If you’ve been offered a compromise agreement then you will need independent legal advice on it. However, as well as getting compromise agreement advice from a specialist employment lawyer you will probably also want to educate yourself on the nature of a compromise agreement so as to give yourself peace of mind. This post therefore deals with what the potential pitfalls of a compromise agreement may be. Potential pitfalls may include (among other things):
  1. An incorrect “settlement sum” is specified in the agreement
  2. Extra restrictive covenants are added to the agreement
  3. You get a new job before the compromise agreement is signed
  4. The tax in the agreement isn’t dealt with properly
  5. You breach a restrictive covenant in some form
  6. You waive your rights for an insufficient sum when you have potentially strong claims
  7. You agree to staged payments in your compromise agreement
  8. You waive contractual benefits in your compromise agreement
  9. You have to pay a large amount of money for legal advice on your compromise agreement
  10. You fail to include a suitable reference in the agreement

An incorrect “settlement sum” is specified in the agreement

A compromise agreement is effectively a contract which pays you a sum of money (and/or other benefits) in return for waiving your right to pursue any statutory or common law claims you may have against your employer. One of the main issues with compromise agreements is the value of the “settlement sum” specified and whether this is accurate. You should check what basis the settlement sum is being calculated on and whether you are being paid in lieu of notice or not. Further, you should check with human resources (and do your own calculations as well) that you’re being paid the correct amount for any accrued but untaken annual leave. You must do this prior to the signing of the compromise agreement – you have no effective remedy against your employer (but may do against your solicitor) if you suffer financially as a result of the compromise agreement.

Extra restrictive covenants are added to the agreement

This is something that you should definitely check for. A restrictive covenant is a “promise” not to do something after you leave your employment. Examples of restrictive covenants include “no dealing” clauses, “no solicitation” clauses, “confidentiality” clauses and “non-competition” clauses (among others). You must check your contract of employment or any attached documents to discover whether you have any valid restrictive covenants included within them. The compromise agreement may try to “reinforce” existing restrictive covenants or introduce entirely new restrictive covenants. You should be careful here – any reinforcement or introduction of restrictive covenants must be “reasonable” (and not onerous) and must be in return for payment. There should ideally be a breakdown of what you’re being paid for the restrictive covenant included in the compromise agreement.

You get a new job before the compromise agreement is signed

Normally, you warrant upon entering into a compromise agreement that you haven’t already received new employment. This is because you have a duty to mitigate against the loss of your job in any unfair dismissal claim or constructive dismissal claim and once you have got a new job this will reduce the value of any compensation due to you (should you have succeeded in your claim). Employers will therefore insist that you inform them once you get a new job. If this is before the signing of the compromise agreement then they may insist on reducing the value of the settlement sum in the compromise agreement to reflect your reduced losses. If you obtain a new job after the signing of the compromise agreement (and the payment of the settlement sum) then it is more difficult for your employer to “claw back” any sum paid to you. They may try but it is quite difficult for them to do so.

The tax in the agreement isn’t dealt with properly

In the vast majority of cases compromise agreements which involve the termination of the contract of employment are tax-free up to £30,000. After £30,000 you pay tax on the settlement sum at the appropriate rate. However, the issue of taxation can be more complex in cases which don’t involve the termination of employment (such as victimisation, harassment, discrimination and unlawful deduction of wages claims) and in claims which involve high-value and complex financial benefits, such as share agreements, partnerships, bonuses, commission etc.

You breach a restrictive covenant in some form

If you breach a restrictive covenant (such as, for example, confidentiality) your employer may have a cause of action against you if this breach of contract causes them harm in any way. If you, for example, divulge a trade secret of your employer’s to a competitor and your employer loses a valuable contract as a result then you may be liable for damages for the loss of that contract.

You waive your rights for an insufficient sum when you have potentially strong claims

It is extremely important to get advice from a specialist employment lawyer for precisely this reason – only a specialist employment lawyer will have adequate knowledge of the potential claims that you may have against your employer. Compromise agreements normally involve the following types of claim:

  • Unfair dismissal
  • Constructive dismissal
  • Discrimination
  • Harassment
  • Victimisation
  • Breach of contract
  • Unlawful deduction from wages

These claims can often be quite complex and overlapping.

You agree to staged payments in your compromise agreement

This can be a problem for some of the reasons specified above. If you obtain a new job or breach a t term of the compromise agreement then your employer may be entitled to withhold payments due under the compromise agreement to reflect the value of the damage that you may have caused them. It is therefore preferable for the settlement sum in a compromise agreement to be paid in a lump sum rather than in staged payments.

You waive contractual benefits in your compromise agreement

You should familiarise yourself with what your contractual benefits are under the compromise agreement. If you are entitled to the use of a company car for professional purposes, receive an annual bonus, receive regular commission or receive healthcare benefits (among other things) you may be entitled to be paid these contractual benefits for the duration of your notice period. If you’re being paid in lieu of notice then you should investigate whether you’re being paid a proportionate sum for these benefits.

You have to pay a large amount of money for legal advice on your compromise agreement

In relatively “simple” compromise agreements this normally isn’t a problem. However, in complex compromise agreements or if there is a significant dispute as to the terms of the compromise agreement then there may be a large amount of extra work done to ensure that the compromise agreement is suitable to both parties. This can incur potentially substantial extra costs so make sure that you receive a quote for any extra work done when you first instruct your employment solicitor.

You fail to have a suitable reference included in the agreement

This is an extremely important point for most clients. If they haven’t got a job already lined up then they will need to obtain new employment as soon as possible. They will therefore need a reference from their employer, even if this is a simply factual reference.

Redmans Solicitors are London employment lawyers with employment solicitors in Hounslow. They are specialist unfair dismissal solicitors and offer employment law advice.

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Redmans Solicitors are a law firm based in Richmond, London. They are specialist employment lawyers and represent both employers and employees in the Employment Tribunal

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