Settlement Agreements V Compromise Agreements

Settlement Agreements came into effect on the 29th of July 2013.

From 29 July 2013Compromise Agreements have been replaced by Settlement Agreements.

Settlement Agreements are, on the face of it, the same as Compromise Agreements, albeit with a new name; the same conditions need to be satisfied for them to be legally binding and they have the same effect of terminating the employment relationship whilst compromising an employees’ employment rights.

Settlement Agreements are recognised by statute and they are an exception to the general principle set out in all employment legislation that an individual cannot contract out of their statutory employment rights. They are the only way in which an employee can contract out of their rights under employment law. They enable employees to agree to compromise their own statutory employment rights in return for compensation. The main employment rights most often compromised relate to withdrawing an existing, or subsequently refraining from bringing a claim to an Employment Tribunal and/or the courts.

A Settlement Agreement (formerly known as a Compromise Agreement) is a legally binding contract between an employee and employer which is used to end an employment relationship on agreed terms. In return, the employee generally receives a financial settlement and an agreed form of reference.

In other words, a Settlement Agreement is an agreement which enables an employee and the employer to agree that the employee will not bring a claim to the employment tribunal and/or the courts against the employer about the issues covered in the agreement in return for a compensation payment. Without a Settlement Agreement if the employee and employer end their relationship, the employee has the right to take a case to the employment tribunal and/or courts if there are grounds to do so.

There is a range of scenarios in which Settlement Agreements are used. Settlement Agreements can be used to end an employment relationship on agreed terms. They can also be used to resolve an ongoing workplace dispute. Settlement Agreements are often used to safeguard the interests of both employer (who gain certainty they won’t face a tribunal case on any of the grounds covered by the agreement) and employee (who gets a payment and avoids a dismissal in their employment history).

Settlement Agreements can be proposed by either an employer or an employee and they are voluntary, the parties do not have to agree to them or enter into discussions about them if they do not wish to do so. Equally the parties do not have to accept the terms proposed to them.However,once a valid settlement agreement has been signed, the employee will be unable to make an employment tribunal claim about any type of claim which is listed on the agreement.

Prior to 29th July 2013, Settlement Agreements were known as Compromise Agreements.

In practice, there is little difference between a Compromise Agreement and a Settlement Agreement. The main difference between the two is that Compromise Agreements provided limited protection as the “without prejudice” principle applies only to pre-termination discussions entered into between an employer and an employee where there is an existing employment dispute between the parties. Without prejudice is a common law principle which prevents statements (written or oral) made in a genuine attempt to settle an existing dispute from being put before a court as evidence against the interest of the party which made them.

In other words, in order to benefit from the without prejudice protection there must be an existing employment dispute between the parties before pre-termination discussions take place; without a formal dispute the without prejudice principle does not apply. In fact if no dispute exists pre-termination discussions are not covered by the without prejudice principle and they can be referred to in a subsequent tribunal claim.

Settlement Agreements introduced the concept of “confidential” pre-termination discussions. As stated above, to benefit from the without prejudice protection so that such discussions cannot be used in any subsequent tribunal proceedings, there has to be an existing employment dispute before the discussions take place. Since there are often occasions where either the employer or the employee want to enter into pre-termination discussions where there is no existing dispute, the concept of “confidential” pre-termination discussions have been introduced with the intention of encouraging employers and employees to enter into settlement agreements.

Under the new Settlement Agreements pre-termination discussions where there is no existing dispute are confidential and cannot be used as evidence in unfair dismissal claims. Thus, employers and employees are now able to enter into pre-termination discussions without fear of such discussions being used as evidence in subsequent employment tribunal proceedings, in circumstances where there is not an existing dispute.

Pre-termination discussions/negotiations are defined as “any offer made or discussions held, before the termination of employment in question, with a view to it being terminated on terms agreed between the employer and the employee”. Under the new Settlement Agreements such discussions/negotiations are kept confidential whether there is, or is not, an existing employment dispute, or where one or more of the parties is unaware that there is an employment problem. Furthermore where there is an existing dispute between the employer and employee, both the ‘without prejudice’ and new statutory confidentiality provisions will apply, as the new “confidential” and the existing “without prejudice” rules run concurrently.

