A recent survey of around 94 organisations, conducted by IRS Employment Review, has found that two-thirds of employers favour paying off a sacked employee on the quiet rather than exposing themselves to the potentially costly and embarrassing risk of an employment tribunal. The survey has found that despite the introduction of new statutory dispute resolution procedures introduced in October 2004, the use of compromise agreements remains extensive. Around 70 of the organisations questioned admitted to using compromise agreements to avoid the cost and hassle of an employment tribunal, and more than a third confessed to entering between three and five agreements in the past two years.
The use of compromise agreements has become particularly popular as they enable employers to deal with a whole host of 'difficult' situations, including after a merger "to avoid difficult redundancy situations"; where "a manager was not performing but their underperformance was considered difficult to quantify"; and where an employee "only wants approximately £1,000 and its cheaper than preparing a case". Many organisations also now use agreements to deal with the newer areas of anti-discrimination legislation on sexual orientation and religious belief.
However, although employers believe that by entering into such agreements they can wash their hands of the employee in question and consider the matter closed, it has emerged in recent case law that this is not necessarily the case. The recent decisions in University of East London v Hinton (2005) and Hilton UK Hotels v McNaughton (2005) have cast doubt on whether employers can be guaranteed the clean break they envisaged.
In both cases particular consideration was given to the wording of section 203 of the Employment Rights Act 1996 (ERA) and the need in any agreement to compromise "particular proceedings". It has emerged that it is not sufficient for the employee to have contractually compromised their claim, even where the intention of this is clear from the wording of the agreement. The agreement must also be well drafted and relate to the employee's particular circumstances to prevent the employee going back on the agreement.
In Hinton, where an employee was able to bring a claim under the whistleblowing provisions of the ERA, the Court of Appeal held that it was not sufficient for the compromise agreement to refer to "all statutory claims" or all claims under a particular statute. The agreement must either refer to the section of the statute or describe the generic nature of the claim, for example "unfair dismissal". The relevant failure in this case was to specifically list a claim under Section 47B (the relevant whistleblowing provisions) of the ERA.
Also in McNaughton the Employment Appeal Tribunal held that an employee had not waived her right to bring a claim that her exclusion from the employer's pensions scheme was a breach of the Equal Pay Act 1970, despite having signed a compromise agreement. The fatal flaw for the employer was that the compromise agreement only covered statutory claims which the employee believed she had or might have against the employer. This wording did not prohibit the employee from bringing a claim she did not know she had at the time, despite the fact that there was a general waiver of future claims.
These cases serve as a word of caution to all employers considering entering into compromise agreements. Whilst in most cases compromises agreements act as a very useful tool in getting rid of unwanted employees, it is essential that the contractual wording is sufficiently clear and specific to avoid claims such as these. In practical terms as a precautionary measure, some employers have also begun delaying payment of compensation under an agreement for three months after termination (the time limit for bringing an Employment Tribunal claim) and others have started inserting a clause in the agreement requiring re-payment of the compensatory sum in the event that the former employee brings a successful tribunal claim.