Compromise agreements: a mutual benefit or tribunal avoidance tactic?

Research shows that compromise agreements are widely used in UK workplaces but employers need to be clear about the legal implications governing their use.

There can be a certain mystique surrounding the use of compromise agreements. Because they are typically characterised by confidentiality issues and an employer's wish to keep the circumstances surrounding the individual dispute under wraps, they are rarely discussed openly.

However, the use of compromise agreements is widespread in UK workplaces - recent research by XpertHR found that exactly eight in 10 employers use such agreements in some circumstances. This means that understanding when and how compromise agreements can be used most effectively is important. There are strict legal rules governing the use of compromise agreements that need to be understood and applied in the workplace.

This article aims to shed light on some of these issues and examines the pros and cons of using compromise agreements, as well as how to avoid the legal pitfalls associated with their use.

What is a compromise agreement?

Compromise agreements were first introduced as part of the Trade Union Reform and Employment Rights Act 1993. They are legally binding agreements in which an employee (or ex-employee) agrees not to pursue particular claims in relation to his or her employment or its termination, typically in return for a financial settlement.

The Chartered Institute of Personnel and Development, in its response to a consultation concerning compromise agreements, says that such agreements "operate as a safety valve to reduce recourse to an overloaded employment tribunal system".

There are certain statutory conditions that must be met for a compromise agreement to be valid; these are set out in box 1.

When to use compromise agreements

Compromise agreements are typically used where the employer wants to finalise a relationship with an employee. This situation can arise after the employee has left and issued a claim against the employer, before the employee has left, or at the time of departure.

There are a variety of circumstances where employers resort to using compromise agreements. The 2010 compromise agreement survey by XpertHR identified the top three situations as follows:

• if the cost of contesting an employment tribunal claim outweighs the cost of an agreement (59% of employers);
• there is a risk of damage to the organisation's reputation among customers (53%); and
• dealing with senior members of staff leaving the organisation (52%).

"There are many reasons why an employer may choose to use a compromise agreement," says Philip Landau, partner of Landau Zeffertt Weir solicitors. "In redundancy situations, where there is often a grey area on matters of process (such as selection), the compromise agreement represents a 'belt and braces' approach for the employer. This is not necessarily an acceptance by them that they have got the process wrong, but means there is no chance of a future claim.

"In other cases, there will be disputes arising within the employment relationship such as relating to performance, or a simple breakdown of the relationship between a line manager and employee," Landau continues. "In such circumstances, the compromise agreement provides an amicable way out for both parties."

An employer will often make enhanced termination payments in a redundancy situation and insist that the signing of a compromise agreement is a pre-requisite before such enhancements are paid.

Nicholas Moore, principal of specialist employment law firm Nicholas Moore, always advises employers to use compromise agreements where they are making redundancy payments above the statutory minimum. As he says: "There is nothing stopping the redundant employee later making a claim for unfair dismissal, having already received the enhanced redundancy payment. It is possible to put together a simple compromise agreement where the form can be automatically populated with the details of each employee who is being made redundant - this is more cost-effective than individual agreements and protects the employer against future claims."

When not to use compromise agreements

Landau explains the main circumstances where it is not appropriate to use compromise agreements. "You would not usually use a compromise agreement if:

• the person is self-employed or an independent contractor; and
• the employee has less than one year's employment as there is not exposure by the employer to a claim before this time."

There are exceptions to this rule - specifically where dismissal is automatically unfair, when an employee has been dismissed for reasons related to trade union activities, or reasons relating to discrimination, maternity, paternity or whistleblowing, or where the rights being compromised do not require an employee to serve a qualifying period (eg unlawful deductions from wages).

Waiving statutory employment rights

Compromise agreements are not the only instance where an employee can waive their statutory employment rights. As Landau explains, there is also the option of using an Acas-conciliated settlement (external website), otherwise known as a "COT3". This agreement is valid and binding - as is a compromise agreement. According to Keith Mizon, director of individual dispute resolution at Acas, a COT3 can have wider range than a compromise agreement.

There is also an Acas arbitration scheme (external website), where Acas can get involved at an early stage before the issue of proceedings. The terms become binding once agreed, but this scheme is not heavily used.

How do compromise agreements compare to Acas settlements?

A 2006 policy discussion paper (PDF format, 246K) (external website) published by Acas expresses concern at the rise in the number of compromise agreements and consent orders. "Unlike Acas-conciliated settlements, compromise agreements do not necessarily offer a general, final settlement of all employment claims; neither do they offer the third-party neutrality that is the Acas' hallmark that helps to ensure fair play," the paper argues.

