compromise agreements and probably the world’s most expensive lunch

It is an often-heard maxim in contract law that a party cannot seek to claim the benefits of a contract which he has breached. While that is a rather simplistic statement and is, in practice, subject to numerous qualifications and exclusions, the decision of the High Court in Imam-Sadeque -v- Bluebay Asset Management (Services) Limited is an example of how the general principle can apply, even in the most complex of cases.

Heard over seven days and with the judgment of Mr Justice Popplewell running to 235 paragraphs in 61 pages, the case concerned the departure of Mr Imam-Sadeque from Bluebay. As is common with executive contracts there were “good leaver” and “bad leaver” provisions. Resignation would make Mr Imam-Sadeque a “bad leaver”. The distinction was particularly important for him since, as a good leaver, he would be able to exercise share options worth £1.7m. Terms were therefore set out in a compromise agreement.

what are “settlement agreements” and how, if at all, do they differ from compromise agreements?

During the second reading of the Enterprise and Regulatory Reform Bill on 11 June Vince Cable announced that the Government wants to promote and increase the use of agreements relating to the termination of employment as an alternative to employment tribunal proceedings. No details were provided but the intention is to "ensure that the offer of a settlement cannot be used against an employer in an unfair dismissal case". But, hang on, isn’t that what a compromise agreement under the current legislation does and are these new settlement agreements going to be confined to unfair dismissal claims?

It has been suggested that, for small employers, there will be no need to obtain legal advice. But small employers do not need legal advice as matters stand: it is employees who must obtain advice in order for an agreement to be binding. Clearly, employees might not know whether a proposed settlement is fair and reasonable given the circumstances and the requirement to obtain legal advice is intended to address this understandable lack of knowledge. However, the Government has suggested that employees will continue to enjoy full employment protection because they can reject a settlement offer and proceed to an employment tribunal.

compromise agreements – the law of unintended consequences

The government seemed to find it mildly surprising that over half the respondents to its consultation used compromise agreements often; most of those directly involved with employment law in practice would not. But there is a cost involved for employers every time one is used, especially since the decision in Hinton v University of East London CA (2005 EWCA, Civ 532) which had a big impact on drafting practice and then the advent of s.147 of the Equality Act 2010, which undoubtedly had unintended consequences, even though the government stoutly maintains that it is “fit for purpose”.
Hinton made it clear that compromise agreements must identify each and every claim that is being settled – thus the tendency to include a long list of possible claims in agreements to make sure that nothing is missed out, or the need to spend a lot of time identifying all possible claims to ensure that all necessary “i”s are dotted and “t”s crossed – meaning that agreements are generally cumbersome, and sometimes expensive to draft.

compromise agreements and Andy Coulson

Compromise agreements made the BBC News at Ten tonight with Robert Peston’s report that Andy Coulson received “hundreds of thousands” from News International while working as press officer for Prime Minister David Cameron.

The function of a compromise agreement is to prevent an employee who might bring a claim against his or her former employer from doing so. It’s an essential element of such an agreement that the terms remain confidential between the parties. Any properly drawn compromise agreement will ensure this. The idea is that a payment is made which represents a fair settlement without the need for the issues to be played out in public tribunal proceedings. However, if those issues are not subject to judicial scrutiny and the fact of the payment is disclosed, it’s easy for people to take the view that the employer is acknowledging wrongdoing by making the payment. Often that is not the case.

Compromise agreements

For many years it has been the practice of the Inland Revenue, now HMRC, to publish “extra-statutory concessions”. These effectively correct errors in and omissions from legislation which would result in tax being collected where it would be inappropriate. The practice has always been of questionable legitimacy. For HMRC to have discretion, even via published…

newsletter – Equality Act 2010 – compromise agreements

The general rule is that informal “out of court settlements” of employment disputes are not legally binding in the sense that they cannot exclude an employee’s right to take the matter concerned to an Employment Tribunal. As is well known, one exception to this general rule is a formal “compromise agreement”. Provided it complies with…

more about settlement agreements and compensatory awards

Proposals regarding settlement agreements from earlier this year have been fleshed out in a new government paper. Avid readers will recall talk of “protected conversations” – these seem to have died a death for now. The Government’s response to consultation seems to accept that such a concept could add to the administrative burdens on employers and create a new area of contention which could be “a field day for lawyers”. The response instead concentrates on “settlement agreements” to replace compromise agreements. The question is whether this will amount to more than just a change of name.
The paper sets out a proposed model wording for a settlement agreement, which doesn’t differ all that much from the sort of wording seen in compromise agreements in common use. This is not too surprising, given that any wording must be sure to satisfy the requirements of s203 of the Employment Rights Act 1996, which permits contracting out from employment rights in limited circumstances. Moreover, the standard wording sets out a long list of potential claims which could be covered. Many compromise agreements look pretty cumbersome, it is true, but that is for a number of reasons – some excessive caution perhaps, but many issues are often dealt with over and above statutory employment claims. Pensions and personal injury claims are frequently carved out. Benefits in kind and so on are dealt with. Employers want post termination restrictions and confidentiality obligations added or reaffirmed. The tax position needs to be dealt with. The employer wants written confirmation that the necessary legal advice has been given. The model agreement put forward covers some, but not all of these, and extends, with its guidance notes, to 15 pages.
More specifically we now have the answer to the question of contribution to the employee’s legal costs.

