement, it has become standard for the Employer to pay the Employee’s legal fees, and the Employer has no influence on the employee’s advisor, who acts solely for the employee.

If I sign the Agreement have I been sacked?

The answer is no. An employer cannot force you to sign a Compromise Agreement and the legal nature of the Agreement is that you will be agreeing to terminate your contract of employment, whether written or verbal, by mutual consent.

What is the tax position on payments made to me?

In general terms, any payment which an employer is contractually bound to make to an employer results in the employer being legally obliged to make appropriate deductions before payment to the employee. This generally means that payment for your notice period and holiday pay and potentially other entitlements may need to be taxed before payment to you.

There is an exception to this which sometimes applies to a Payment in lieu of notice (PILON). If your employment contract has a clause allowing the Employer to pay you in lieu of notice, then this payment must be taxed, as it is included in the contract. If the contract is silent as to this option, and in practice, which is typical of compromise agreements, the employer does not require the employee to work notice, this payment can be tax free, as it is not a contractual payment under law.

The ex gratia payment part of the overall financial package is not a contractual entitlement and is generally payable tax free up to a maximum of £30,000.00.

Compromise Agreements typically include a clause known as the Indemnity Clause, which states that if the Inland Revenue challenge part or all of the payment as taxable (where the Employer has not deducted tax on part or all of the overall payment), and force the Employer to pay tax, the employer can then pursue the employee for tax then paid. In relation to this clause, whilst no lawyer can offer the employee a ”cast iron guarantee” that no such claim will be made by the Inland Revenue and then by the employer, this is very unlikely in our experience. If you remain concerned about this point, please ask us to explain further.

Can I/should I negotiate on the terms offered in the Compromise Agreement?

There are 2 aspects to this question, being:

- As the Agreements are statutory and generally quite standardised (in order to make the Compromise Agreement valid and legally binding, it must include the vast majority of content included) there are few aspects of the wording which need to be changed/negotiated and/or which the Employer will generally agree to amend and/or delete

- It is not unusual to seek to negotiate on the ex gratia payment, particularly if the employee has been offered an amount at the lower end of the likely range of ex gratia amounts.

Why has the employer set a deadline for the Agreement to be signed?

This is generally a tactic by the employer to ensure that the Agreement is concluded rapidly. Whilst any deadline should not be ignored, in practice, many employers will still agree to conclude the Compromise Agreement even if there is a delay due to negotiation or stand off between the parties resulting in the deadline passing.

Will the employer provide a reference for my next employer?

The employer is not legally bound to provide any reference. It is common for the employee, via legal advisors, to seek to agree the form of any written reference which will be given for any prospective new employer, and that any verbal reference will not be dissimilar or unhelpful to the employee.

What does “without prejudice & subject to contract” mean?

The words “without prejudice” when incorporated onto any letter or document are designed to prevent a letter or document being shown to a Court or Tribunal. In other words the words are incorporated to enable a party to negotiate without fear of compromising his/her or it’s position in the event negotiations fail. Compromise agreements are consequently offered on a without prejudice & subject to contract basis until they are signed by both parties, when they become open, binding and enforceable agreements which can be produced in court or Tribunal for enforcement purposes (which is rare).

Can I reclaim the court fees, issue fee etc?

The answer is usually Yes, The court fees and interest are added onto your claim and are usually added to the Judgment if you win your case.

Can I reclaim any other costs?

You can usually claim travelling expenses and witness costs fixed by the court. You can ask for any reasonable expense incurred and the judge will decide if it is relevant and should be awarded.

Note: It is very rare to recover all your costs.

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