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Compromise Agreements – Valid or Void?

Employers should beware.

The compromise agreements they are currently handing out like confetti to departing employees may well not be valid, particularly if the Employee has not had proper independent legal advice.

Compromise agreements are part of everyday life for Employers in this era of mass redundancies because getting the Employee to sign one means that the termination payment is accepted in full and final settlement and the Employer cannot be sued later. In this sense they are there to protect the Employer.

However, one of the key requirements for a valid compromise agreement is that the Employee gets proper, independent legal advice from an independent solicitor. Section 203 of  The Employment Rights Act 1996 is quite specific. The compromise agreement must identify the independent adviser. The Employee must have received legal advice from a relevant independent adviser on the effect of the compromise agreement and the independent adviser must have a current contract of professional indemnity insurance, covering the risk of a claim against them by the Employee in respect of the advice. Further, the lawyer must certify that his firm is not acting for the Employer. So the statute is pretty clear and the independence of the Employee’s solicitor is a key factor in deciding whether the compromise agreement is valid.   In addition, no law firm should ever accept instructions if that would result in a conflict of interest.

What if the Employer ‘recommends’ the solicitor to which the Employee should go for advice on the compromise agreement or agrees only to pay the legal costs if the Employee uses that particular firm? What if that firm gets a constant stream of instructions on compromise agreements from the same Employer and is paid between £350 to £950 each time? Do you think that firm can be regarded as ‘independent’? Do you think that might give rise to a conflict of interest?

It is not surprising that such ‘recommended’ firms may well, in these circumstances, be reluctant to negotiate on the Employees behalf and are far too ready to accept that the first offer is the best offer available. They may be too keen to breeze through the compromise agreement or explain it in very general terms and seem keen to get Employees in and out through the door as quickly as possible.

Employers should therefore be very wary of providing Employees with a recommeded firm. At the very least the Employer should provide the Employee with a list of firms that can advise on comprmise agreements and the list should be a long list. We would suggest there should be at least 10 firms on the recommended list. The Employer should not say that they will only pay for the legal advice if given by either one or two named law firms and the Employee should always be told that they are free to take advice from any firm of their choosing. The practice of ‘bulk advice’ being given to departing Employees at the Employers premises on an appointed day is also likely to call into question whether the employee has truly been given independent legal advice as the law requires.

Employers should monitor how dependent one particular firm may become on the income generated by referred compromise agreements. This is particularly important for large Employers, where one law firm is used regularly and is earning substantial fees. Any law firm advising on a compromise agreement ultimately needs to be free to recommend that the Employee sue their Employer. If a law firm is regularly in receipt of a substantial fee income from that Employer they may well be reluctant to “rock the boat” by recommending further negotiations or litigation.

If the Employer tries too hard to control the manner in which the Employee receives independent advice, the compromise agreements may well be totally unenforceable and the Employer may find himself embroiled in litigation that he sought so hard to avoid.

For truly independent advice on compromise agreements visit Independent Advice on Your Compromise Agreement …..and always make sure that independent means just that.

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