Is a settlement payment taxable?

One of the most frequently asked questions in HR is whether or not a settlement payment is taxable. Several different and apparently conflicting answers can all be correct, depending on the circumstances. In 2014 I wrote about the £30,000 tax exemption which does not apply in all circumstances and in 2011 I highlighted a potential trap for employers.

Now we have a further and significant contribution in the form of a decision by the Tax Chamber of the First Tier Tribunal in the matter of Mr A v HMRC. It is a basic principle of tax law that earnings are taxable. Unsurprisingly HMRC interprets “earnings” widely as including any payments in respect of which earnings are involved (section 62 Income Tax (Earnings and Pensions) Act 2003). As a result severance payments are frequently regarded as taxable (subject to the £30,000 exemption pursuant to sections 401 to 404A of the 2003 Act when applicable).

Mr A worked as a trader for a Bank in London. His job title was managing director and he was on a basic salary of £120,000 plus eligibility for the Bank’s bonus scheme. In the period from 2003 to 2007 he received significant bonuses based on the bank’s overall performance. In 2007 there was a dispute concerning his bonus and when the Bank was bought out he was made aware of imminent redundancies. He raised grievances including allegations of race discrimination (based on inappropriate comments made by the bank’s chairman and vice chairman).

In early 2008 he raised further grievances including the fact that other directors had received bonuses and he had not. A questionnaire was sent to the employer in accordance with the relevant provisions of the Race Relations Act (as it then applied). On March 2008 the Bank informed Mr A that he was to be made redundant and he was offered £1650 in statutory redundancy pay and a further ex gratia redundancy payment of £48,898. A couple of days later Mr A was offered a further payment if he agreed to sign a compromise agreement (now referred to as a settlement agreement). The agreement provided that in addition to the payments already offered he would receive a further payment of £600,000 in settlement of all outstanding claims. The terminology used will be familiar to those who have dealt with settlement agreements:
The parties have entered into this Agreement to record and implement the terms on which they have agreed to settle all outstanding claims which the Employee has or may have against the Employer…arising out of or in connection with or as a consequence of his employment and/or its termination. The terms…are without any admission of liability on the part of the Employer…
Unsurprisingly HMRC queried the £600,000 payment and asked for a detailed breakdown of what it consisted of.

Enterprise & Regulatory Reform Act becomes law – dotted with various employment law reforms

On 25 April 2013, the Enterprise & Regulatory Reform Act became law, on receiving Royal Assent.
It is an enormous Act and, quite frankly, a thorough hotch-potch. There are Parts covering the UK Green Investment Bank, abolition of the Competition Commission, laws concerning cartels, the appointment of bankruptcy adjudicators, copyright law and rules concerning estate agents. Part 2 (covering sections 7 to 24) is entitled Employment and it brings into law a number of provisions which have been covered by blog posts over the last few months. Where known I have included the relevant commencement dates. Key among them are:

ACAS and conciliation
There is a requirement for the reference of claims to ACAS before implementation, to attempt conciliation, along with extended limitation periods to enable this to happen (sections 7-10 & Sched 2): to those who remember the 2004 dispute resolution procedures, does this idea sound worryingly familiar? In a climate of cutting red tape this looks very much like adding some.
Employment Tribunals
There are changes to the potential make up of both Employment Tribunals and the Employment Appeal Tribunal – the latter to allow more appeals to be heard by a judge sitting alone (sections 11 and 12). As far as Employment Tribunals are concerned “legal officers” will be able to make legal decisions, including those determining proceedings, in place of an employment judge. There can be no doubt that this is nothing more than a cost cutting measure and has little if anything to do with the proper administration of justice.
Qualifying periods (effective 25 June 2013)
Section 13 deals with the removal of any qualifying period for a complaint of unfair dismissal based on political opinion (thus implementing European Court of Human Rights requirements identified in Redfearn v UK).

settling TUPE claims

Two recent cases have considered the effect of compromise agreements in TUPE cases where claims are made against more than one employer.
In Optimum Group Services Plc v Muir the Employment Appeal Tribunal looked at the situation in which an employee with a claim arising out of a TUPE transfer reached a settlement with one transferee (in a case where he was claiming against the transferor and a number of other potential transferees), while carrying on against other respondents. At the tribunal hearing he did not disclose the settlement, which the Employment Tribunal decided should not be deducted from the compensation he was awarded. It included a compensatory award of £23,668.84, after applying a 50% deduction to reflect the possibility he would have been made redundant in any event.
The Employment Appeal Tribunal overturned this decision, remarking that the compensatory award “should not over compensate the claimant. To do so could hardly be said to be just or equitable“. It ordered the claimant to disclose the £20,000 he had received under the compromise agreement, and ruled that it should be deducted from the figure he could recover for loss of earnings. It did, however make it clear that under Norton Tool Co Ltd v Tewson, notice pay would continue to fall outside the principle that there should be no double recovery of loss of earnings.
Lady Smith summarised the principles governing the award of compensation as follows: