UK: It´s All About Compromise

Last Updated: 17 January 2001

As a general rule ‘out of court settlements’ of employment disputes are not legally binding in that they cannot exclude an employee’s right to take the matter concerned to an employment tribunal (section 203(1) of the Employment Rights Act 1996 (ERA)).

There are few exceptions to this basic rule. One of the most important is where a settlement takes the form of a formal compromise agreement fulfilling the conditions in section 203(3) of the ERA (a compromise agreement). Another exception includes the settlement of matters where an ACAS conciliation officer has ‘taken action under section 18 of the Employment Tribunals Act 1996’ (ETA) normally involving a COT3 form of settlement (the COT3 procedure).

The compromise agreement procedure enables employers and employees to make fully binding settlements of most employment disputes without involving ACAS. However, it will not be effective to settle disputes arising under the TUPE Regulations.

The categories of proceedings that can validly be settled by a compromise agreement include:

  • those complaints under the ERA that are specified in section 18(1)(d) of the ETA, which include unfair dismissal proceedings (see section 203(2)(f) of the ERA)
  • proceedings under the Sex Discrimination Act 1975 and the Equal Pay Act 1970
  • proceedings under the Race Relations Act 1976
  • proceedings under the Disability Discrimination Act 1995
  • proceedings under the Trade Union and Labour Relations (Consolidation) Act 1992
  • National Minimum Wage Act proceedings
  • proceedings under the Working Time Regulations 1998
  • proceedings under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations

There are several conditions to fulfil if a compromise agreement is to be binding as a full and final settlement. For instance, the agreement must be in writing, it must relate to the particular issue in question and the particular proceedings or potential proceedings and the employee must have received advice from a ‘relevant independent adviser’ as defined.

If a compromise agreement does not fully comply with the above requirements it can still be partially effective. Although it will be void in respect of statutory claims, such as unfair dismissal, it will be effective in respect of any non-statutory claims, such as breach of contract. In Sutherland v Network Appliance Limited 2000 the employment appeal tribunal held that where a compromise agreement seeking to exclude any claims fails to comply with section 203(3) of the ERA the agreement is only void in respect of statutory claims. Contractual claims will remain compromised by the agreement. In Sutherland the agreement had failed to comply with the requirements and therefore the attempt to exclude S’s statutory rights was void, leaving him free to pursue his statutory claims. The contractual claim remained compromised, with the effect that S could not go on to pursue a claim for breach of contract.

It should be noted that straightforward contractual claims relating to termination of employment, such as claims for payment in lieu of notice or unpaid wages, can be settled without a formal compromise agreement. However, it is common to waive both types of claim by means of compromise agreements as it is rare to find someone with a contractual claim who might not also have the possibility of some form of statutory claim, which cannot be waived without observing the provisions for compromise agreements.

Points To Be Aware Of

A compromise agreement can be binding in respect of the 'particular proceedings' being settled (ie any claims relating to or arising out of the contract of employment or its termination and of which the employee and employer were aware). However, it will be ineffective as a total blanket ‘full and final settlement’ of all claims. In Lunt v Merseyside Tec Limited 1999 whilst it was confirmed that a compromise agreement is effective not only in settling those complaints which have formed the basis of an originating application to the employment tribunal but can also include such potential claims as the employee has raised, it was also confirmed that compromise agreements cannot be used to compromise all and any complaints which an employee may have but has not raised with the employer, as at the date of the agreement. A compromise agreement can settle claims arising under more than one statute but to be valid must set out each statute in relation to which a claim is being settled and state that the conditions regulating compromise agreements are satisfied in respect of each such statute.

Therefore a compromise agreement should state the particular complaints which the parties are compromising. The employer should try to ensure that the employee discloses all complaints that he or she believes may exist. The agreement can go as far as identifying a range of employment claims that the employee might have against the employer.

Restrictive Covenants

It is good practice to set out clearly in the compromise agreement what is intended with regard to the continued applicability of any restrictive covenants. This will avoid any argument to the effect that the compromise agreement has superseded any such covenants and represents a new entire agreement. Where the covenants contained in the original contract are in an acceptable form it is usual simply to state that the relevant clauses of the contract will remain in full force and effect.

Where the original covenants are considered not to be well drawn or there has been a re-negotiation of their scope then it will be necessary to set out in full the new restrictions in the agreement. However, the Income and Corporation Taxes Act 1988 imposes a charge to tax where a payment is made in return for entering into a restrictive covenant. This could have the effect of rendering the entire payment under the compromise agreement taxable and forfeiting the entitlement to the tax-free sum of Ł30,000. If restrictive covenants are a major concern consideration should be given to sacrificing a tax benefit to avoid arguments arising.

Personal Injury

When acting for an employee who is unsure whether or not he might have PI claims against his employer in the future it is advisable expressly to exclude personal injury claims in routine compromise agreements. However, where there is any indication of a personal injury claim arising out of any alleged claim for discrimination employers would be well advised to include personal injuries in the list of claims to be waived.

Why Bother?

If all the requirements of a compromise agreement are fulfilled they will hopefully avoid the need for the parties to proceed to a full hearing, if concluded early enough. Clearly this will save any associated expenses for the employer in having to take management time out of the office to attend the tribunal. Secondly, even though a party may have a case with good prospects of success, at the end of the day there is always an element of risk involved in litigation and (unless you can predict the future!) there is no guarantee that the desired result will always be achieved. To compromise the proceedings early on will reduce any such litigation risk. Thirdly, an employee hoping for an award of money in bringing his claim will receive this far quicker than having to wait several months before a case is even listed for hearing.

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.

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