Clough & Willis Sees Spike in Compromise Agreement Cases:

Terminating a contract of employment can be a stressful exercise for all parties involved. Thanks to the current economic situation, the number of dismissals is on the rise and one of the growing trends that Clough & Willis has seen is the use of compromise agreements. Compromise agreements have a reputation as being used by by employers to bury a problem - by preventing employees complaining to a tribunal after they have been dismissed. However, that's not always the case as people choose to compromise claims for many different reasons.

Employers like to buy certainty and paying a little extra (or a lot) more than the statutory minimum may help to salve a conscience - or reward a long standing staff member for years of service. Employees, of course, have less choice. But a compromise agreement offers them closure on an otherwise difficult situation and may have tax advantages. Coupled with a good reference, a payment may offer an employee a way out of a stressful situation in a job which is increasingly tenuous. However, it should not be forgotten that to be enforceable a compromise agreement must satisfy certain statutory requirements, for example - the employee must have received advice from a relevant legal adviser.

There have been some recent cases which have highlighted the importance of drafting compromise agreements with care. The courts have made it clear that the use of standard, off the shelf, agreements will be frowned upon and in some cases they will be unenforceable. The agreement must relate to the claims the employer wishes to compromise. The drafting of compromise agreements can be complex and requires thought.

There are also other benefits for employers which tend to be forgotten. Restrictive covenants and confidentiality clauses can be reinforced or introduced via the agreements. Such provisions can be incorporated as a term of the agreement and therefore may be more easily enforced against the ex-employee should they breach a clause. Nonetheless, restrictive covenants need to be drafted with care to avoid being held unenforceable.

Both employers and employees need to take care in respect of the tax implications of the settlement figure. It is a common misconception that the first £30,000 of any sum payable under a compromise agreement is free of tax. The position is that any contractual payments (e.g. notice payments) are taxable. Therefore, agreements need to be drafted correctly to show which elements are contractual payments and which are not. Ultimately, the tax payable on any sum (including the first £30,000) is not decided by the employer or the employee - but by the tax man! Advice should be taken on that point.

Andrew Moore, employment law specialist at Clough & Willis commented; 'Compromise agreements are without doubt useful to both parties. However, the idea that one agreement fits all situations is misconceived. Time needs to be taken to consider enforceability, the terms of the agreement and its effect. The costs of getting it wrong can be expensive to both parties.'