Termination packages - agree in haste, repent at leisure

12/08/2010

By Nick Hobden, Partner and Head of Employment

The case of Gibb v Maidstone & Tunbridge Wells NHS Trust has been well publicised in the local and national press. Considerable controversy surrounds the payment of such a large sum of money to an employee who appeared to have presided over an NHS Trust within which almost 1,200 patients contracted Clostridium Difficile and as many as 90 people died. This was undoubtedly a very difficult situation. But it is important to take a moment and consider the legal reasons behind the Court of Appeal's decision to allow Mrs Gibb to receive her full severance payment.

The facts

Gibb was the Chief Executive of the Maidstone and Tunbridge Wells NHS Trust (the Trust). She had worked for the Trust for many years and enjoyed a salary of around £150,000 a year. She stepped down from her role as Chief Executive in October 2007, after coming to an agreement with the Trust regarding the termination of her employment. The terms agreed between the parties formed the basis of a compromise agreement. Gibb agreed to accept a payment of approximately £250,000 in return for the immediate termination of her employment contract. The payment consisted of notice pay of about £75,000, and a compensation payment of about £175,000.

By signing the compromise agreement with Gibb, the Trust entered into a legally binding contract to pay her the settlement monies. In turn, she agreed to abide by obligations to refrain from pursuing any grievances or indeed any claims against the Trust. Gibb was subsequently paid her notice pay, but the Trust failed to pay her the remaining money otherwise due under the agreement. As a result, Gibb pursued the Trust for breach of contract in the High Court.

It came out during the High Court proceedings that the Government's Department of Health had ordered the Trust to withhold the payment to Gibb. In support of this decision, the Trust sought to argue that its own remuneration committee (which had agreed the deal with Gibb) had acted 'ultra vires' (i.e. outside its powers) in agreeing the level of compensation set out in the compromise agreement. 

The decision

Initially, the High Court dismissed Gibb's claim. It held that the Trust had acted outside its powers (ultra vires) and therefore the compromise agreement was unenforceable. The Court concluded that the payment made to Gibb had not been assessed properly and was "irrationally generous." The High Court also felt that Gibb's past service and the time that it would take her to find another job were factors that the Trust wrongly took into account when calculating the sum to be paid to Gibb.

Gibb appealed to the Court of Appeal. The Court of Appeal held that the decision to pay Gibb £250,000 under a compromise agreement was not 'ultra vires' and that she was entitled to receive the money due under the compromise agreement. The Court of Appeal concluded that it was not unreasonable for the remuneration committee to take account of such matters as Gibb's long service and future difficulties in securing new employment. The Court of Appeal also concluded that the Trust would be "unjustly enriched" if it could decline to pay Gibb the money otherwise due under the compromise agreement, even though she had complied with her obligations by not pursuing a grievance internally or a claim in the Employment Tribunal.

What does this decision mean for employers?

This decision demonstrates the willingness of the Courts to look beyond the normal factors that an employer might weigh up in deciding how much compensation to pay to an outgoing employee. The Court of Appeal accepted that an employer might reasonably wish to be generous to staff, as a sign of good relations and mutual respect between employer and employee. Once a deal is struck, it is likely to be very difficult for an employer later to backtrack, simply because it regrets the decision that it took at the time.

When negotiating the exit of an employee by way of a compromise agreement, it is essential that you ensure that the terms have been carefully thought through. Have you:

• taken account of all relevant considerations
• come to a decision that is rational and is backed up by evidence and
• checked that you are acting within your authority?

If you want to talk the situation through with us before you commit to a deal that you might live to regret, give a member of the Employment team a call.