To obtain the new “confidential” protection, pre-termination discussions must only be used in circumstances involving a “straight forward” unfair dismissal claim. Pre-termination discussions are not protected if the employee has been dismissed for an automatically unfair reason. Employees are not prevented from bringing claims in relation to ‘automatically unfair’ dismissals, such as for whistleblowing, trade union membership or asserting a statutory right, by virtue of having entered into a Settlement Agreement. The confidentiality provisions also do not apply to grounds other than unfair dismissal, such as claims of discrimination, harassment, victimisation or claims relating to breach of contract.

Furthermore, the “confidential” protection also does not apply where there is “improper behaviour” by one of the parties, in which case the tribunal will allow evidence to the extent that it considers it “just”. Improper behaviour, by either an employer or employee, includes all forms of harassment, bullying and intimidation; physical assault or the threat of physical assault; victimisation; discrimination; and putting undue pressure on a party, which can include not giving an employee sufficient time to consider an offer.

Consequently, in the instances above, an employee can use the contents of pre-termination discussions as evidence to support their claim.

To assist employers, employees and their representatives understand the implications of the changes introduced to the Employment Rights Act (ERA) 1996 in relation to negotiation of settlement agreements; ACAS have produced a Code of Practice on Settlement Agreements (“the Code”). The Code is statutory, but failure to follow it does not entitle an employee to bring a claim for this reason alone.

In order for a Settlement Agreement to be valid it must comply with stringent statutory conditions. There are strict and well-defined requirements to be fulfilled to ensure that a Settlement Agreement is valid. A correctly structured Settlement Agreement will be legally binding on both parties.

The following conditions must be satisfied in order for the Settlement Agreement to be valid. If these conditions are not satisfied then the Settlement Agreement is not legally binding:

·         The agreement must be in writing.

·         The agreement must relate to a particular complaint or proceedings

·         The employee must have received independent legal advice on the terms and effect of the proposed agreement

·         The agreement must identify the adviser

·         The adviser must be covered by a suitable insurance policy. The policy must cover the adviser against the risk of a claim for losses because of the advice that has been given

·         The agreement must state that the applicable statutory conditions regulating the settlement agreement have been met.

The Code requires that employees should be given a reasonable amount of time to consider the proposed conditions of the agreement and specifies a minimum of 10 calendar days unless the parties agree otherwise.

 

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For more information on Settlement Agreements and to purchase a compromise agreement template-settlement agreement template please visit: www.thelegalstop.co.uk

AN OVERVIEW OF COMPROMISE AGREEMENTS

A compromise agreement is a formal, legally binding agreement made between an employer and employee (or ex-employee) in which the employee agrees not to pursue particular claims that they might have in relation to their employment or its termination, in return for a financial settlement. Thus, the primary function of a compromise agreement is to stop an employee from making any statutory or contractual claim in connection with their employment.

Compromise agreements are often used in situations where employer and employee want to part company without resorting to redundancy, firing or resigning. They can also be used as a way of settling serious employee grievances, such as claims of constructive dismissal or unlawful discrimination. Generally, compromise agreements are used by employers in order to remove employees from employment quickly and easily, avoiding the possible adverse publicity and uncertain outcome of an Employment Tribunal or court case.

This article considers the overall legal requirements of compromise agreements, but legal advice should always be sought when drafting such an agreement.

Compromise agreements are complex legal documents and they must be specifically drafted according to the facts and circumstances of each particular case. The Legal Stop offers a fixed fee compromise agreement drafting service in addition to our compromise agreement templates. For further details please contact us using our request form.

Legal Formalities

In order for a compromise agreement to be legally binding, the following conditions must be satisfied:

  • The agreement must be in writing.
  •  It must relate to the ‘particular proceedings’.
  • The employee must have received independent legal advice from a qualified adviser as to the terms and effect of the agreement.
  • There must be in force, when the adviser gives the legal advice, a contract of insurance or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising as a result of the advice.
  • The agreement must identify the relevant adviser.
  • The agreement must state that the conditions regulating compromise agreements are satisfied.

