The Jersey media has recently reported much about the sums paid to certain public officials when their employment contracts have come to an end, in particular the payment to the former Chief Executive of the States of Jersey.

As anyone who has been involved in the drafting of the terms and conditions of a senior company executive, civil servant or high profile sports personality will know, their contracts often include provision for a severance payment in the event that the relationship ends earlier than anticipated. This is known as a severance agreement and will record the terms of the employee's departure and the payments to be made in return for a waiver of any contractual claims. While a severance agreement would thus avoid the employee bringing a claim for wrongful dismissal, it would not cover any potential statutory claims that the employee may have. Statutory claims can only be waived by means of a compromise agreement.

Compromise agreements are therefore wider in scope than severance agreements and when an employer offers one to an employee, it is intended to amount to a waiver of all contractual and statutory claims, actual and potential (with very limited exceptions – see mention of this below).

Why the need for a severance payment clause?

Sometimes it is felt that certain clauses have to be written into the contract of employment (or the terms and conditions) to recruit the desired calibre of candidate. These frequently include provision for a severance payment to be made.

Clauses relating to severance payment(s) can also be included to reflect or acknowledge the fact that the post may involve being in the public eye and subject to potential personal criticism by the public and others.

In times of cut backs and recession it is not surprising that the level of such payments is questioned, but considering it in the context of other contractual terms can often make what might seem an excessive or unjustifiable sum understandable. For example, if one takes into account that the basic annual salary of such an individual will be high, along with the value of other entitlements and benefits (such as private health insurance, dental cover, car parking), then the figures very quickly add up.

Such large pay-offs have generally received the same disdain as large bonus payments for senior executives, but for the same or similar reasons, their contracts often provide for these if they satisfy certain performance criteria.

Severance payments kick in if a contract of employment or terms and conditions specifically providing for the occurrence of a certain situation or event; on other occasions a large sum can be paid as a result of a negotiated settlement (reached after the initiation by the employee of some form of claim), specifically to avoid the protracted time, expense and/or embarrassment that could be associated from the contested proceedings.

The Employment Tribunal

A claim for alleged breaches of a contract of a senior official would be pursued in the Royal Court as the remit of the Employment Tribunal is currently limited to £10,000. However, if the employee were to additionally allege a form of unfair dismissal, then the Employment (Jersey) Law 2003, as amended ("the Law"), provides for this to be brought by way of a JET1 before the Employment Tribunal. Potentially, therefore, there is scope for two separate sets of proceedings in Jersey, albeit they relate to, or arise from, identical facts or circumstances which resulted in the termination of the relationship. In such an instance, the law provides for the unfair dismissal proceedings to be determined first, and the employee has to lodge the JET1 form within 8 weeks of the effective date of termination.

An example of an employee who brought to such claims before the Tribunal was Mr Whitley. In 2011, he attended two separate hearings before the Tribunal. First, in July, it heard his claim for unfair dismissal and found that he had been unfairly dismissed. In December , it considered his claim for wrongful dismissal but this did not succeed. As his claims raise several points which are worthy of comment, these have been set out in another article to this newsletter.

From the employer's perspective, the purpose of entering into a compromise agreement is to provide them with the comfort or security of avoiding any possibility of litigation, which may be lengthy, possibly complex and if court proceedings were to commence, would incur legal fees as well as the payment of any damages.

Large payments are thus sometimes made, on a staged basis, to the employee in lieu of what they may be legally entitled to if they were to bring, and succeed with, a claim for unfair dismissal and/or breach of contract. However, such payments are often made to the employee without the employer undertaking much, or any, analysis (or legal advice) on whether there is the basis for any form of claim or even if there is, whether this has any real merit or prospect of success.

All types of agreement (whether it be a severance, compromise or settlement agreement) always include a clause relating to the confidentiality of the terms agreed, although the parties are invariably permitted to disclose details to their professional advisors, the Comptroller of Income Tax or as may be required by law, and in respect of the employee, to their immediate family.

Another reason why the payments made under such agreements can be so large is because of the duration of the notice period within the terms and conditions of employment of such top civil servants or high profile individuals. Often, this can be 6 or 12 months. Consequently, for example, if a basic annual salary is in excess of £100,000 with a notice period of 6 or 12 months, then when coupled with the monetary value of all other benefits and contractual entitlements that they would be entitled to receive during the notice period, plus an allowance made for a potential award for unfair dismissal or constructive unfair dismissal (such being dependent on the duration of the employment but under the Employment (Awards) (Jersey) Order 2005 is capped at 26 weeks' gross salary), it soon becomes apparent how a figure of in excess of half a million pounds can be arrived at.

Once it is known that the employer/ employee relationship has come to an end, or needs to be ended, it is often not practicable or viable for the employee to be allowed to continue in the post or to have access to premises, systems, computers etc. They are often put onto garden leave as they are perceived as a potential threat or risk to the business or the organisation. Public perception is often that garden leave is being paid for doing nothing and as such is grossly unfair or improper, but nonetheless the employee does still have to abide by various duties and certain conditions that continue to apply until the end of any notice period, and often for a period thereafter.

If no compromise agreement is offered or agreed, and the employee commences proceedings, but successful negotiations take place prior to any contested hearing, the amount paid out by the employer pursuant to either a settlement or a conciliation agreement are often the same, or similar, to that which would have been paid if a compromise agreement had been entered into earlier. However, in this scenario, the employee has been put to the test of whether they are prepared to pursue the matter and presumably, they at least have an arguable case such that the employer feels it needs to settle the action.

An exception that is sometimes appropriate to be made to the list of potential claims that an employee is waiving the right to bring when signing a compromise agreement, is in respect of a potential personal injury that has, or may have, arisen during the course of their employment. Thus an employee with such a claim would still be able to commence litigation in respect of this within the prescribed period, but the difference with this is that this is not an employment claim. Although the employer would be named as the Defendant to any such action, any damages which the employee receives would be paid by the Insurers who were the relevant Employers' Liability Insurers at the time the injury was suffered, and not by the employer itself.

Case study: an example of when a compromise agreement was not successful in avoiding litigation?

Occasionally, there may be circumstances when the terms of a compromise agreement may be undone or set aside. Misrepresentation can be one reason for this. Those who follow football may recall that in 2007, Iain Dowie was manager of Crystal Palace Football Club ("the Club"). Within his fixed term contract was a clause that if he left early and took another post at another club prior to the expiry of the term, in mid 2008, then the club would be paid £1 million in compensation on the day that he started at the new club. A compromise agreement was entered whereby the club waived its right to the compensation. A few hours after Dowie's departure, there was a press conference during which it was said that the reason for his departure was that he wanted to work geographically closer to his family in Bolton. It was a surprise to many when a week later Dowie was unveiled as the new manager at Charlton Athletic Football Club, only a few miles away. Thus, the club served Dowie with a High Court claim for the £1 million in damages, on the basis that he had deliberately misled it as to his reason for wanting to leave and that because of this, it had agreed to forfeit the right to the compensation. There was a preliminary hearing in the case to determine certain issues, but at which the Judge decided that Dowie had intended that the club's representative sign the agreement under false pretences and also that the club had been deceived about the chances of Dowie taking the vacant manager's post at the neighbouring club, which in turn had influenced its decision to sign forfeiting the right to £1 million.

In summary, while it may be embarrassing for such large payments to be made per se, or particularly when others are being made redundant, there may be certain instances when a compromise agreement is subsequently considered void and it is possible for the employer to recover from the employee for consequential loss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.