In what is a potentially worrying development for employers, the Employment Appeal Tribunal held last week in Industrious Limited v (1) Horizon Recruitment Limited (in liquidation) (2) Vincent that an Employment Tribunal has the jurisdiction to determine whether or not an otherwise validly entered into compromise agreement can be set aside because of misrepresentation, i.e. a false statement made by the employer which induces the employee to sign up where he would not otherwise have done so.

In principle this is nothing new – despite all the bells and whistles of legal advice and intimation of claims etc., a compromise agreement is just a contract and so its validity may be attacked, just like that of any other contract, on grounds of misrepresentation. What is new in practical terms is the decision that this challenge may now take place in the Tribunal and not, as previously thought, only in the County and/or High Courts. That means that compromise agreements can be attacked more quickly, more easily and without the material costs exposure implicit in civil court proceedings.

Whilst the facts of the particular case are not material the potential implications for employers are significant. Those who previously breathed a sigh of relief as the ink dried on a freshly signed compromise agreement may now find themselves in an Employment Tribunal weeks, months or in theory even years later (a claim questioning the validity of the compromise agreement could potentially be brought up to 6 years after the claimant discovers the misrepresentation). A finding that the compromise agreement had been entered into as the result of a misrepresentation would render the agreement void, i.e. as if it had never been reached in the first place. That would leave the original dispute unresolved and even though it might well be then out of time, the Tribunal would almost inevitably admit any employment claims late on just and equitable grounds.

There are a number of potential scenarios that could lead to a former employee bringing such a claim. These could include:

  • The employee being told during a redundancy consultation process that his role will no longer exist but, having signed a compromise agreement, he later discovers that someone else is performing exactly his role.
  • A statement that others guilty of the same misconduct would also be dismissed, when in fact they were not.
  • Statements are made during a redundancy process about the company’s performance and the consequent need for job cuts but information is released later shows that the statements were untrue.
  • An assurance that others dismissed at the same time had received or would receive severance payments calculated in the same way, or that less than 20 redundancies were contemplated at a given point where that was not actually the case.

In fact anything leading an employee to enter the agreement.

WHAT CAN EMPLOYERS DO TO REDUCE THE LIKELIHOOD OF CLAIMS?

Prudent steps to take could include ensuring that:

  • Statements made during the consultation process are genuine so as to reduce the later likelihood that they will be challenged successfully. Where commitments are sought by employees before entering into compromise agreements, think carefully whether to answer it at all. A refusal to comment may not help progress towards completion of the agreement, but it cannot be construed later as a misrepresentation.
  • A robust ‘entire agreement’ provision is included in the compromise agreement. At a minimum, the provision should state that the compromise agreement represents the entire agreement of the parties and should also include wording to the effect that “it supersedes any other arrangements, agreements or understandings relating to the termination of the employee’s employment, all of which are deemed to have terminated by mutual consent”. This may act so as to exclude the employee’s ability to rely on anything said which is not also in the agreement.

If a former employee brings a successful claim of misrepresentation in the Employment Tribunal, the employer will not only have already paid out under the compromise agreement (a prudent claimant would ensure that it had!) but will also face the Tribunal claim the agreement was designed to avoid. There is not even any certainty that it would get credit for sums paid out under the agreement – if the employee’s losses are £60,000 but he has £20,000 under the compromise, the Tribunal will only award £40,000. However, if his losses are £100,000 and he has already received £30,000 under the agreement, he could still be in line for the maximum unfair dismissal award (currently £66,200 but reducing to £65,300 from 1 February 2010).

Whilst many departing employees are happy to sign the compromise agreement, take the money and move on with their lives, there will always be some disenfranchised (okay, bitter) ones who will continue to pick over the circumstances of their entering into the agreement and see this ruling as the opportunity to add to the sums already paid to them under the compromise agreement.