Compromise agreements are regularly agreed with employees in exchange for a sum of money to protect employers against employment tribunal claims. The case of CMC Group PLC v Zhang recently led to a new interpretation of wording, which can be very disadvantageous to employers.
CMC Group PLC (CMC) agreed in a compromise agreement to pay Mr Zhang $40,000 in settlement of his claim. The contract contained a clause, common in compromise agreements, which said that the full $40,000 would be immediately repayable if Zhang broke any terms in the agreement (namely non-harassment and non-derogatory remarks clauses).
CMC alleged that Zhang breached the agreement and brought proceedings for repayment of the $40,000 but, in May 2006, the Court of Appeal held that the repayment clause was unenforceable on the basis that it was a ‘penalty’ rather than a ‘repayment’ clause and fixed damages of $40,000 as a ‘penalty’ were plainly excessive.
The Court of Appeal has granted permission for appeal to the House of Lords but, in the meantime, employers should ensure that they make some evaluation of the loss they may suffer in the event of a breach of any repayment clauses by an individual.