09 December 2010
Have compromise agreements been compromised?
It appears that the Equality Act 2010 has had an unintended effect on the potential enforceability or otherwise of compromise agreements. These agreements, which must comply with statutory requirements, are commonly used to agree terms on termination of employment and require an employee to waive statutory claims against the employer.
Under existing legislation set out at section 203 of the Employment Rights Act 1996, a departing employee is required to obtain advice from an independent adviser on the terms of a compromise agreement, and in particular, on its effect on his or her ability to pursue claims in the employment tribunal for the agreement to be binding. Essentially, to be independent, the adviser has to be independent from the employer.
However, the requirements for independence at section 147(5) of the Equality Act exclude as being independent (amongst others), a person acting for an employee entering into a compromise agreement. This has given rise to concern that compromise agreements are not valid if the employee has been advised by their own solicitor.
The Government Equalities Office has denied that there is any intention to change the requirement for independence, although there has been conflicting counsels' opinion on the effect of the new wording. Our view is that:
1. tribunals are likely to interpret the statute purposively and in favour of compromise agreements being enforced in spite of the confusion;
2. any attempt by a former employee to receive money under an otherwise enforceable compromise agreement and then sue for further compensation may be dismissed as being an abuse of process;
3. compromise agreements should, in any event, contain a provision requiring the repayment of at least a proportion of any payment received under its terms if an employee issues legal proceedings in breach of an undertaking that they will not do so;
4. a paragraph can be inserted confirming that in spite of confusion in respect of the adviser's independence, the parties intend that the agreement should be deemed binding; and
5. if there is a particular lack of trust, ACAS could be involved and a COT3 agreement entered into instead, this being another form of binding agreement.
If you would like to discuss any of the issues raised in this article please contact either Peter McRoberts or Sarah Rushton on 020 7465 4300.
This publication is not intended to provide a comprehensive statement of the law. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken.
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This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.
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