In the UK it is usual that, on termination of employment, the leaving employee will be asked to sign a compromise agreement. It shuts down the possibility of future claims either way.
.....Or does it?
When the compromise agreement is signed both parties agree to honour that bargain and to ensure that the compensation is paid and no proceedings are brought.
However, a landmark case in the UK High Court; Gibb v Maidstone and Tunbridge Wells NHS Trust has challenged the premise that the severance payments agreed in compromise agreement must always be paid after the agreement has been signed by both parties.
Ms Rose Gibb, a former Chief Executive of Maidstone and Tunbridge NHS Trust, had her employment terminated prior to the publication of a Report into outbreaks of the “super bug” C difficile at hospitals managed by the Trust (“the Super-Bug Report”). When she left her job a compromise agreement was agreed and signed by both parties providing for a severance payment of £250,000 made up of £75,000 payment in lieu of her contractual notice and the balance of £175,000 as payment for loss of office.
The payment had not been made by the time that the Super-Bug Report was published and the Department of Health decided that the Trust should not make the payment for loss of office to Ms Gibb. As a contract (the compromise agreement) had been entered into and signed, Ms Gibb sued the Trust for breach of contract.
Even though the parties had negotiated and signed a Compromise Agreement, the Trust argued successfully that the amount of compensation agreed was, in the light of the findings of the Super-Bug Report, “irrationally generous” and therefore ultra vires. The judges agreed with this and held the compromise agreement was unenforceable.
The Court held that if the Trust had only paid Ms Gibb her contractual notice and the statutory maximum award for unfair dismissal, the total liability would have been in the region of £145,000, some £105,000 less than the Trust had agreed to pay in the compromise agreement.
The Court considered that £250,000 was an over-generous calculation of what was owed, and could not see the justification for the extra £105,000 being paid on the basis of management time and legal costs which would have been expended by the Trust had Tribunal proceedings been brought instead.
The Court also concluded that the decision by the Trust to pay this additional sum of £105,000 was based on irrelevant considerations and without a proper financial analysis. It was also held that the Trust had failed to consider that they would be seen as rewarding failure, and that payments above statutory and contractual limits must only be made in exceptional circumstances.
The case highlights the importance of proper consideration of the appropriate amount of compensation to pay departing employees. It also demonstrates the potential consequences of having compromise agreements with payments that exceed the contractual and statutory limits.
The judgment can also be applied in the private sector. Under the Companies Act 2006 shareholders must approve directors’ termination payments. Where shareholders approval is necessary, but has not been granted, shareholders may, acting on behalf of the Company, legitimately challenge any payment that has been made to the director even if contained in a compromise agreement. Shareholders may also decide to bring an action against the board for breach of duty for authorising unduly generous or inappropriate compensation payments.
Practically speaking, the judgment means that employers should ensure they follow guidelines for approving termination payments and should use objective criteria when justifying large termination payments.
The case serves as a warning for both public and private sectors to beware paying excessive termination payments without having objectively justifiable reasons for doing so.
Employers must always bear in mind the actual contractual and statutory entitlement of the employee before adding any “zeros” to the settlement sum.
