Defective Compromise Agreements & Employment Law

There are specific rules that normally apply when an employer enters into a compromise agreement in order to prevent an employee from taking action on a particular matter at the Employment Tribunal at a future date. A recent case has further illustrated the need for careful drafting of such agreements if they are to achieve their intended purpose.

One such rule is that the agreement itself must fulfil conditions set out in the Employment Rights Act 1996 and, if the agreement is intended to apply to discrimination claims, the conditions set out in the relevant discrimination legislation. Another is that the agreement must relate to particular proceedings and cannot be a generalised, ‘cover all’ agreement.

The Employment Appeal Tribunal recently ruled in Palihakkara v British Telecommunications plc that a compromise agreement did not cover claims of sex and race discrimination because it did not specifically include a clause confirming that the conditions in the relevant legislation had been satisfied, even though the agreement did confirm that the conditions of the Employment Rights Act regulating such agreements were satisfied.

In addition, the compromise agreement in this case stated that the payment to the employee was made and accepted ‘in full and final settlement of all claims past or future arising out of the termination of her employment’. The Employment Appeal Tribunal judged that the meaning of these words was that the agreement did not compromise claims other than those which arose out of the termination of the employment, in spite of the use of the words ‘past or future’.

In this case, the compromise agreement clearly failed to protect the employer as intended because care was not taken to abide by the rules relating to such agreements. If you are contemplating entering into a compromise agreement, we suggest that you ensure that all relevant claims are compromised and check that this is the case at law.