Bournemouth Solicitors

BOURNEMOUTH COMPROMISE AGREEMENTS FAQS

I think I need a compromise agreement with my employer. Is it normally the case that the employee approaches the employer for a compromise agreement?

It is not that unusual for an employee to suggest a compromise agreement but care needs to be exercised and such an approach is usually best made by a solicitor. It is also the case that if an employee suggest a compromise agreement, there is often no prospect of a successful long term employment relationship if the employee changes his or her mind. Such a suggestion usually destroys any remaining trust and confidence.

Why has a Compromise Agreement been offered ?

A Compromise Agreement may be offered by your employer for many 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.

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.

My employer says I must go home for my notice period – do I have to comply?

Your contract may include what is often called a “gardening leave” clause, in which case you will have to abide by it. But if your employer has not included such a clause then technically he has no right to tell you not to come to work. In any case, if your contract does not have a gardening leave clause payment in lieu of notice may well be tax free if your gardening leave covers your notice period. If you accept that you will be leaving your employment one way or the other the complicated issues of what payments are taxable, and what you may do after the end of your employment, are best set out in a Compromise Agreement.

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.

Why are compromise agreements used in redundancy situations?

Compromise agreements are being increasingly used by employers in redundancy situations as a mechanism for preventing any future claims arising out of the redundancy.  For employers compromise agreements are a useful tool, especially if they have not fully or fairly complied with redundancy procedures. However they can still be used even where the redundancy is fair to give the employer a clean break between you and them. Remember by signing the compromise agreement the employee agrees that there is a ‘full and final’ settlement of all claims against the employer.

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