Compromise Agreements - Employers Beware - Again!

In previous issues of SMIB, we have highlighted some of the pitfalls that need to be avoided when drafting compromise agreements. A further warning comes courtesy of the case of Palihakkara v British Telecommunications plc, Employment Appeal Tribunal, 9 October 2006.

Ms Palihakkara had been employed by BT as a Finance Manager/Finance Analyst from September 2001. It would appear that her time with BT was not a happy one. She claimed to have been subjected to a sustained course of bullying and racial harassment and she had submitted various grievances. During the course of her employment, her health deteriorated and in late March 2005, she decided to apply for voluntary redundancy. A compromise agreement was then entered into on 28 April 2005. In terms of the agreement, Ms Palihakkara received a severance payment of £12,897.15. Subsequently, Ms Palihakkara presented an application to the Employment Tribunal. She sought to pursue a number of discrimination and termination of employment related claims. BT argued that the application should be struck out on the basis that the claims that Ms Palihakkara sought to pursue had been compromised by her. That argument was successful before the Employment Tribunal but the EAT found against BT.

Two of the issues that the EAT required to consider were firstly whether the agreement covered claims that were said to have arisen during the course of Ms Palihakkara's employment (as opposed to at its termination) and secondly whether the agreement was formally valid in terms of the Sex Discrimination Act 1975 and the Race Relations Act 1976.

With regard to the first issue, clause 2.2 of the compromise agreement stated that the severance payment was being accepted "in full and final settlement of all claims past or future arising out of the termination of her employment". The EAT was of the view that the meaning of this provision was clear. It meant that the only claims compromised by Ms Palihakkara were those that arose out of the termination of her employment. In other words, claims of discrimination during the course of her employment had not been compromised. BT's argument that the use of the word "past" favoured their interpretation of the clause was rejected by the EAT on the ground that, past or future, it was only claims "arising out of the termination of employment" that were compromised.

Insofar as the second issue is concerned, it is important to bear in mind that, to be valid, compromise agreements require to comply with certain conditions. The conditions are set out in the various pieces of legislation that allow for complaints, such as unfair dismissal or discrimination, to be compromised. The conditions include that the agreement is in writing and that the employee has received independent legal advice prior to entering into it. They also include the requirement that the agreement must state that the conditions regulating agreements under the particular piece of legislation have been satisfied. Thus, in Ms Palihakkara's agreement, there was a clause stating that the "conditions regulating this Agreement in Section 203 of the Employment Rights Act 1996 are satisfied".

The difficulty for BT was that there were no equivalent provisions confirming that the conditions set out in any of the discrimination legislation, and in particular Section 77 of the Sex Discrimination Act 1975 and Section 72 of the Race Relations Act 1976, had been met. The EAT therefore had to decide whether the absence of such provisions meant that the agreement was ineffective in compromising Ms Palihakkara's complaints of sexual and racial discrimination.

BT's argument before the EAT was that the policy behind the legislation was to protect employees from entering into bad agreements and that the failure to state that the necessary conditions had been satisfied could be excused if, as a matter of fact, the conditions had been satisfied. The EAT did however give this argument fairly short shrift and concluded that the absence of the necessary statements was fatal to the compromise agreement. Ms Palihakkara was therefore free to pursue complaints that BT no doubt assumed had been compromised in return for the severance payment made by them.

This case again emphasises the importance of ensuring that compromise agreements are properly drafted. It also makes clear that clauses that may, at first blush, appear to be formulaic and serving no obvious purpose may in fact be vital if the compromise agreement is to achieve the aim intended for it.

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