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Businesses must be particularly careful when drafting terms under which they provide indemnification for costs incurred in relation to future legal proceedings.
In most cases, such an indemnity will only be provided in return for the employee agreeing to act as a witness on behalf of their employer. Where this type of indemnification is necessary, both parties should clarify the circumstances in which they think the indemnity may be called upon and its scope. Businesses should also consider capping their financial exposure and carefully wording the clause to only cover specific types of fees and costs and only those that have been "reasonably and necessarily incurred."
A high profile Court of Appeal decision (Coulson v News Group Newspapers Ltd  EWCA Civ 1547. Jurisdictions, England, Wales.) underlines the need for businesses to ensure that any compromise agreements they enter into are carefully drafted. The court overturned a High Court decision that an indemnity in a compromise agreement, to pay reasonable costs and expenses properly incurred by a former employee in defending criminal proceedings, was limited to the lawful responsibilities of the employee's post and did not extend to allegations of personal misconduct. The court held that the indemnity would apply where the criminal allegations arose out of how the employee had gone about the performance of his job.
The checklist below sets out the key issues a business should consider before entering into a compromise agreement with an employee.
What is a compromise agreement?
A compromise agreement is a legally binding agreement between a business and an employee under which the employee agrees to settle their potential claims and in return the employer will agree to pay financial compensation. Sometimes the agreement will include other things of benefit to the employee, such as an agreed reference letter.
In what circumstances will a compromise agreement be appropriate?
- An employee can make a claim against a business under both their contract of employment and under statute. These claims may arise:
- on recruitment;
- during employment; or
- when their employment has been terminated.
- In many cases, a business may want to make a payment to an employee in return for an effective waiver of their potential claims. Businesses can enter into an agreement with an employee to settle potential claims when they are still working for the business, but in most situations, their employment will have ended (or be about to end).
What are the legal requirements for a valid compromise agreement?
For a compromise agreement to be legally binding, there are a number of conditions that must be met:
- The agreement must be in writing.
- The agreement must relate to a particular complaint or particular proceedings.
- The employee must have received legal advice from a relevant independent adviser (for example, a qualified lawyer or union official) on:
- the terms and effect of the proposed agreement; and
- its effect on their ability to pursue any rights before an employment tribunal.
- The independent adviser must have a current contract of insurance (or professional indemnity insurance) covering the risk of a claim against them by the employee for the advice.
- The employee’s adviser must be identified.
- The agreement must state that the conditions regulating compromise agreements have been satisfied.
Possible content of a compromise agreement
Other than the legal requirements listed above, the contents of a compromise agreement are largely at the discretion of the business and the employee involved. Examples of common clauses include:
- Compensation for loss of employment.
- Contribution to legal fees.
- Waiver of claims by the employee, including warranty that the claims listed are the only claims which the employee has against the employer.
- Re-assertion or modification of existing restrictive covenants.
- Indemnity from employee in relation to tax and National Insurance Contributions.
Protecting confidential information is usually crucial to a business and therefore compromise agreements often contain confidentiality provisions, for example, the employee agrees:
- Not to use any confidential information.
- Not to disclose any confidential information to any person, company or other organisation.
- To keep the terms and existence of the agreement confidential.
- To not make any derogatory comments about the employer (or any individuals employed by it) to a third party.
Which types of claim can be settled by a compromise agreement?
A large number of statutory claims can be settled by a compromise agreement, for example claims for:
- Unfair dismissal.
- Pregnancy or maternity-related discrimination.
- Discrimination, victimisation or harassment related to sexual orientation.
Which types of claim cannot be settled by a compromise agreement?
There are a number of statutory claims that cannot be settled by entering into a compromise agreement, including some types of:
- Personal injury claims.
- Pension claims.
- Claims following the transfer of a business.
For legal advice on employment law matters, please contact Neil Largan.