Tips for Employers and Employees
Whilst we can negotiate on your behalf (whether you are an Employer or Employee) we find that it most effective if the essential terms are resolved directly between Employer and Employee. The following guide is designed to encourage consideration of possible terms. We recommend that agreement is reached on all relevant heads before we are instructed.
Statements to Third Parties
We put this first because we have found that in many cases it is the matter that needs to be considered first and yet is frequently not considered at all! It is all very well having a term that advises that either party must keep the fact and terms of the Compromise Agreement strictly confidential, but it is important that both parties agree a line that can be given to third parties. This may be in the form of an express statement. More likely there will be two expressly agreed statements; one for “internal” third parties such as work colleagues and one for “external” third parties such as customers and suppliers. The statements should of course be consistent in terms of substance.
Grounds
Employers: you may have your reasons for not wanting to say anything. You do not have to but if it is redundancy we recommend that that is stated.
Employees: check if you have any redundancy protection schemes and if so what proof of redundancy is required by the insurer. You may need an express obligation on the part of your Employer to confirm that the reason for termination is redundancy. The statement in the Compromise Agreement should be adequate but there must be a term that permits you to disclose, if necessary, that provision to the insurer, otherwise the confidentiality terms will be breached.
Termination Date
Employers: you are talking without prejudice so depending on the overall deal and the circumstances there may be an opportunity to set a retrospective termination date. This is often the case where negotiations go beyond what the parties regard as the likely termination date.
Employees: you are in negotiations. You may have an ongoing disciplinary or performance review. Consider using these as grounds for deferring the termination date.
The Payments
- Payments In Lieu Of Notice (PILON)
Employers: everyone will qualify for this. (If you are justified in dismissing summarily you are unlikely to be talking Compromise Agreements). Some PILONs can be paid gross. If so the Employee is happier and you save the Employer’s NIC. Check whether this is possible. Is PILON contractual? Is it limited to basic pay only? If not, consider value of Employee benefits that will be lost in notice period – bonus due, pension contributions, healthcare plan, car.
Employees: check your contracts. Ensure all benefits are covered in your PILON. Consider particularly if a bonus would become payable in the notice period.
Employers: check statutory entitlement. Remember there is a strict formula based on age and length of service with a cap on weekly pay reviewed on the 1st February each year. Check whether there is any contractual redundancy entitlement. If you are offering enhanced redundancy pay specify what the statutory redundancy entitlement is in any event.
Employees: as above.
- Compensation Payment (aka Termination Payment/Severance Payment)
This is what the Employer is paying in exchange for the Employee giving up his statutory rights. If there are genuine issues then it should properly reflect what the Employee might receive in terms of a Tribunal award but discounted to reflect: avoidance of litigation risk, legal costs and inconvenience of a Tribunal claim, accelerated payment. Obviously it is what the Employer is happy to pay and the Employee happy to receive.
Employees: note that the other elements of the Compromise Agreement may offer something that an Employer is not otherwise obliged to offer but might be a benefit to you.
Remember that the first £30,000 is tax free. There may be ways of reducing the effect of tax on the tranche above £30,000 by considering additional payments into the pension fund, payments or PILON and termination payments in separate tax years.
Contractual Pay to Date of Termination
Employers: make sure that this is fully calculated and paid and that holiday pay has been correctly calculated. Both of course are subject to statutory deductions.
Expenses
Employers: make sure there is a provision for repayment of these and return of company card if there is one.
Employees: check obligations for claiming expenses. If some are getting stale put them in now! Note likely time limit for obligations in the Compromise Agreement for compliance.
Loans to Employees
Employer: are there any? Season ticket loans? Advances for courses? Check right of recovery and right to make deductions from final salary. If no right to deduct from salary ensure that repayment is factored into negotiations.
Employees: as above.
Confidential Information
Employers: consider carefully what constitutes confidential information. Are there any special features of your business or industry that need to be taken into account? It is usual to protect confidentiality with separate consideration, usually about £100.