Employee’s Complaints

A compromise agreement can be used to settle one or more employee complaints. It must clearly state each of the specific complaints being settled and refer to the relevant statutory provisions because, as identified above, the compromise agreement must relate to the ‘particular proceedings’. Please note that a ‘blanket agreement’ simply signing away all of an employee’s employment rights, or one which lists every form of employment right known to the law, will not be a valid compromise agreement.

Contractual and Statutory Claims

Compromise Agreements are an exception to the general principle set out in all employment legislation that an individual cannot contract out of their statutory employment rights. Thus, a compromise agreement is necessary to obtain a valid waiver of an employee’s statutory claims. Please note that there is no need for a compromise agreement in order to settle only contractual claims. This is because an agreement to refrain from instituting proceedings in a contract claim is binding without the need for any special requirements to be satisfied. A simple waiver and release of claims will be effective. On the other hand, with statutory claims, any agreement by an employee to waive their statutory rights that is not in the form of a compromise agreement will be invalid and unenforceable. This means that the employee would still be eligible to lodge a claim in the Employment Tribunal, even though they might have already accepted a sum of money from the employer in apparent ‘full and final settlement’.

‘Without prejudice’

Open discussions with employees in relation to compromise agreements are very risky. This is because such conduct, if not protected by the veil of without prejudice privilege, is likely to be enough to constitute a fundamental breach of the implied term of mutual trust and confidence, enabling the employee to resign and claim constructive dismissal. Thus, never invite an employee to resign in return for an exit package on an open basis. The employee might resign anyway and then issue a constructive dismissal claim.

For the ‘without prejudice’ rule to apply, the employee must have genuinely consented to the meeting being held on a ‘without prejudice’ basis, there must be a pre-existing dispute between the parties and the discussion must be a genuine attempt to settle the dispute.

Compromise Agreement Clauses

Common clauses found in a compromise agreement include:

  • An agreement by both parties to keep the details of the settlement confidential and not to make detrimental statements about one another.
  • A requirement for the employee to return the employer’s property.
  • The provision of an agreed form reference for the employee.
  • A requirement for the employee to resign as a director or as company secretary.
  • A requirement for the employee to transfer their shares in the company.
  • An agreement by the employer to contribute towards the employee’s legal costs.
  • A tax indemnity from the employee.
  • Post-termination restrictive covenants (if these are new, there should be a separate monetary payment, called ‘consideration’, given to the employee for agreeing to them).
  • Confirmation that the employee has not knowingly committed any breach of their employment contract or breach of duty owed to the employer.

Generally accrued pension rights cannot be waived under a Compromise Agreement (as the trustees of the pension fund are not party to the agreement).

If the terms of the Compromise Agreement are breached by the employer, the employee could pursue a claim for breach of contract.

Taxation

Employers often wrongly believe that all payments made on the termination of employment are subject to a tax exemption of £30,000. Not all sums payable under a compromise agreement are tax-free. In determining what tax is payable in respect of termination payments, the key is to identify each element of the termination package and then consider the tax provisions applicable to the individual elements.

Outstanding wages, bonuses, commission and holiday pay are fully taxable, being payments made under the employee’s contract of employment. Ex gratia (non-contractual) sums paid as compensation for loss of employment under the terms of the compromise agreement are taxable, but subject to the £30,000 tax-free exemption.

Where an employee receives a contractual payment in lieu of notice, the payment is chargeable to tax as earnings from employment. However, where there is no contractual entitlement to a payment in lieu of notice, a non-contractual payment will be regarded as compensation for loss of employment, making it subject to the £30,000 tax-free exemption.

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Directors’ General Duties under the Companies Act 2006

This briefing is intended to give you an overview of the general duties set out in the Companies Act 2006 and to provide some practical guidance to help you comply with those duties.

