Employment - compromise agreements

Since their introduction, compromise agreements have largely been seen as a godsend by employers.

No compromise

Since their introduction, compromise agreements have largely been seen as a godsend by employers. They provide a relatively easy way for employers to terminate an employee’s contract, and for employees to gain compensation for the termination of their employment without a protracted dispute.  In a local authority setting, the scope for discretionary payments under the LGPS Regulations is limited and the Courts have not been slow to find ex gratia payments to departing officers to be unlawful (see for example Hinckley and Bosworth BC v Shaw [2002] LGR 9).  Compromise agreements are, in effect, a means of settling a claim against the employing authority, and have often been seen as a source of additional flexibility, and of achieving a successful severance deal with a senior officer which is, to some degree at least, confidential.

Although there has been significant public scrutiny in recent months of the spending behaviour of public bodies, MPs’ expenses being a case in point, few would have predicted the outcome in the case of Gibb v Maidstone & Tunbridge Wells NHS Trust.  This case illustrates the importance for public bodies of documenting clearly how the terms of agreements such as compromise agreements are reached and ensuring that appropriate approval processes, potentially both internal and external, have been completed before the agreement is signed and payments made.

In this case, Rose Gibb, the Chief Executive of the trust, was forced to stand down as a result of an outbreak of a super bug and a compromise agreement was reached between her and the trust regarding the termination of her employment. The deal was done relatively quickly, in the space of five days. A payment of around £250,000 was agreed. It appeared that both parties were reasonably content with the details of the agreement reached between them. However, a week later, the Director for NHS Finance, Performance and Operations ordered the trust to withhold the payment to Ms Gibbs. The trust later paid notice pay and a lump sum of approximately £75,000 without prejudicing outstanding issues that had formed part of the compromise agreement.

Unsurprisingly, Ms Gibbs sued to enforce the original agreement in the High Court.  She was unsuccessful.  It has been reported that she may seek to appeal against the decision.

The employer’s defence

The trust claimed that the agreement was ultra vires. As a public body, the trust’s powers were limited by statute and it had to exercise its powers in a manner that was reasonable in the Wednesbury sense, i.e. the payment was such that it was reasonable to make by a trust properly exercising its powers. The trust’s arguments were as follows:

  • The payment was unreasonably generous
  • The payment substantially exceeded the maximum statutory claims
  • The decision to pay took into account irrelevant considerations
  • There was insufficient consideration of value for money and need to not reward failure; and
  • There was no adequate business case for the payment and no treasury approval.

The contract provided for termination on the basis of a six months’ notice period and the basic salary of the employee was approximately £150,000. The maximum award for unfair dismissal would have been £69,590 and so the amount effectively in dispute between the parties was just over £100,000.

Ms Gibb’s case

Ms Gibbs argued that the payment was reasonable. The trust had taken and followed independent legal advice and as part of the agreement had secured confidentiality, avoided further damage to reputation, saved legal and management costs defending a claim for unfair dismissal and avoided the risk of an order for reinstatement. Further, the trust had taken account of her previous good performance.

High court judgement

Mr Justice Treacy showed little enthusiasm for Ms Gibb’s case. The trust had been reasonable in paying to her six months notice together with the equivalent of a maximum award for unfair dismissal. He dismissed the idea that reinstatement would have been relevant in this case.

Legal advice received by the trust prior to signing of the compromise agreement indicated that it could pay between £90,000 and £250,000 to settle the matter. The judge criticised the lack of analysis that had gone in to how the amounts had been calculated. He felt that any recognition of past service had effectively already been rewarded with salary previously paid.

Interestingly, there was also a dispute as to whether or not the Strategic Health Authority had given approval for the settlement.

It was felt that the trust had failed to give adequate consideration to whether it was effectively rewarding failure and that the agreement could only be viewed as being irrationally generous and therefore ultra vires.

Comment

There are many reasons why this decision can be criticised, not least because the High Court action cost more than the saving the trust made in not completing the compromise agreement itself.

It acts as a stark reminder to all public bodies that in situations such as these consideration must be given not only to the employment law aspects of the matter but also to much wider issues. A balance needs to be struck between the potential outcome and costs of legal action and the level of the payment needed to gain agreement from the employee to enter into a compromise agreement. The possible risk of later adverse publicity is unlikely to weigh significantly in the balance.

In addition, the Government has consulted on a proposal to amend the Accounts and Audit Regulations 2003 to oblige local authorities to make more details of the remuneration of individual employees available to the public.  The proposals include a requirement to make public the total amount of any compensation payable for loss of office to senior employees.  If this becomes law, confidentiality clauses in local authority compromise agreements will no longer be able to keep the headline figure out of the public domain.

Advice on staff severance agreements

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