Restrictive Covenants
Employers: take advice if you want to introduce a restrictive covenant into the Compromise Agreement. It may need to be tailored for this particular Employee. Merely re-stating contractual covenants does not make them effective if they would fail anyway. If you have effective contractual covenants then re-state these in the Compromise Agreement. A separate premium is usually payable but this has the added attraction to the Employee of not giving rise to a charge to tax (see Inland Revenue – Statement of Practice 3/96).
Employees: think carefully of your own plans for the future before committing to any covenants. You may want to offer consulting services to other group companies which may not be offensive to your Employer, but might appear to be in breach of the Compromise Agreement. Agree terms accordingly.
References
Employers: you will be advised not to give anything other than a factual reference. However, in difficult negotiations sometimes the offer to provide a testimonial reference (in agreed terms) can be a sweetener for the Employee to accept the compromise.
Employees: do not expect anything other than a factual reference but if there is an opportunity to negotiate a testimonial one then prepare one for your Employer’s consideration. Keep it modest. A prospective Employer will be suspicious of a reference that is excessively glowing!
Outplacement Consultancy
Employers: this is another useful “sweetener” and has the prospect of generating some goodwill. It may not cost you anything if it is not taken up. Talk to Outplacement Consultants first and find out what packages are on offer.
Employees: try and negotiate for this benefit and make maximum use of it.
Return of Company Property
Employers and Employees: is there any? If the Employee is going to be permitted to keep any property e.g. phone, laptop then make sure this is expressly provided for in the agreement as most lawyers have a “whole agreement clause” at the back of the agreement.
Intellectual Property and Creative Work
Employers and Employees: the Employer will legitimately require return of intellectual property such as databases, passwords etc. as well as the rights in any designs, inventions, processes which have been created by the Employee for the purposes of his employment.
Parties should check whether there was any intellectual property which belonged exclusively to the Employee prior to employment. To whom does this now belong?
In the case of creative work the Employee will want to retain his portfolio to demonstrate to prospective Employers. Employers you should permit this but ensure that the Employee understands that there are restrictions on use of the portfolio and he must not hold himself out as still retained by or acting for you.
Regulated Industries
Statements, references, use of confidential information, and offers of further assistance in litigation or enquiries by regulatory bodies, may well be regulated. Both parties should consider whether anything needs to be expressly incorporated into the Compromise Agreement so both parties understand what the position is.
“No Slagging Off” Clause
Employers will usually want to ensure that an ex Employee says nothing detrimental about them but there is no reason why such an obligation should not be reciprocated. This will be particularly important with Senior Employees or specific sectors where reputation and status are of great importance.
Pensions
Accrued pension rights are not affected by the termination. The Employee can be given a reassurance of that during negotiations. It may be that a tax advantage can be achieved by agreeing to pay certain sums direct into the pension fund. Depending on age the Employee may be able to access these immediately. If final salary is the Employee permitted to buy extra years?
Share Option Schemes
Rights under these are unlikely to be unaffected but Employees should check terms of the scheme to see how the options are to be exercised. There are likely to be time limits.
Share Save Schemes
The Employee will have the option to have his money returned and judgment in these matters is a commercial one.
Fees
Employers: remember you are paying fees of the Employee’s independent adviser. If you know that there are going to be issues then you should be prepared to increase the fees payable to the independent adviser to cover the reasonable costs that the Employee will incur in his given situation. You are after all trying to achieve a compromise. That will become more difficult if the Employee feels he is being forced into a position where he has to pay legal fees unreasonably.
Employees: you will not have to pay if we are required to advise on the agreement and we will also deal with matters immediately incidental to that to include a small element of ironing out glitches. If there are major issues or if the matter is not fully negotiated then you will become responsible for our fees over and above those provided by the Employer. We would expect the Employer to make a more significant contribution in those circumstances but in a difficult case you need to consider all the possible costs implications if you are not prepared to compromise. You will have to be prepared to meet some fees yourself.
And finally……
Employers and Employees: if the employment relationship is otherwise good the parties may wish to give consideration to future relationships. How are these to be achieved? Will the Employee offer consultancy services and if so, through what vehicle? Accountancy advice may be required by both parties lest the Inland Revenue take the view that the Compromise Agreement is a complex sham.