Every director of a company owes a number of duties to the company they are appointed to. Compliance with each of the general duties is the personal responsibility of each director. The main directors’ duties are set out in statute in sections 171 to 177 of the Companies Act 2006 (the CA 2006). The failure by a director to comply with any of the general duties has potentially serious consequences for that director.

Under the CA 2006 any person occupying the position of director, whether or not they are actually named ‘director’ and or have been validly appointed, will be a director of the company and will be subject to the general duties. In addition, shadow directors may also be subject to the general duties. A ‘shadow director’ is a person who has not been appointed as a director of the company but in accordance with whose directors or instructions the directors of the company are accustomed to act.

The general duties are:

  • a duty to act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred;
  • a duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard to various specified matters;
  • a duty to exercise independent judgment;
  • a duty to exercise reasonable care, skill and diligence;
  • a duty to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company;
  • a duty to not accept a benefit from a third party conferred by reason of the director being a director, or his doing (or not doing) anything as a director, and
  • a duty for the director to declare if he is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, and the nature and extent of that interest, to the directors.

It is important to note that any provision in a company’s articles of association, a contract or otherwise, that purports to exempt the directors from compliance with the general duties is void.

A company may, through its articles of association, go further than the general duties by placing more onerous obligations on its directors. However, the articles of association may not ‘dilute’ the general duties.

Duty to act in accordance with the constitution and properly exercise powers

Each director must ensure that they:

  • only exercises their powers for the purposes for which they are conferred, and
  • acts in accordance with the company’s constitution.

For these purposes, a company’s constitution includes (but is not limited to):

  • the company’s articles of association, and
  • any resolution or agreements affecting the company’s constitution.

Every director should ensure that they are fully aware of the content of the company’s constitution and all resolutions and agreements affecting it.

Duty to promote the success of the company

This duty requires that director acts in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. To be able to comply with this duty, the directors should first establish what ‘success’ means for the company.

Duty to exercise independent judgment

A director has a duty to exercise independent judgement, which means that he or she must not blindly follow the advice or instructions of a third party or fetter his or her discretion.

Duty to exercise reasonable care, skill and diligence

A director has a duty to exercise the same reasonable care, skill and diligence that would be exercised by a reasonably diligent person with:

  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
  • the general knowledge, skill and experience that the director has.

This is a two part test, the first part of the test is objective and sets a minimum standard for a director based on their particular role and responsibilities. The second part of the test is subjective and takes into account the particular director’s actual experience, knowledge, skills and specialism.

Duty to avoid conflicts of interest

A director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company.

The prohibition relates to the situation rather than the actual conflict, thus, it appears that this duty applies whether or not the director has any influence over the situation and even if the conflict in question is trivial in nature. The scope of this duty is therefore very wide!

This duty is not infringed:

  • if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest;
  • if the matter has been authorised in advance by the directors in accordance with the CA 2006, or
  • where a company’s articles contain provisions for dealing with conflicts of interest, the directors have acted in accordance with those provisions.

Please note that authorisation cannot be given retrospectively and it applies to the conflict situation only and not other breaches of duty.

Duty not to accept a benefit from a third party

A director is under a duty not to accept a benefit from a third party that is conferred because:

  • he is a director, or
  • he has done (or not done) anything as a director.

This duty does not catch benefits accepted by a director from the company, an associated body corporate or a person acting on behalf of the company or an associated body corporate.

There is no definition of what constitutes a ‘benefit’, although it is thought to have a broad meaning that covers benefits of any description, including non-financial benefits.

Duty to declare an interest in a proposed transaction or arrangement

A director who is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company has a duty to declare the nature and extent of that interest to the other directors before the company enters into the transaction or arrangement, except where:

  • the director is not aware of his interest or the transaction or arrangement in question (although for this purpose, the test is objective and director is treated as being aware of matters of which he ought reasonably to be aware);
  • the interest cannot reasonably be regarded as being likely to give rise to a conflict of interest;
  • the other directors are already aware of the interest (and for this purpose, the test is objective and the directors are treated as being aware of matters of which they ought reasonably to be aware), or
  • it concerns the terms of his service contract that are to be considered by a meeting of the directors or a committee of the directors.