Landau weighs up the appeal of compromise agreements compared to the different forms of Acas settlement available: "Many Acas officers are nothing more than 'verbal postbags' and will merely pass the offers made between the parties. This is unfortunate as tribunal proceedings will often have been issued by this time, and the respective positions between the parties will have hardened.

"The arbitration scheme, on the other hand, applies only to unfair dismissal complaints or disputes under the flexible working Regulations," Landau continues. "Arbitration involves both the employer and the employee entering into a process where an Acas appointed arbitrator will decide whether compensation should be awarded and, if so, how much; but this scheme is little used."

Since its inception in the 1970s, Acas has had a duty or power to broker settlements where there is an individual employment dispute, and not only where a claim has been made to an employment tribunal. A relatively new initiative that has increased the settlement of disagreements in the workplace where they are likely to, but have not yet, lead to a tribunal claim is pre-claim conciliation (PCC) (on the Acas website).

PCC was introduced as part of the 2009 dispute resolution changes. According to Keith Mizon, Acas is projecting it will receive around 20,000 referrals for PCC from its national helpline this year that could well result in around 5,000 COT3 agreements being signed before any tribunal proceedings have been initiated.

"The best approach is to try and resolve a difference or dispute as early as possible, in the workplace and directly between the employer and employee," says Mizon. "If this is not possible, PCC offers the opportunity to head off litigation and find a solution that is acceptable to both parties, and avoids the costs, stress and time associated with an employment tribunal."

Factors influencing the use of compromise agreements

According to Moore, compromise agreements typically come into their own where the situation is complex and concerns a senior employee: "The simple wording in COT3 agreements makes the Acas approach more suitable for straightforward cases," Moore says. "But in more complicated or delicate terminations - for instance, where the employer is paying out a lot of money in share options, or there are restrictive covenants - compromise agreements can be more appropriate."

Moore explains that there are five main factors influencing the wisdom of opting for a compromise agreement:

• the size of the "deal";
• the complexity of fringe benefits involved;
• taxation issues;
• the presence of restrictive covenants; and
• confidentiality issues.

If none of the above are factors involved in the dispute, choosing the compromise agreement route can be an expensive option that is not warranted.

Exercise caution when discussing compromise agreements

XpertHR guidance points out that a suggestion by an employer that an employee resigns (or that his or her employment is terminated by mutual agreement) and enters into a compromise agreement has been found by case law to amount potentially to a breach of the implied term of mutual trust and confidence. This would allow the employee to resign and claim constructive unfair dismissal.

To prevent this scenario, employers wishing to propose a compromise agreement should present it as one of a range of options open to the employee to move the situation forward amicably and to the satisfaction of both parties.

Landau advises: "The employer should exercise caution in relation to making sure that any settlement talks or documentation is on a 'without prejudice' basis so that the communication between the parties is not admissible in evidence in tribunal proceedings."

Moore agrees: "The employer needs to be very careful about how it gets into a discussion about compromise agreements - ideally, any dialogue should be initiated by the employee. The 'without prejudice' provision means that the substance of the conversation is conducted under the cloak of privilege but this is not a blanket assurance: the fact that discussions took place could still be admissible."

The charity Christian Aid is very careful about how and when the issue of compromise agreements is raised. Ros Bolton, senior HR business partner, comments that: "We would never raise the possibility of a compromise agreement directly with an employee, and would prefer the issue to be raised by the employee or through their trade union. The legal implications mean that we could be making ourselves vulnerable if we approached an employee with the suggestion."

Settling future claims

The case law surrounding the issue of whether or not a compromise agreement can be used to prevent any statutory claims the employee may make at some point in the future can be confusing.

According to Moore, the issue is still legally in a state of flux, and could still be tested in the courts. "There are two ways in which an employer can help guard against future claims," Moore explains. "The first is to agree the termination agreement in principle but sign it at the end of any notice period - if it isn't signed, the employee would not receive any agreed financial settlement and would have to go down the tribunal route. But the belt and braces approach is to sign a compromise agreement at the time, but on terms where a further one will be signed at the end of the notice period."

When is it appropriate to have a compromise agreement?

Moore's last piece of advice is for employers to ask themselves, is it appropriate to have a compromise agreement in this situation? As he says: "Employers often act instinctively and opt for a compromise agreement while there may be a cheaper and just as effective means of achieving the same outcome. Even if the employer has a standard form for a compromise agreement, in my experience the agreement often needs detailed adaptation to meet the particular circumstances."

Landau's last words of advice are for employees: "They need to make sure the compromise agreement offers them the best package as they will be compromising their legal rights - that is, they will not be able to bring a claim. An example is to make sure there is a clause stating that the employee will be paid their salary and all contractual benefits up to and including the termination date. And it is usually a good idea to try to get a reference incorporated into the agreement early on in negotiations as there is generally no legal obligation on an employer to provide a reference."