The declaration of interest must be made as soon as reasonably practicable after the director becomes aware of the interest.

Breach of a duty

The consequences of a breach of duties may, amongst other things, include:

  • damages or compensation where the company has suffered loss;
  • restoration of the company’s property;
  • an account of profits made by the director, and
  • rescission of a contract.

It may be possible for a director to be protected from liability in the event of a breach of the general duties by:

  • directors’ insurance;
  • an indemnity from the company;
  • ratification by the members of the company, or
  • relief from the court for the breach of duty.

 

The Legal Stop provides several legal documents and contracts aimed at helping you comply with your legal duties as director!

Compromise Agreement

A Compromise Agreement (also known as “Termination” or “Severance Agreement”) is an agreement which enables an employee and the employer to agree that the employee will not pursue a statutory claim or claims against the employer in return for compensation.

Compromise Agreements are recognised by statute and they are an exception to the general principle set out in all employment legislation that an individual cannot contract out of their statutory employment rights. They are the only way in which an employee can contract out of their rights under employment law. They enable employees to agree to compromise their own statutory employment rights in return for compensation. The main employment rights most often compromised relate to withdrawing an existing, or subsequently refraining from bringing a, claim to an Employment Tribunal and/or the courts.

Compromise Agreements are becoming increasingly common. They are often used to safeguard the interests of both employer and employee redundancy situations. In these situations it is common practice to offer a compensation payment (also known as “Ex-gratia Payment”) above and beyond the employee’s statutory redundancy payment.

Compromise Agreements are most commonly used:

  •  To settle an existing claim an employee might have against the employer
  • To prevent an employee from claiming before an Employment Tribunal and/or the courts
  • To avoid legal challenge in redundancy situations

Provided that the Compromise Agreement is legally binding once the agreement is signed, the former employee cannot subsequently lodge a case with an Employment Tribunal or the courts. That is a major plus for the employer. In return, the employee receives an ex gratia payment and both parties agree to keep the terms of the agreement secret.

In order for a Compromise Agreement to be valid it must comply with stringent statutory conditions. There are strict and well-defined requirements to be fulfilled to ensure that a Compromise Agreement is valid. A correctly structured Compromise Agreement will be legally binding on both parties.

The following conditions must be satisfied in order for the Compromise Agreement to be valid. If these conditions are not satisfied then the Compromise Agreement is not legally binding:

  • It must be in writing
  • It must clearly identify the complaints being settled. The Agreement must specify what specific claims the employee is agreeing not to pursue
  • The employee must have received independent legal advice
  • It must be signed by a qualified adviser who must have properly advised the employee of the statutory employment rights he has agreed to compromise
  • The adviser must be covered by a suitable insurance policy. The policy must cover the adviser against the risk of a claim for losses because of the advice that has been given
  • The agreement must contain a statement to the effect that the conditions regulating compromise agreements have been satisfied

Compromise Agreements are generally marked “without prejudice and subject to contract” to prevent an employee subsequently using evidence of an offer before an Employment Tribunal or court, should an agreement not be reached between the employer and the employee.

N.B. It is a common mistake to think that, where any payment is made on termination of employment, it is not taxable unless it exceeds £30,000.

The taxation of payments made on termination of employment depends on the type of payment made to an employee. If a payment or benefit is an entitlement under the contract of employment or the payment or benefit derives from the employment, it will constitute employment income and will be subject to tax. If a payment or benefit is not employment income, it is not taxable. Thus, if a termination payment and the value of any post-termination benefits is not taxable, the first £30,000 will be tax free.

Under a Compromise Agreement an employee receives all that is due to them by way of salary and benefits up to the termination date. A payment by way of ‘compensation’ is also made to the employee. In return for this the employee agrees not to bring any claims against the employer whether through the Employment Tribunal or the courts. Effective use of Compromise Agreements helps to prevent lengthy, costly and time consuming litigation by providing the parties with a clean break.

For a fully comprehensive Compromise Agreement, suitable for settling the claim of any employee please visit: http://www.thelegalstop.co.uk/Employment/Compromise-Agreement.html